Labor Reallocation in the Transition Economics - Essay Example

?Thesis ment: Labor reallocation in the transition economies. Introduction A shift in the in the focus of interests has been observed in researches on transition. The policy papers that acted to influence the various aspects on the policies of transition played the central part in most researches. The process of transition can affect the lives of billions. The economic conditions of the population have witnessed a drastic change in the countries where transformation of the economic institutions has taken place. The event will be remembered for the contest between the two economic systems, capitalist and the socialist and the former defeated the later. Some important failures of the capitalist system like the Great Depression serve as the reasons on why the event should be remembered. Capitalism has not tested success on everywhere it was implemented (Aslund, n.d.). Transition Economies The economy which experiences change from a centrally planned economy to free market is defined as transition economies. In this type of economies the central planning organization is not entrusted with the task of setting the price. The market forces tend to determine the prices. There is no restriction to trade and the economy witness economic liberalization. There is tendency towards privatization and the financial sector takes the responsibility in facilitating stability in the economy. The change and creation of institutions characterizes the process of transition. The private enterprises have a major role to play (Atkeson, Andrew and Patrick, 1996, p. 377). The process of transition changes the role of the state. The process encourages the creation of different institutions and promotes state owned enterprises and financial institutions which can act independently. The role of the state in the transition transforms from being the provider of growth to an enabler. The private sector serves as the engine of growth in the transition economies. The mode of transition can change the way of growth in an economy. Micro transition and macro transition should be included in the transition economies (International Monetary Fund, 2000). Countries use different transition models as they have different initial conditions in the emerging periods of transition. P.R. China and Vietnam followed the gradual transition mode while Russia and some East-European countries followed the aggressive model of transition. The main indicators of the process of transition include liberalization, macroeconomic stabilization, restructuring and privatization and legal and institution reforms (Boeri and Terrell, n.d. p. 2). A rapid change was expected in the configurations of institutions that structured the transition countries after the collapse of the Soviet Union. Almost all transition economies were expecting to face the twin impacts of recession and income inequality. In order to shift to an economy where wage is determined by the market transitional unemployment is necessary. Structural challenges like shortage of labor demand can result because of long periods of unemployment. The market should set the appropriate price of labor taking into account free mobility of labor and a supportive institutional framework (Nickel, n.d. p. 96). Labor Reallocation in Transitional Economies The process of transition involves substantial reallocation of labor. Employment in the planned economies is concentrated on the heavy industries. There was absence of small business sector and private initiatives concentrated almost solely in agriculture. The economic planners used to determine the pattern of foreign trade. The Council for Mutual Economic Assistance was used to govern the trade flows in what are now regarded as the transition economies. In the process of transition, employment is concentrated in the small scale business sector. Actually shifting of employment from the state owned industries to these units take place. The success of transaction depends on how efficiently the reallocation of labor has been handled. Comparison of the modification trajectories across nations and time will provide the opportunity to learn. It is possible to identify two important samples. Since the beginning of transition, the countries that were created from earlier republics of the Soviet Union presented L-shaped pattern of GDP. There is sharp decline in the graph and then leveling out at the lower level. Some recent signs of possible upturn are also witnessed. They have seen relatively little decline in employment along with noticeable declines in real wages and level of productivity. The process of transition included large turnover of the unemployment pools along with small reallocation of employment opportunities between the old and the emerging sector. U-shaped patterns of GDP were recognized in the countries of Central and Western Europe. In these economies employment started to decline in the initial stages with consequent decline in the productivity of labor. The period of recovery started and performed more efficiently than in the Soviet Union. The countries experienced stagnant unemployment conditions due to rapid degree of structural change. However some unique cases in Central and Western Europe can also