Unemployment, Labour Markets and Structural Change in Eastern Europe

Labour markets in Eastern Europe Michael Burda Unemployment is a major concern in the transforming economies of Central and Eastern Europe. The modern ‘flow approach’ to labour markets suggests both that unemployment is an important component of the transformation process and that the labour market institutions adopted will influence the rate of unemployment in the long run. To date, Eastern European countries exhibit considerable divergences in several of these institutions; especially in unemployment benefit systems, collective bargaining structures, and active labour market policies. An aggregate matching function is successfully estimated for data from Czech and Slovak employment offices. Emerging labour markets in the East function not so differently from those in the West. The implied dynamics make both ‘big bang’ and ‘benign neglect’ unattractive strategies for transformation: a ‘mixed bang’ is more appropriate. Quantitative evidence about the effects on unemployment of different labour market institutions in OECD countries is used to make long-term projections of equilibrium rates of unemployment in Central and Eastern Europe, given the labour market institutions now in place there. With the possible exception of the Czech Republic, high unemployment is likely to be pervasive and persistent.