Colloquium 1996 Panel II : Living Standards, Social Welfare and the Labour Market

Labor Markets and Income Maintenance: A Survey of Transition Marvin Jackson Director, Leuven Institute for Central and East European Studies Faculty of Economic and Applied Economic Sciences Catholic University of Leuven, Belgium Summary The former system under communist rule in Central and Eastern Europe established stable expectations about the conditions of economic welfare and the connections between economic welfare and the provision of labor services. Of course there were exceptions as in Romania and Albania, or generally when one's well-being was undermined by environmental erosion or disaster. Transition both shook these expectations and initiated forces that changed, sometimes dramatically, the terms upon which economic security could be obtained. On one hand, opportunities for much higher income opened through the provision of badly needed services and goods, but also rent seeking, tax evasion, and criminality appeared. On the other hand, falling real wages, unemployment, and loss of purchasing power of savings, pensions, and other social benefits threatened workers, farmers, pensioners, and new entrants into the labor force. What can and should be said about these two components of the transition: 1) the labor market and 2) changes in both average real incomes and the distribution of income underlying economic welfare? Some notable conclusions from this survey are: In Central and Southeastern Europe, the fall in official employment figures has nearly stopped, has stopped, or is rising. Also in Central and Southeastern Europe, unemployment rates have fallen in some countries since 1992 and have stabilized in others. Except for the very low rate of the Czech Republic, there appears to be emerging unemployment rates of from 10 to 15 % for this region. Although there is clearly a worry about increasing shares of long-term unemployment, so far the shares in this region are not higher than in the European Union. Also, the share of youth unemployment, the disparity between female and male unemployment, and the variation across regions within countries all seem to fall within the ranges of European Union countries. In terms of incomes, there is a difficult to explain contradiction between consumption statistics and real wage statistics, with the former showing as little as half as much fall from 1989 to 1993 as the latter. Differences in income distribution have opened up and are resembling, but are not greater than, those in comparable western countries. The differences are mostly in the increases of white-collar incomes compared to blue-collar incomes, and in much wider dispersions of white-collar incomes. Blue-collar incomes have not become highly differentiated. Returns to education and to new job experience have increased significantly. Systematic studies of Polish and Russian poverty both show a concentration of poverty among large families and, hence, the great incidence of poverty among youth. The incidence of poverty falls as education increases in both countries. In Poland poverty incidence is also higher in rural areas, but is not especially connected to agricultural occupations. Contrary to popular opinion and the focus of the western media, pensioners have less poverty than the average population and in Russia they have even experienced increasing purchasing power in the first two years of reforms. These facts suggest that income assistance should be better targeted to provide health and opportunity for the region's youth. Note: Tables will open up in a new browser window

Labor Markets Changes in Employment and Output The former system generated a condition of over-employment that was concentrated in the industrial sector. Over-employment has two meanings in this context. First, more people were employed than might have been needed, given the amount of output produced. Second, the incentive to have a job was distorted both by laws that made not working illegal, as well as by the linking of essential services to employment. The latter probably contributed to the unusually high participation rates in work of females. In Poland, for example, some studies suggest that overmanning could have been as high as 25% in the late 1980's (European Commission 1995, p.3). If that were the case, even the 14% decline in Polish employment from 1989 to 1993 (Table 1) would not have eliminated overmanning. Hence, it is not surprising that the first factor affecting the change in social conditions has been the decline in employment in the region. Between 1989 and 1993, the UN Economic Commission for Europe estimated overall employment in the region declined by 8.4% (ECE 1995). Thus, nearly 15 million people either moved from recorded to unrecorded employment, the unemployed, or the inactive population. If over-employment existed in the initial state a fall in employment could have taken place without a fall in output. But actually in the initial stages of transition output has tended to fall more than employment. Consequently, the degree of over-employment has risen. As can be seen in Table 2, by 1993 only Slovenia, Hungary, and Poland had experienced a decline in over-employment by this definition. Employment also started to fall less than output in the Czech Republic and Romania in 1993 and even more countries by 1994. Over employment has reached huge proportions in most of the former Soviet Union. According to the Economic Commission for Europe, this could be the result of several factors: mismanagement, the customary influence of workers on management, the strong position of trade unions, and the effort to stay on the payroll in order not to lose social provisions at the enterprise level. Changes in the Structure of Employment Shift to services. Another initial distortion of the former economic system was over-employment