The economic transformation in Central and East European countries has been associated with a dramatic increase in unemployment, with jobless rates typically rising to 15 per cent or higher. A remarkable exception is the Czech Republic, where unemployment persistently remains in the 3–4 per cent range. With output growth now returning and unemployment stabilizing in the Visegrad countries, it is clear that either the Czechs did something right, or had an enormous amount of good luck, or both. Even more puzzling is the fact that Slovakia, which shared institutions and policies with the Czech Republic for decades, experienced the same increase in unemployment as did Bulgaria, Hungary, Poland and Romania. In Discussion Paper No. 1102, Research Fellow Michael Burda and Martina Lubyova investigate these issues by observing the impact of active labour market policies (ALMPs) in the Czech Republic and Slovakia over the period 1991–4.

Econometric results suggest that the different spending levels of these policies (including a dramatic reduction of ALMP spending in Slovakia by more than two-thirds in 1993) contributed to the divergence in labour market outcomes in the two countries. All other things equal, raising average Slovak district 1993 ALMP spending to 1992 levels would have been associated with at least a 30 per cent increase in monthly outflows out of unemployment into jobs. While aggregate ALMPs are positively associated with aggregate vacancies, cross-sectional correlation at the district level is negative in the Czech Republic, suggesting a degree of local responsiveness which is less evident in Slovakia. The findings also shed light on the implementation as well as the effectiveness of ALMPs. The evidence points to a somewhat more stable policy response to unemployment in the Czech Republic than in Slovakia.

The Impact of Active Labour Market Policies: A Closer Look at the Czech and Slovak Republics
Michael C Burda and Martina Lubyova

Discussion Paper No. 1102, February 1995 (HR)