Unemployment in Transition

Janice Bell, Tomasz Mickiewicz

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781134436330
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

The emergence of open unemployment is an unavoidable consequence of postcommunist transition. Some countries-notably in the former Soviet Union-initially slowed economic contraction. But in the longer run slower reformers have generally sustained deeper and more prolonged recessions than faster reforming central European countries. Moreover, the initially low unemployment rates in the former Soviet Union are now rising, and may stabilise at higher post-transition equilibrium rates than in Central Europe.

Chapter 1

Employment and Unemployment During Economic Transition

As this book will investigate factors affecting the dynamics of unemployment in transition economies, the first step is to take a detailed look at labour market performance across the transition countries. Using the available statistical data, this chapter provides a comparative perspective on employment and unemployment in the post-communist countries of Central Europe and the former Soviet Union. Along with a series of empirical figures, it will present both some explanations and caveats about the interpretation of this data, in light of the specific and problematic nature of statistics during a time of systemic change.

As the emergence of unemployment in the transition economy has defied some initial expectations, this first chapter also aims to highlight some puzzling aspects of unemployment paths in the region. Each of the examined countries has experienced a “transformational recession,” although these have differed in duration and intensity. This chapter concentrates on establishing what happened where, and when, and how the experience of transition countries compares with each other and with established market economies. This will not only provide the reader with a thorough picture of the scale of the problem of unemployment in Central European countries, it also highlights the contradictions and questions which will be addressed in the following chapters.

1.1 Transition and Unemployment

Labour Hoarding. Expectations

The structure of the centrally planned economic system led the state-owned firms which dominated the economy to employ more people than were actually needed. This excess employment, or labour hoarding, was accompanied by the two forms of administrative control. First, wage rates were kept low, with low differentiation across skill levels. Secondly, the total amount which enterprises could spend on salaries (the “wage bill”) was not necessarily constrained by what each enterprise had to spend, that is, by its revenues. Financial constraints on firms were loosened through various forms of financial redistribution within the industrial sector, including highly differentiated taxation levied on firms, various forms of subsidies, and also through the common practice of granting of bank “loans,” which were effectively grants allocated by the state through the central bank. These loans reflected policy priorities and bargaining strength plus the lobbying potential of firms rather than any commercial evaluation of creditworthiness. Once the loan was made, firms regularly “rolled over” the liability, rather than paying it back.

Given these characteristics, at the very outset of the transition programmes in Central and Eastern Europe, economists and policymakers realised that any move towards the marketisation of the socialist economies which would remove administrative controls would also result in the emergence of unemployment.

Initially, it was often proposed that gradually withdrawing these subsidies from state-owned industries could slow the rate at which excess labour was released or “shed” during transition. Yet few observers thought the problem could be completely avoided. Whether it happened sooner or later, once enterprises stopped receiving subsidies—whether because of the government’s commitment to dismantle the centralised management of production or because of the demands of tightened fiscal budgets—all firms would have to operate at a profit. The implementation of what Kornai (1986) termed hard budget constraints would make labour hoarding unsustainable. Firms would be compelled to reduce their workforces to the numbers actually needed for the purposes of production.

Beyond making firms operate according to market principles, the process of liberalisation also entailed opening economies in which the domestic private sector has been repressed and which had been closed off from the larger, global economy for at least two generations. The anticipated results of liberalising economic activity in Central and Eastern Europe were both an increase in competition from domestic, private entrepreneurs and foreign companies, and also the (upwards) adjustment of formerly controlled prices relative to world prices. While internal and external liberalisation of prices, market entry and foreign trade were expected to bring benefits to consumers through an improved supply of goods, more choice, and greater competition, many domestic firms would have to restructure dramatically if they expected to survive in the new economic environment. Given the unresponsive and inefficient nature of socialist industry, massive job losses through cutbacks and closures were expected to happen rapidly after liberalisation.

An additional reason for expected employment losses was that transition countries planned to introduce stabilisation measures at the same time. Stabilisations were needed because socialist economies typically developed a “monetary overhang.” This occurred when the amount of active money in the economy—like M1, cash or demand deposits which are ready to be spent on goods and services—was not in balance with the centrally administered supply of goods which were made available to be purchased at low, fixed prices. This disequilibrium was manifested by queues in front of shops and shortages of goods within them, and by both open and hidden inflation. Disequilibrium in any market had a tendency to spread to all parts of the economy. Unable to buy shoes, for instance, people may decide to increase their consumption of food, thereby creating greater demand which outstrips food supply further, thus increasing black market prices (Podkaminer, 1982, 1987). The disequilibrium is worsened even further when the state grants workers wage increases as compensation for inflation, but does not increase the supply of goods on the market. The extent of macroeconomic disequilibrium varied widely in transition countries, from very severe in Poland and Russia to nearly non-existent in Czechoslovakia and East Germany. Yet in all transition countries there was a need to address the question of wages, prices, government spending and the nature of the state’s involvement in the economy.

Between the planning stage and the implementation of stabilisation programmes in Central and Eastern Europe, there was a great deal of uncertainty amongst experts and the public alike whether their economies would experience a recession, and if so, how large it would be and how long it would last. From the experience of Latin America in the 1980s, it was known that the strict austerity measures entailed in stabilisation programmes usually resulted in a downturn in economic performance. Also, as in several Latin American countries, the core of the “heterodox” stabilisation programmes planned for Central European countries consisted either of monetary-based or exchange rate-based programmes, but with all incorporating some form of income controls.¹

Poland was the first country to enter the ranks of “post-communist” economies, by introducing its comprehensive “big bang” or “shock therapy” transition program on January 1,1990. From the earliest stages of Poland’s preparations late in the summer of 1989, it was never clear how long or deep the resulting “transformational recessions” would be in any country. Of Poland’s best-known economists, future Finance Minister Grzegorz Kolodko was among the most pessimistic. He reasoned that since unemployment jumped from 10% to 20% in Bolivia and rose to 21% in Chile during similar reform programmes, jobless rates could climb at least as high in Poland.² From a more liberal perspective, Rostowski (1989) was even more radical in his pessimism, predicting that unemployment could go as high as 40%. Not all predicted doom; some press articles anticipated that the economy would boom as soon as it was freed. In Czechoslovakia, it was said that the reform program would be a failure if unemployment rates of 10% were not achieved. In any case, it was generally acknowledged that there would be both recession and open unemployment during transition, but few dared to forecast how strong the shock would be. For Poland, the question was not answered until mid-1992 when the aggregate economy actually started to grow. Other countries, including Romania, Bulgaria, and Ukraine, are still waiting for their answers. In any case, all the predictions proved to be inaccurate—in Poland, the Czech and Slovak Republics, and elsewhere.

Transformational Recession

In spite of differences in initial characteristics, economic policy, and ...