be recognized where countries like Czech Republic and Estonia experienced long periods of unemployment. These countries also exhibited significant reallocation of labor from the initial stages of the process of transition. If the role played by unions and labor market insiders along with the policies of the government is taken into account, one can argue that the explanation for the countries following different patterns of reallocation of labor involve effects on the rewards of labor and participation in the labor force of the broad package of what is regarded as ‘non employment benefits’. The unemployment benefits and other income support from the States to the jobless are included in the non employment benefit. The Governments of the Central and Eastern Europe diverted resources to non employment benefits (Lipton, David and Sachs, 1990, p. 75) . Within the structure of the benefit they tend to allocate more to the low wage earners than their counterparts in the earlier Soviet Union. The distribution of the earnings is affected by the high levels and structure of non employment benefits. A floor under the wages was created which induced more destruction of jobs in the state enterprises. The unskilled and low paid workers felt the heat most. They encouraged the growth of self employment by offering income to start up a new business. The benefits were not withdrawn even after taking up a new job. The failures of the administration can be thought of as the reason. The benefit offered long tern unemployment to large number of low skilled workers and also displaced some from the labor force altogether. (Boeri and Terell, n.d, p. 33) The above figure shows the patterns of employment and output adjustments for the nations of the former Soviet Union since the initiation of transition. Employment seems to be correlated with output in the countries of Central and Eastern Europe (Aghion, Phillipe and Blanchard, 1994, p. 283). Output responded by falling more sharply with less fall in employment for the former Soviet Union countries. Even the decline in employment continued for the countries when output decline somehow managed to take the reverse gear. The forecasted employment to output elasticity in Russia was not significant during that period. It can be seen in the figure that employment growth has been lagging behind output recovery which indicates that gains in productivity for both regions. (Boeri and Terell, n.d, p. 33) (Boeri and Terell, n.d, p. 34) This figure points out the fact that real wages decline twice the amount in former Soviet Union nations for the nations of Central and Eastern Europe. Since the year 1991, wages started to recover. The structure of employment has gone through dramatic changes over a relatively short period of time. The pace of the structural change is faster in the Central and Eastern Europe than in the former Soviet Union. During the communist period employment was concentrated in the industry. (Boeri and Terell, n.d, p. 29) The above table measures the extent of structural reallocation in several ways. The table considers the change in the shares of employment from agriculture and industry to the services sector, the growth of non public ownership and the expansion in small employment and self employment. Restructuring of the labor market will result in short term rise in unemployment as it is not frictionless. The benefits of unemployment were set at a very high level in Europe. Measures were taken to tighten such benefits as the number of beneficiaries took the steep rising path. In former Czechoslovakia and Hungary, the duration of obtaining the benefit was reduced to half. The duration was only 1 year in Poland. Bulgaria also followed the same path and the rate of income used to be replaced by unemployment payments was decreased. Uncertainty still remained in the fact whether the scope of active markets for labor had an impact on reducing the duration of unemployment. (Pauna, 2009, p. 182). The above table shows the employment distribution by broad economic sectors and existing market economies in the initial stage of transition. The differences between the employment structures of Western European and Central and Eastern European countries can be captured from the table. In order to capture the initial differences in the sectoral distribution of employment it is required to introduce a restructuring index. The proportion of the work force that is required to change their sector for the country to attain the employment structure as that of a comparable Western European country in 1989 is measured by the index. The index was calculated for each country relative to North and South Europe. (Pauna, 2009, p. 183). The main differences in magnitude terms of the reallocation across sectors, required to obtain a similar distribution to that of the European Union nations, can be observed from the table above. For Hungary, 19.6% of workers are needed to change their sectors for the country to reach the North European Structure. But in case of Romania the same figure would have been 33.4. The table shows the overall reduction in the indices for the economies of Central and Eastern Europe relative to 1898. The table suggests the occurrence of some degree of convergence in terms of the