Output, employment and unemployment in Central Europe during the economic crisis: a look at four transition countries.

• Author: Mondschean, Thomas S.

1. INTRODUCTION

   This paper examines the labor market performance of four transition countries in Central Europe, the Czech Republic, Hungary, Poland, and the Slovak Republic, during the current economic crisis. Employment and unemployment measures, as well as output, are analyzed and benchmarked against the G7 and the Euro Zone from 1995 to the present. The global economic recession has affected employment and unemployment in almost all countries. For example, the number of unemployed in the 30 OECD countries at the end of 2009 was 45.5 million, up from 29.5 million as of the end of 2007 (OECD statistical database). According to Holland, Kirby and Whitworth (2009), estimates from the ILO show global unemployment up by as much as 59 million from 2007 to 2009, representing an estimated increase of 16-33%. In their review of a large number of labor markets, they find that the unemployment rate in OECD countries had already risen from the second quarter of 2008 by more than would be expected based on Okun's rule of thumb, which connects a 1 percentage point increase in the unemployment rate with a 2-3 per cent decrease in GDP. However they find considerable variation among countries, ranging from a 0.5 percentage point rise in the unemployment rate in the Netherlands and Romania to an 11.9 percentage point rise in Estonia (pp. 35-36).

   The four Central European countries examined here have now completed two decades of transition from central planning to market economies, and from economic separation from the East to extensive integration with Western Europe through the European Union, and in the case of Slovakia through adoption of the Euro. In fact, the World Bank, writing about the Europe and Central Asia region (Central and Eastern Europe including Turkey and the Commonwealth of Independent States), found this area to be, "among the most integrated of emerging and developing regions," and that although this region has been "hit hard by the global economic and financial crisis," these authors also find considerable variation among countries (Mitra, Selowsky, and Zalduendo, 2010. p.25).

   Transition has in large part been successful although significant problems and concerns were evident prior to the economic crisis that is now being referred to as The Great Recession. For example, as GDP rose, "Some 55 million people were lifted out of absolute poverty between 1999 and 2006" in the Europe and Central Asia region (Mitra, Selowsky and Zalduendo, 2010, p.25) . At the same time problems such as persistent long-term unemployment for a large segment of the labor force remained serious in many countries and were just beginning to show improvement. (See for example, Mondschean and Oppenheimer, 2007, Rutkowski, 2006 and Schiff, Egoume-Bossogo, Ihara, Konuki and Krajnyak, 2006). Allard (2007) finds continuous nonprice competitive gains, strong foreign direct investment, and increases in exports and imports in Central and Eastern Europe (CEE) until 2007, but points out the risks of a heavy reliance on external demand. In an evaluation of mortgage and housing markets in the CEE countries, Friedemann (2008) finds that for the CEE countries, "Since the beginning of the transition process, the mortgage markets have experienced a vibrant development. In all countries, access to housing finance has largely improved although affordability still lags behind due to gaps in supply in housing ... (p.151)." He also points out that the still limited availability of housing loans (compared to many other countries), and national regulation in some cases, can be positive by preventing "doubtful lending practices (p.157)," a factor that may have helped some countries avoid some of the financial problems for households seen in other countries. Many authors have examined other aspects of the long-run and complex process of adjustment and convergence with other market economies, describing both advances and challenges. (See for example, Mondschean and Oppenheimer, 2006, Svejnar, 2002, Boeri and Terrell, 2002, Iara and Traistaru, 2004, and Feldman (2004).)

   With the advent of the Great Recession, concerns about the downside of economic integration come to the forefront. The same economic integration which facilitated growth and development when major global economies were expanding, now leaves these new economies open to large negative shocks to their output, income and employment. This may be especially true for the two smaller countries in this group. Rucinska, Urge and Rucinsky (2009) emphasize the importance of this concern for Slovakia. They describe the Slovak Republic, "as a small, highly open and export-oriented economy (that) depends on foreign markets fundamentally (p. 52)." They report that the Slovak economy went from a 9.3% growth rate in the first quarter of 2008 to a contraction of 6.8% to 2.5% in the last quarter of 2008, and that, "lower growth of GDP in Slovakia was caused by pending and deepening economic recession in the countries of its largest business partners (especially Germany) and related lower demand for Slovak goods (pp. 55-56)." In the Czech Republic, integration has gradually increased the importance of international trade with...