in industry and under-employment in services. Not surprisingly, as shown in Table 3, services have become the most important source of employment in the region. This does not mean that service employment always has increased nor have services fully absorbed losses in other sectors (European Commission 1995, pp. 4-5). Great job losses in industry have matched the greater decline of output in this broad sector of activity. Reductions continued even in 1993 after output started to recover. In that year alone, industrial employment fell 28% in Albania, but by contrast only 2% in the Czech Republic. In the Czech Republic and Hungary in 1993, great losses, respectively 17% and 24%, took place in agricultural employment, which was only half the levels of 1989. In Albania and Bulgaria, by contrast, agricultural employment increased. This shift is reflected in Table 3. Shift to private employment. As shown in Table 4, employment organized privately or as "non-state" has increased rapidly as a share of total employment, especially in services, but not enough as officially estimated to offset officially estimated declines in employment. As will be pointed out below, much employment in the private sector takes place by direct movements from a state to a private job without a period of unemployment in between. Also, part-time employment in private activities, even by those otherwise fully employed by the government, is difficult if not impossible to estimate and is rather extensive among persons with high technology skills. Employment in simple household services is surely rarely reported. Eliminating "wage levelling". There are other significant changes in the structure of employment such as shifts within the service and industrial sectors. Also, within enterprises significant shifts in wage structures have taken place, thus suggesting reductions of categories of work that added little to value as well as the increased differentiation in pay according to the quality of work. Leaving Official Employment When an employed person leaves a job it is possible to go directly to another job, be pensioned, or enter the ranks of the unemployed. In the latter case, the person might find a new job or eventually become inactive after being unemployed for a long time. Of course, there is also a need to account for new entrants into the labor force when students finish their training or education. They can also be employed immediately or enter the ranks of the unemployed. Some estimates of these alternatives are presented in Table 5. The change in population plus the change in employment should show up as either a change in unemployment or a change in the inactive population. As can be seen, in the countries listed in Table 5 the change in registered unemployment does not equal the change in population plus the change in employment. The difference "implied withdrawal" from the labor force represents changes in the inactive population. In all but Romania and Slovakia there was withdrawal from the labor force into the inactive population. In Albania this represented a large 11.5% of the initial number of employed persons. In Bulgaria, the Czech Republic and Hungary 6-8% of the initially employed appear to have left the labor force. Hungarian data shown in Table 6 gives a better picture of the sources of change in that country's inactive population in the period of 1990 to 1994. Low Turnover of the Unemployed Pool in Central and Eastern Europe The dynamics of employment and unemployment are even more complex when we examine the flows into and out of unemployment, and the flows through enterprises. As illustrated with 1993 data in Table 7, the inflow rate (monthly inflow as a percent of employment) in transition countries has been very low compared to western countries. Unemployment has built up because (with the exceptions of Russia and the Czech Republic) the outflow rates have been so low (monthly outflows as a percent of unemployed). In this respect, transition countries are resembling Western European countries and are building up large shares of long-term unemployed (Layard and Richter 1995). Flows through Russian enterprises, where unemployment stayed low, showed fairly high rates of hirings and separations, but very low rates of redundancy - only 1.5% in 1993. Industrial enterprises even registered a vacancy rate of 3.8% in the summer of 1993. Two things were happening to keep the redundancy rate so low. First, workers were quitting stagnate enterprises and moving into new jobs. Second, rather large numbers became "hidden unemployed" through schemes of involuntary leaves and short-term work (Layard and Richter 1995). By contrast, in Central Europe in 1991 only 56-67% of outflows from unemployment were to jobs (Boeri 1994). In 1992-93 these shares dropped to about 50% in Hungary, the Slovak Republic and Poland, but rose to nearly 71% in the Czech Republic. It is assumed that those who left without jobs became "discouraged", retired and left participation in the labor force. Registration versus Survey Data: Are Unemployment Rates Overstated? Unemployment data from the unemployment registers of the various countries have been considered to give a poor picture of unemployment. This is because they not only are subject to national regulations, which are affected by norms on the eligibility and duration of benefits, but also by individual incentives not to report informal activities or even to ask employers to not offer jobs in order to claim benefits. Nevertheless, at the same time there are persons seeking work, who are no longer eligible for benefits and who may believe there is little benefit to being registered. The first Labor Force Surveys (LFS) were initiated in Hungary and Poland, and have since been extended to other countries. The surveys attempt to implement measures of unemployment that are internationally acceptable. A