Central and Eastern Europe
Unemployment Policy

At a lunchtime meeting held in London on 19 September, Michael Burda discussed the role of active labour market policies in combating the long-term joblessness and social exclusion that may be expected as unemployment continues to rise in Central and Eastern Europe. Burda is Professor of Economics at the Humboldt-Universitat zu Berlin and a Research Fellow in CEPR's International Macroeconomics and Human Resources programmes. His talk was based on research reported in his Discussion Paper No.977, 'Structural Change and Unemployment in Central and Eastern Europe: Some Key Issues'. The views expressed by Burda were his own, not those of CEPR, which takes no institutional policy positions.

Burda noted that the transformation of the Central and East European countries and their exposure to international competition have been associated with sharp declines in measured economic activity, which appear to be largely independent of their choices of macroeconomic policies and reform strategies. They have been accompanied by sharp rises in unemployment, which is quite distinct from that which arises during recessions in the West, since it represents the unwinding of several decades of distortions and misallocation of human capital. Burda discussed the role of labour markets in this reallocation of human resources and considered the effects of a variety of policies.

First, many workers have come under pressure to change industries and occupations, as early predictions of a massive reorientation of trade towards the West have proved true, but drastic improvements in productivity and product quality will be needed to allow the profitable production of goods to Western standards. At the same time, the rapid growth of an abnormally underdeveloped service sector has created new employment opportunities for displaced industrial workers. The need for such reallocation of skills and human capital varies across geographical regions, so this 'mismatch' can be remarkably high, even within the smaller countries such as Bulgaria and Hungary. Second, labour force participation rates have fallen dramatically during the transformation. Employment provided an important mechanism of social integration and protection under communism, so participation was extraordinarily high by Western standards, especially for women. OECD countries' experience suggests that pressures to change labour force status will increase dramatically once enterprises are relieved of their social protection function and shed low-productivity staff .The administration of social safety net programmes will strongly influence this restructuring, since imposing strict eligibility conditions for the receipt of unemployment benefits will lead to 'self-selection' of low-productivity workers out of the labour force into domestic or shadow economy activity. Maintaining the illusion that all individuals of working age can or should find work under market conditions can serve no purpose, since this certainly does not apply in the West. Finally, there may also be restructuring across gene-rations. While these economies have high levels of education and literacy, much of their human capital consists of work experience that the transformation has rendered obsolete. There is now strong evidence to indicate that rates of return to new, experience-related human capital has recently increased in the transforming economies. Since this investment will clearly be most productive for and easily amortized by younger workers, the transformation is giving rise to an emerging 'generational conflict'.

Under these extreme conditions, Burda maintained that labour market policies and institutions will strongly influence both the speed at which unemployment returns to some 'natural' rate and that natural rate itself. For example, the Czech Republic, Slovakia and Bulgaria have already reduced their pal1icipation rates sharply towards those of low-income OECD countries through their strict administration of unemployment benefits. Early retirement programmes can also increase total output, despite their budgetary cost. The Eastern German programme has sharply reduced youth unemployment; Hungary and Poland, in contrast, have sought to protect their workers from redundancy, so early retirement is much less common and youth unemployment is high.

Active labour policies, which are designed to increase the efficiency of the matching process directly, include retraining programmes, mobility grants, reinterview programmes and efforts targeted on specific high-unemployment groups. The effectiveness of the Czech and Slovak employment offices, which employ relatively large staffs, appears to confirm the importance of their role in transmitting information to workers who are still learning how to search effectively for new opportunities. Direct job creation plays a similar integrative role to state employment under communism, while further programmes target young people, the unskilled and the long-term unemployed. Combined with the rigorous administration of unemployment support, these policies have successfully prevented long-term joblessness - even in Slovakia, where unemployment is considerably higher. Public works support short-run labour market turnover and may be largely funded by savings on unemployment benefits, whereas wage subsidies tend to freeze existing inefficiencies, remove pressures for change and distort compensation structures. Recent Czech and Slovak experience indicates that short-term job creation and the effective targeting of marginal rather than inframarginal groups may provide an effective response to the current adverse labour market conditions elsewhere in Central and Eastern Europe.