1 Labor markets, Inequality and Income Distribution in Transition

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  • 1 Labor markets, Inequality and Income Distribution in Transition
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  • 2 I. Labor Markets 1. The Labor in the Command Era characteristics major element was education, especially technical training, the transition started with major stock of human capital The issue in transition is how to use the human capital in very different environmental setting. full employment-underemployment in a setting where the dismissal of workers, whether productive or not was generally difficult wage differentials were used to reward differential inputs and to motivate effort, but even so the outcome was generally egalitarian, compared with market economies But the distribution of income changed as mkt arrangements were introduced during the 1990s.
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  • 3 2. The labor in transition conflict between labor market adjustment and command economy "job right constraint" (full employment) distribution of income changed sharply Movement of labor from state sector to private sector; considerable unemployment created. As a result of transition or structural changes the unemployment has increased. Reasons for increase in unemployment rate in transition decreased state employment (closure of state enterprises) decreased private employment (closure of private enterprises) job quitters entry into unemployment the imposition of hard budget problem of financing unemployment benefits The transition economies have generally developed system of unemployment compensations. These programs differ from country to country and have been typically more generous in EE than in the FSU. With high unemployment rate poverty becomes a greater treat.
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  • 4 Aghion-Blanchard model On the Speed of Transition Aghion P. & O. Blanchard, NBER Paper 1994; State firms that dominated the econ. are struggling with mkt forces. A new private sector quickly emerged. Unemployment which did not exist is high and increasing. Model analyzes the movement of labor from the former state sector to the private sector; the levels of unemployment and change in wages. It includes: a) The speed with which production and hence inputs will be transferred from the state to the emerging private sector. b) The nature of the mechanisms involved changes in wage level in the declining state sector and in the emerging private sector, and the level of unemployment. The speed with which labor can be released from the state sector and absorbed into the emerging private sector depends in part on wages in both sectors. Unemployment can lead to lower wages, therefore, increased demand in private sector.
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  • 5 Model: Relative cost and demand changes with hardening the budget constraint have forced firms to substantially reduce employment. The same relative cost and demand changes have led to a rapid initial increase in private employment (small scale trade and services) but further growth of private sector is constrained by lack of expertise and external finance. The net effect of these changes has been an increase in unemployment that affects the speed of restructuring and rate of private sector growth. The increase in private sector employment has not offset the decrease in state employment E+N+U=1 labor force E-state sector employment; N- private sector employment; U-unemployment
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  • 6 Before transition E=1 and N=U=0 During transition: State sector-restructuring, decrease in employment New private sector-increase in employment Job creation Private wages depend on labor mkt conditions Higher unemployment lower wages faster private job creation Higher unemployment unemployment benefits higher taxes per worker c.p. decrease in private job creation. Unemployment and speed of restructuring (s) When the firm restructures it reduces employment to workers The flow into unemployment s(1-) depends on the speed of restructuring and the proportion of workers loosing their jobs in the process The flow out of unemployment is equal to the private job creation, H Private job creation depends on unemployment thought 2 channels-wages and taxes: The higher unemployment, the lower is the wage. Hence, higher private job creation the higher unemployment, the higher are taxes. Hence, lower private job creation As unemployment increases, the effect that dominates initially is the direct effect on wages, so that private job creation increases; as unemployment gets sufficiently large, the effect on taxes dominates, and private job creation declines.
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  • 7 Figure 1 The authors characterize the dynamics of unemployment; the flow into unemployment is a horizontal line s(1-). Two conclusions: 1. There is a max speed of restructuring (s). If s is such that s(1-) exceeds the max rate of private job creation, therefore, the transition eventually fails. Starting from low unemployment (U), private job creation is initially positive and increasing. But it remains smaller than the flow into unemployment, coming from restructuring, and the U becomes so large that the taxes are increasing. Private job creation declines leading to a faster increase in U. At p. C the fiscal burden is large than the new and the privatized sectors become unprofitable and close down. The conclusion is too fast a rate of restructuring can lead to too high level of U, that will lead to a collapse of the private sector. 2. Figure 1there are two equilibriums Ua and Ub. Ua is stable equilibrium, Ub is unstable. Uo is initial level of U. If the initial net decrease in employment is so large that Uo is to the right Ub, then private job creation insufficient to avoid a further increase in U and eventually collapse of private sector. But as long as Uo is less than Ub, the economy converges to the lower level of unemployment Ua. At Ua, flows in are equal to flows out, the private sector grows steadily from two sources, restructuring/privatization (s) and private job creation (H). Unemployment remains at Ua until restructuring has been achieved and the state sector has been fully transformed.
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  • 9 Equilibrium rate of unemployment and speed of restructuringthe flow into unemployment from restructuring is just absorbed by the rate of private job creationp. A The model implies that the initial adjustment can lead to initial unemployment rate that exceeds the equilibrium rate. In that case restructuring does not take place until job creation has reduced unemployment to low levels. If unemployment is high and private creation slow, this adjustment will take a while. Policy implication the initial phase of adjustment, priority should be given to private job creation. Trying to increase the speed of restructuring may not be feasible (opposition of workers in state firms). Poland The evidence suggests that unemployment that has resulted from labor shedding far exceeds equilibrium unemployment. The exit rate from unemployment to employment is extremely low; private wages are lower than wages in state firms. It is not surprising that workers in most state firms are resisting restructuring and the associated risks of unemployment. The model forecasts that the restructuring will remain limited until private job creation has sufficiently reduced the unemployment rate to make restructuring less unattractive. In major cities unemployment is lowerlabor mkts are closer to equilibrium unemployment.
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  • 10 3. Empirical Evidence: Value of human capital in transition to market: Evidence from Slovenia, P. Orazem and M. Vodopivec, European Econ Review 41. Goal: How transition has altered returns to human capital? It focuses on changes of labor mobility and wage structure. Human Capital and Labor Market Transitions Changes in patterns of mobility--identifying the determinants of exit from both unemployment and employment (multinomial logit and hazard models) Educationmore educated, more likely to find a job; the share of university graduates among unemployed declined Experiencethe least experienced group faced significantly higher probability of job loss
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  • 11 Human Capital and Transition Wages Dramatic changes in the structure of earnings Returns to educationaverage returns to years of education rose relative to earnings of the least educated group Returns to experiencereturns to the most experienced rise relative to those with the least experience, for men and women. Conclusions Transition dramatically increased the wage and employment premium attached to skilled labor. More educated workers have not only experienced an increase in relative wages, but they have experienced greater relative success in switching jobs, lower probability of layoff, and better chance of finding a job if unemployed. The increase in the premium to job experience is much less pronounced than for education, but still shows up in higher probability of exit from unemployment to job and in lower probability of exit from employment to unemployment. Relative wages have grown dramatically for the most educated.
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  • 12 Winners and Losers in Russias Economic Transition, E. Brainerd, American econ Review 88(1998): 10-94-1116 Goalto answer the questions: Have Russian workers benefited from the changes?, Who are the winners and losers of the transition?, Is increased inequality in Russia real? Data-cross-section household surveys conducted before and after the transition Findings: a) Overall wage inequality nearly doubled 1991-1994 and reached a level higher than that in the US b) Returns to both measured skills (education, occupation) and unmeasured skills within groups have increased. c) Relative wages for older workers have declined d) Wages of women re