common definition, which reflects the OECD-ILO standard, is with respect to a reference week to be out of work, seeking work, and immediately available for work. A modified measure includes the possibility of someone working part-time who is willing to work full-time. (Boeri 1994) The countries in the table seem to fall into three groups. First, the Czech Republic and Bulgaria, which have tight registration requirements and short duration benefits, seem to exceed even the LFS standards in the numbers officially registered as unemployed. Second, Poland and Hungary have had more generous registration standards, but have become more conforming. Third, Romania's registrations include far greater numbers than those covered by the survey. This difference seems to match the Romania data in Table 5 above, suggesting that nearly 600,000 persons have come out of the inactive group either to work or to register as unemployed. Russia, not included in Table 7, has registration data which extremely under estimates actual unemployment. A survey undertaken by Goskomstat on the basis of ILO definitions in December 1994 revealed open unemployment of 5.3 million persons (7%) compared with only 1.6 million (2.1%) officially registered. The same survey found 4.8 million persons (6% of the labor force) "involuntarily working part-time, or being on compulsory unpaid leave, or with only partial maintenance of wages" (UN-ECE 1995, p112). The latter, as suggested by the UN Economic Commission for Europe, is a rough measure of disguised unemployment in Russia. The Structure of Unemployment A comparison of the shares in total unemployment of female, youth, and long-term unemployment can be seen in Table 8. Although there are western countries like Spain and the Netherlands that come within the ranges of the share of long-term unemployment in Central and Eastern Europe, the uniformly high shares in Central and Eastern Europe is a special phenomenon. No country in the West has the high shares of females in the unemployed found in Russia and Ukraine (for example, the highest share in 1994 was Belgium and Portugal with 56.3% and 56.6% respectively. In Russia, the registered unemployment rate, which hardly reflects reality, was twice as high for women (2.5%) as for men (1.3%) in September 1994). In Table 9, as can be seen, the rates for women are not always higher than for men. In fact, in the case of these countries in Central and Southeastern Europe, the relative unemployment rates for women seem to be lower than in most western countries (again, see the data in UN-ECE 1995, p.46) (1). In the West, the highest shares of youths in total unemployment were found in Italy with 40.3% and the United States with 34.0%. The range of youth unemployment rates in the West (from 38.3% in Portugal to 5.2% in Germany) seems roughly comparable to the figures in Table 9. One might assume there to be positive incentives to hire new school graduates in Central and Eastern Europe because they can be given new human capital if education systems were only modernized. Regional variations always become greater as the number of reported regions within a country increases so such statistics can be quite biased. According to the latest Employment Observatory, unemployment rates varied within the following ranges (per cent): Bulgaria 3.9 to 18.0; Czech Republic 1.3 to 4.8; Hungary 6.9 to 15.6; Poland 10.9 to 21.0; Romania 6.4 to 15.5; and Slovakia 4.6 to 17.4. In most cases the lowest rates are found in the capital city (or its region) and remains a situation that should be more systematically explained. Again, however, these reported ranges are not greater than those found in the countries of the European Union. Benefit Schemes and Labor Policy All transition countries began with relatively generous retirement schemes inherited from the former system. Since nearly everyone was officially employed and paid wages, there was no need for unemployment compensation schemes. However, soon after the onset of transition rather generous schemes were introduced which paid as much as 65-70% of former incomes and in some cases were without time limits. These schemes soon came under heavy criticism. First, they consumed very large shares of public funds that were increasingly difficult to raise (Sachs 1995). In addition, they have been criticised for negative effects on work incentives, for raising employment costs, encouraging unreported employment, and for discouraging search effort for new jobs. Beginning in 1992 eligibility requirements were tightened, benefit periods defined and reduced, and gradually average benefit levels fell. In Poland and Hungary where reforms were slow, the new socialist governments have had to undertake the unpopular job of tightening benefits. According to Boeri (1994) the shares of registered unemployed receiving benefits fell from 55-80% in 1990 to 35-60% in 1993. Average benefits fell from 50-60% of average wages to only 35-45% (see Table 12). Benefit and retirement schemes continue to be discussed. Among the issues raised are: The efficacy of encouraging early retirements of workers without relevant experience skills because doing so makes places for younger and easier to train workers. This was done in East Germany (Burda 1994). The efficacy of terminating benefits in the short run when it is important to keep unemployed persons in contact with the labor office for job information and possible training benefits (Boeri 1994). The Central and Eastern European countries spend larger shares of available funds on employment subsidies and smaller shares on retraining schemes than do the OECD countries (Boeri 1994), yet Burda and Boeri (1995) have made a special study of the "highly successful direct and subsidised job creation schemes" of the Czech Republic. A problem is that in the OECD countries retraining schemes often have few results.