structure of employment. The comparison of shares of employment across sectors does not provide a comprehensive picture. The role of employment in the process of restructuring and overall magnitude of job creation remains ignored in the comparison. An argument against the comparison can offer that the increase in the share of a particular sector can occur just due to decline in other sectors and not due to change in the level of employment in that sector. The model followed by the countries of Central and Western Europe had much more influence on the non employment benefits than the model followed by the countries of former Soviet Union (Simon, 1997). Conclusion Within the environment of the modern world the process of transition has become a highly complex notion as nations such as China have seemingly transcended traditional bounds of the centrally planned economy combined state-sponsored industries with aspects of the free market. To a large degree, the traditional structural boundaries of the transition economy still hold. There are significant differences between the patterns of adjustments in the market for labor in the Central and Western Europe and the former Soviet Union nations. The model adopted by the different countries can be held responsible for the difference. The role of the labor market institutions in reallocation of jobs from the public to the private sector cannot be ignored. The transition economies offer generous unemployment benefits but are exposed to large increases in unemployment. But transition economies with low unemployment benefits and away from the concept of minimum wage should experience massive reduction in real wage along with small increase in destruction of jobs (Adams, 2003). The cross country differences in labor market institutions are regular with the cross country difference in the dynamics of unemployment. Transition may be accelerated by unemployment benefits but they are involved in increasing the unemployment in steady state. The labor market institutions can shed its effects on private job creation; accelerate the speed of reallocation of jobs and level of unemployment in the long run. High minimum wages can accelerate the process of reallocation without imposing any effect on creation of private jobs (Garibaldi and Brixiova, 1998, p. 270). References Adams, H., 2003. International Migration, remittances, and the Brain Drain: A study of 24 Labor exporting countries. [Online]. Washington D.C. World Bank. Available at: http://books.google.co.in/books?id=uVnlCCBjyokC&printsec=frontcover&dq=International+Migration,+remittances,+and+the+Brain+Drain:+A+study+of+24+Labor+exporting+countries.&hl=en&sa=X&ei=8GZ9T8SuGNHIrQeiy9zuDA&ved=0CDAQ6AEwAA.[Accessed:5th April,2012]. Aghion, P. & Blanchard, O., 1994. On the speed of transition in Central Europe. Macroeconomics Annual 1994. Massachusetts, MIT Press. [Online]. Available at: http://books.google.co.in/books?id=Gr5ntwAACAAJ&dq=On+the+speed+of+transition+in+Central+Europe.&hl=en&sa=X&ei=X2Z9T5SXNoTmrAe_qK2BDQ&ved=0CDYQ6AEwAA. [Accessed:5th April, 2012]. Aslund, A., n.d. The collapse of the Socialist System. [Online]. Available at: http://www.econlib.org/library/Enc/TransitionEconomies.html. [Accessed:5th April, 2012]. Atkeson, A. & Patrick, K., 1996. Social Insurance and Transition. International Economic Review. [Online]. Available at: http://books.google.co.in/books?id=fkBYPgAACAAJ&dq=Social+Insurance+and+Transition&hl=en&sa=X&ei=pGZ9T9SHFsHQrQfitfDdDA&ved=0CDAQ6AEwAA. [Accessed:5th April, 2012]. Boeri, T. & Terell, K., n.d. Institutional determinants of Labor Reallocation in Transition. [pdf]. Available at: http://sitemaker.umich.edu/terrell/files/boeri-terrell-final.pdf. [Accessed:5th April, 2012]. Garibaldi, P. & Brixiova, Z., 1998. Labour Market Institutions and Unemployment Dynamics in Transition Economies. [pdf]. Available at: http://web.econ.unito.it/garibaldi/papers/utrans_spap.pdf. [Accessed:5th April, 2012]. International Monetary Fund, 2000. The ingredients of Transition Economies. [Online]. Available at: http://www.imf.org/external/np/exr/ib/2000/110300.htm#II. [Accessed:5th April, 2012]. Lipton, D. & Sachs, J. D., 1990. Creating a Market in Eastern Europe: The Case of Poland. Brookings Papers on Economic Activity 20. [Online]. Available at: http://www.jstor.org/stable/10.2307/2534526. [Accessed:5th April, 2012]. Nickel, K., n.d. Inequality in Transition Economies: sharing the benefits and burdens of Post-Communist Change. [pdf]. Available at: http://www.koed.hu/serpent/nickel.pdf. [Accessed:5th April, 2012]. Pauna, C., 2009. Labor Reallocation in Transitional Economies-Twenty Years Later. [pdf]. Available at: http://www.ipe.ro/rjef/rjef4_09/rjef4_09_11.pdf. [Accessed:5th April, 2012]. Simon, 1997. Enterprise Restructuring and Unemployment in Models of Transition. Washington, World Bank. [Online]. Available at: http://books.google.co.in/books?id=DbVfsWNsrOUC&printsec=frontcover&dq=Enterprise+Restructuring+and+Unemployment+in+Models+of+Transition.&hl=en&sa=X&ei=ymZ9T_G2GsamrAeCpJXdDA&ved=0CDYQ6AEwAA. [Accessed:5th April, 2012]. Bibliography Murrell, P., 1992. Evolutionary and Radical Approaches to Economic Reform. Economics of Planning, 25. Roland, G., 2000. 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