In Discussion Paper No. 1132, Research Fellow Wolfgang Franz evaluates recent developments in the labour markets of four Central and East European countries: the Czech and Slovak Republics, Hungary and Poland. He investigates how these labour markets reacted to the breakdown of the command economy, and what should be done to improve conditions. He provides a comprehensive survey of labour market developments in each country, putting special emphasis on the dynamics of employment and unemployment in order to identify the sources of labour market malfunctioning. He then looks at the wage formation process including institutional settings and income policies, active and passive labour market policies, and the structure of employment and output.

Two observations are particularly important. First, despite a rising unemployment rate and although all countries have devoted more resources to active labour market policies (ALMPs) as a fraction of GDP, there is a substantial decline in expenditures on ALMPs per worker. Second, total expenditures on ALMPs are driven by payments of unemployment benefits. This raises the question of whether unemployment benefit systems are too generous in terms of entitlement, the replacement ratio, and the duration of entitlement. The paper finds that they do not seem extraordinarily generous, not least due to substantial changes in the systems during the transition period, Neither do they outperform OECD standards, and in some cases fall short. So what now? First, considerable efforts must be undertaken to prevent the momentarily short-term unemployed from falling into long-term unemployment. Second, ALMPs must be targeted at the long-term unemployed.

Central and East European Labour Markets in Transition: Developments, Causes, and Cures
Wolfgang Franz

Discussion Paper No. 1132, February 1995 (HR)