The Impacts of Labor Market Transition on Incomes More Problems with Statistics Among the more hazardous endeavors is an attempt to explain adequately changes in real personal income and socially provided benefits during the transition. In Table 12 we provide the official indicators of changes in real wages as well as for relative pensions and unemployment compensation for the group of countries reported in The Employment Observatory for Central and Eastern Europe. As an attempt to verify this indicator we also report the change in real consumption expenditures. One can see that the two figures only coincide for the Czech Republic, suggesting a decline of about 20 percent in the component of the standard of living purchased through the market. Expenditures show quite a different impression for Hungary, Poland, and Romania. Part of this difference, of course, is to be explained by changes in the number of wage receivers per family, as well as by income from non-wage sources. In Poland's case, Rutkowski (1994) claims that 1989 is a misleading base year because wages had been inflated by the communist regime in 1988 and 1989 without providing consumer supplies. Thus, forced saving had been thrust upon Polish workers. In his opinion, taking 1987 as a base year would make better sense and this would suggest a decline in real wages of about 10 percent. As has already been explained, even though possibilities for more generous pensions and unemployment compensations were available, the effects of inflation has tended to push average payments down to the minimum legal limits. Thus, while relatively generous unemployment allowances even had the effects of encouraging some persons to register for employment who had never worked before, those depending entirely on benefits have seen their real income decline even faster than real wages have declined. Pensioners in Hungary and Albania have also suffered a similar decline in the purchasing power of their pensions compared to real wages. But in contrast, Polish and Romanian pensioners who might have received minimum pensions would not have faced this disadvantage. Changes in the Distribution of Income In judging comparisons of income distribution over time and across countries, one should bear in mind that there are important general tendencies that affect results apart from the particular system of any country. Thus, for example, incomes tend to become more equally distributed as the level of GDP per capita rises. Also, incomes tend to be more equally distributed in smaller countries than in larger countries. Probably the latter tendency results from the fact that both natural and human factors are more homogenous in smaller countries. Income distributions in the communist system also had special characteristics. Generally the upper tail of distribution was not reported; it took the form of special perks for political elites and of incomes earned in the black and grey economies. Wages and salary income reduced the relative position of white collar groups and specialists like medical doctors and lawyers. Among blue collar workers, high wages were earned in mining and other dangerous occupations, as well as in favored heavy industries. Bearing these general matters in mind, a more precise view of earnings distribution in selected Central, Eastern and Western European countries is given in Table 13 for 1988 and 1991/92. The first comparison shows the relative earnings of selected groups compared to the median earnings. For example, in the Czech Republic in 1988, the lowest 5% of earnings recipients received 53.8% of the median earnings while the highest 5% of earnings recipients received 162.5% of the median earnings. It is useful to borrow some of Rutkowski's summary comments on changes in Polish income distribution: There has been some increase in the overall earnings inequality since late 1980s but it has been rather modest. While salaries of white-collar workers became more dispersed, wages of blue-collar workers actually became more compressed. In contrast to the situation prevailing before the transition, earnings inequality is now higher among white-collar workers than blue-collar workers. The increase in earnings inequality results largely from rapidly growing salaries of top paid white-collar workers rather than from rising dispersion of wages in the lower tail of earnings distribution. Correspondingly, changes in wage distribution did not, in general, contribute to the increase of poverty. It is rather the fall in real wages and especially the loss of income due to unemployment which brought about the increase in poverty. Wage inequalities are significantly higher in the private sector than in the public sector. In the private sector they approached a level high by European standards (they are higher than in Germany or the UK). This is a result of the development of a class of highly paid white-collar jobs in the private sector. Compared to the situation under socialism, the relative position of white-collar