Labor markets in the transition economies: an overview.

• Author: Bah, El-hadj
• Position: P. 26-53 - Report

2.8 Conclusions

The upshot of this discussion is that there are various ways of conceptualizing labor market conditions in transition economies, and, while all provide some measure of information, they must be viewed in the context of the large structural changes taking place as well as in the context of the starting conditions pre-transition. The macroeconomic record makes clear that the transition has imposed considerable stress on workers, their incomes and on the labor markets in the region for a significant period of time during the transition. Nevertheless, we must be cautious in interpreting aggregate data on jobs and incomes both because of the major system changes brought about by the transition and because of problems with the data on unemployment, incomes and output.

The biggest difficulty for both scholars and policy makers is to understand whether phenomena such as growing unemployment, falling labor force participation ratios, etc., are to be viewed as desirable or not and how to respond to them with appropriate policies or how to study them with appropriate models. If unemployment grows due to the shedding of surplus labor by firms, then such an outcome is, in the short run, a desirable result of the transition, leading to more efficient firms, rising productivity, etc. and appropriate polices to deal with this may include active labor market policies, greater expenditures on education and the promotion of inter-regional labor mobility. However, if unemployment grows due to cyclical factors, then, perhaps, countercyclical monetary and fiscal policies are more appropriate. However, judging when the transition is "over" and the rules and behaviors of a "normal" market economy apply is difficult. Certainly, it would help if researchers were clearer about whether their judgments of the situation are based on short-run transition dynamics or on longer-term views that reflect labor market processes in developed market economies.

In the next section of this article, we will review the literature on the microeconomic evidence for labor market problems as well as examine some of the more specific causes of these problems and means for their solution.

3. Microeconomic and Structural Developments

   While the foregoing section has examined the macroeconomic trends in employment and output in the transition economies, in this section we focus on microeconomic phenomena. These include privatization, because privatization determines the nature of the business units in which employment takes place as well as the types of skills required of workers. There have also been significant changes in the structure of output, with services growing at the expense of industry and agriculture in the more successful transition economies and less so in the ones that have experiences slow growth and higher levels of unemployment. Firms have also changed in terms of their size, with small and medium-sized firms (SMEs) taking on a greater role in the economy and especially in the creation of new jobs. We examine the role of SMEs as well as the barriers to their growth. Then, we consider the creation of jobs though investment, both by domestic investors and by foreigners. Lastly we examine the labor market and labor market institutions to see what role they have played in the evolution of employment and unemployment in the course of transition.

   3.1 Privatization and Employment

   It is widely believed that privatization of state-owned enterprises (SOEs) improves their efficiency and accelerates aggregate economic growth in the long run. (20) Many economists believe that privatization is likely to cause layoffs in two ways. One is direct and takes place at the firms being privatized because they often eliminate redundant workers in order to cut costs and improve efficiency and profits. The other source of job loss occurs as the remaining SOEs in an industry face competition from the increasingly more efficient private sector, and they, too, lay off workers in order to survive (Kikeri, 1998).

   Despite the widely held view that privatization causes large job losses, even studies that focus on the direct effect of privatization on unemployment, that is, on the employment changes that take place only in firms that have undergone privatization, tend to yield contradictory results. In transition economies, the results appear dependent on the form of privatization and the nature of the new owners. Brown et al. (2005) and Frydman et al. (1999), based on studies of a number of transition economies, do not find a strong negative effect of privatization on employment, though there appear to be country differences as well as differences within a country due to differences in the method of privatization. For example, the nature of the new domestic owners, particularly whether they are "insiders", meaning the firm's mangers or workers, or "outside" investors, impact on employment patterns. Insiders tend to maintain the status quo, thus minimizing job losses, but at the cost of the firm's growth or even long-term viability, while outside owners tend to strive for efficiency, partly through job cuts, but also to seek long-term growth for their firms.

   There is a reasonable consensus that the ways in which privatization takes place, as well as its pace, have a direct influence on the performance of privatized firms and of the economy as a whole.

   3.1.1 Restitution and Small Privatization

   In a number of East European countries, efforts were made to identify owners of property that had been nationalized and to return that property to those owners. In some cases, this involved the dissolution of collective farms and the distribution of the land and machinery, and, where previous owners could not be identified, the assets of the cooperative farm were distributed to the members. (21) There is some controversy over the effects of such land redistribution on agricultural output and efficiency; although the effects on agricultural employment were generally negative. (22) The initial effect of agricultural privatization was to reduce labor use in order to improve efficiency, although employment loss at private farms appeared to be less than at surviving collectives (Swinnen et al. 2005). In some countries, there has been resistance to such privatization, leading to the need to continue to subsidize the agrarian sector.

   Restitution and the sale or lease of small establishments to their workers was also a major way of privatizing retail outlets, restaurants and service establishments. Countries that pursued such privatizations aggressively were able to create a class of small business owners who could serve as the foundation for an entrepreneurial class while simultaneously improving the quality and assortment of services offered by what was, in many countries, the sector with the greatest potential for growth. (23) Not all such establishments proved to be successful, and some owners took a passive approach, selling off the inventory of goods that they had inherited and then selling the business.

   3.1.2 Privatization of Large Firms

   The extent and method of privatization of large state-owned enterprises was the most controversial aspect of privatization, and it also had the greatest implications for economic performance and for the labor market. Three main methods were used. One was the sale of enterprises to foreign owners, often "strategic investors" who took a controlling interest in the former SOE. Generally, such strategic investors undertook a restructuring of the firm, injected some capital, updated or revised the firm's product line and integrated the firm into the parent's global supply chain. Case studies (Carlin et. al., 1994) indicate that labor shedding was not the prime focus of restructuring strategies, although critics of foreign investors were able to cite job losses, particularly in activities such as R&D and in the provision of social services such as employees' health, recreation and vacation facilities, that had been an integral part of SOEs' business activities before the transition. (24)

   A second way of privatizing firms was mass or voucher privatization, in which all or some citizens received vouchers that could be used to obtain shares of SOEs that were being privatized. The process was more successful in some countries than in others. In Poland and the Czech Republic, outside owners were created, and managers of the newly privatized firms had to adapt to the business objectives of the new owners and to the loss of state subsidies, leading to improvements in efficiency and long term growth. (25) Russia, on the other hand, experienced a voucher privatization that saw large firms pass into the hands of a group of "oligarchs", many of whom came from the old managerial elite, and smaller firms pass into the hands of their managers as well into the hands of local and municipal governments. In such circumstances, firms have not always flourished due to their owners' uncertainty about the legitimacy of their rights to own these firms and their resulting desire to move money overseas; local governments have tended to be paternalistic owners supporting local enterprises either directly or tacitly by countenancing tax arrears, etc. Some restructuring has taken place, but the slower recovery of output in Russia, Ukraine, etc., suggests that, overall, job growth in privatized firms has not been high. (26)

   The least successful form of privatization has been so-called insider privatization. Such privatizations, which involve the preferential distribution of vouchers to employees of a firm so that they can bid for its shares to the exclusion or disadvantage of outside investors; leasing, whereby the workers, or more likely the managers, of an SOE are able to buy the firm from the state for a nominal amount up front, promising to pay the full purchase price out of future profits. These and other preferential transfers of SOE's to insiders tend...