workers against blue-collar workers improved substantially. This is especially the case in the private sector and in the fast developing sectors like finance, government, and justice. There is a strong increase in returns to education, again particularly in the private sector. Hence, the private sector provides incentives for upgrading of skills and greater investment in education. While workers with a high level of human capital tend to earn more in the private sector, workers with low educational attainment tend to earn more in the public sector. Age-earnings profiles become flatter which means that experience gained under the centrally planned system lost much of its value. This is probably associated with the vintage effect whereby younger labor force cohorts are rewarded with relatively high wages. There is incipient strong correlation between households' standards of living and their level of human capital. Households with a low level of human capital drop from high income groups and fall into low income groups. As Rutkowski points out, what is taking place in Poland is also taking place in other transition countries in more or less the same degree. Although changes in the Czech Republic have been less dramatic than in Poland, Vecernik (1995) echoes Rutkowski's conclusions in his study of income distribution in the Czech Republic. In particular: Increasing differences in income distribution are taking place at the top levels rather than the bottom levels, and faster in the private sector than in the public sector. Returns to educational investment are increasing. This change is more evident in private firms and in firms with significant foreign ownership. Ownership is starting to replace political connections as the source of high incomes. Regarding the increased return on human capital in East Germany, Burda (1995) points out that experience accumulated and job tenure under the old regime consistently show lower returns than similar variables estimated for western economies. He concludes that there is significant human capital obsolescence for workers of all cohorts and quotes research which estimates income losses of up to 40% for East German workers aged 40 and older because of these factors. The Growth and Incidence of "Poverty" A "standardized poverty level" for the region? Milanovic (1994) has attempted to present a comparison of poverty in the region. As he points out this is a notoriously difficult issue because measures are unreliable and difficult to interpret. How, for example, does one include the possible benefits associated with regained freedom and democracy? Does one apply a relative standard which depends upon income levels in one country or one absolute standard across countries? In other words, is the absolute level the same in Slovenia and Albania, for example? Milanovic takes as standard a $120 monthly per capita income at 1990 international prices and attempts to correct faulty income figures by making adjustments with expenditure data (2). This poverty line is four times higher than the absolute poverty line of the World Bank, but only one-half that of the United States or Germany. Compared to 1987-88, by 1992-94 he estimates that those living "in poverty" increased from 8 million (3% of the population) to 58 million (18% of the population). Some 30 million would be found in Russia alone, where the share of population rose from 3 percent to 21 percent. This excludes countries at war in the former Yugoslavia, the Transcaucasian region, Central Asia, and Albania, where data is unavailable or unreliable. Finally, in order to raise incomes to the "poverty level" some $5.5 billion would be required, assuming it would be given only to the poor and would raise them only to the $120 monthly level. The sum, we can note, would have to be given each year and we would have to assume that it would cause no substitutions of effort or of other income transfers - unlikely to be the case. Outside of Russia, in Poland and the Balkans the share of persons so counted as poor would increase from 5 percent 1987-88 to 17 percent of the population in 1992-94. By contrast, in the Czech Republic, Slovakia, Slovenia, and Hungary it would barely increase from 0 percent to 1 percent. The Baltic states started out with a situation similar to Central Europe, but then would fall so that about 30 percent of their populations were included as poor. Of course, different figures for poverty shares come from different sources. According to citations in the Economic Survey of Europe 1994-1995, in Hungary persons with less than the minimum official subsistence level increased form 15 percent of the population in 1991 to about 25-30 percent in the spring of 1993. Poland in 1992 is said to have had 35% of its population below the poverty line (UN, ECE 1995, p.119). The figure for Poland is much larger than that given by a World Bank (1995) study. According to the Bank in June 1993 some 14.4% of Poland's population or 5.5 million persons received less than its poverty standard of $140 per month in purchasing power parity. Its figure for 1992 was much smaller than 35%. According to Russia's official guidelines, the share of poverty reached a high of 34% of the population in February 1995 and 50.4 million people. Then the poverty share declined to 20% in the fourth quarter of 1995, when some 30 million persons were included (see Table 14). The incidence of poverty. Two detailed studies of poverty, one of Poland and one of Russia, suggested that the common image of who are the poor of Central and Eastern Europe is highly distorted. Contrary to the image of the poor old woman in the media, pensioners on average have not suffered great relative declines in real income. Also, a much smaller share of pensioners fall under the poverty line than is the case of the average person in the population. The worst hit segment are families with many children - thus the children, and persons living in rural areas, suffer most. According to the World Bank's study of Polish poverty for 1993 and earlier years (World Bank 1995): 1) poverty dropped steadily with increasing age and with increasing years of education; 2) the poorest segments of the population were the young and the poorly educated; 3) only 5% of the poor were elderly, while the great share of the poor were children; 4) about 60% of the poor fell into poverty because income was insufficient and for about 35% the problem was unemployment; and 5) about 60% of the poor lived in villages, although less than a third were linked to agriculture. The study of Russian poverty is based on the Russian Longitudinal Monitoring Survey (RLMS) and is published by Mroz and Popkin (1995). According to their report; 1) in both September 1992 and June 1993 about 28% of Russians fell under the poverty line; 2) by contrast about 60% of all households with 3 or more children suffered poverty; 3) only 17% of families with a pensioner fell below the line. By age groups in 1993; 1) 45% of those 17 or younger fell into poverty; 2) in the prime working ages the proportion of men and women under the poverty line was the same, about 37%; and 3) by contrast only 9% of men 60 and older and 17% of women 55 and older were in the poverty group. Thus, the poverty stricken old women are an important problem, but it is clear that pensioners as a group do not need to be targeted with further special assistance. Conclusions There are other questions that could and perhaps should be treated in this survey. Attention should be given to the effects of enterprise privatization on housing and social benefits, to the dramatic changes in rendering health services, to social indicators, and to other aspects of security and insecurity such as crime and political chaos. Still, by now a rather clear picture of the transition process in terms of changing labor markets and income distribution has emerged. The process of change has been slower in the former Soviet Union. But discounting a possible radical political change in Russia, what has happened in Central Europe should predict the main shapes of coming events in Southeastern Europe and that in turn should tell us important things about what will happen further east. I would repeat the main summary points given in the introduction and would suggest that the course of transition is rather like we might expect it to be. Both the problems of unemployment and income distribution would seem familiar to anyone who has studied these aspects of the economies of the European Union. Indeed, as Central Europe adopts the labor institutions of Western Europe, so should it acquire both the weaknesses and strengths of the latter.

Tables Table 1 : Percentage Decline in Reported Employment from 1989 to 1993 Table 2 : Differences in Percentage Change in GDP and Employment Table 3 : The Structure of Employment by Broad Sectors, 1989 and 1993 (percentage) Table 4 : The Share of Employment in the Private Sector Table 5 : Changes in Population, Employment, Unemployment and Activity from 1989 to 1993 year average (1000 persons) Table 6 : Sources of Economically Inactive Population in Hungary 1990 through 1994 (1000 persons) Table 7 : Registered Unemployment Flows and Stocks, 1993 Table 8 : Unemployment rate (in per cent of domestic labour force, end year) Table 9 : Unemployment Data of Labor Force Surveys and Registrations Compared Table 10 : Share of Female, Youth, and Long-term Unemployed: East and West in 1994 Table 11 : Comparative Unemployment Rates (labor force survey data) Table 12 : Minumum Wage, Average Unemployment Compensation, and Minimum Pension, as Percent of Average Wage Table 13 : Comparative Earnings Distributions in Central, Eastern, and Western Europe - 1988 and 1991/92 Table 14 : Some International Comparisons of Gini Coefficients of Income Distribution Table 15 : Official Poverty in Russia Footnotes Some samples for 1994, citing female (male) rates are: Italy 17.8 (8.3); Spain 30.9 (18.5); Belgium 14.4 (7.0); France 13.6 (9.4). 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