Unemployment, once unknown and illegal in the formerly communist regimes in eastern and central Europe, has become a significant social and economic phenomenon. The rise in unemployment rates has been large but varied across countries. The transition from centrally planned economies to market-oriented economies has produced significant reductions in employment in the state sector as consumer-driven incentives begin to influence industrial structure. Reductions in employment in the state sector were partially offset by reductions in labor force particpation. Differences in the decline in labor force participation among countries led to significant differences in the relationship between unemployment growth and contraction in employment. However, the decline in labor force participation seems to be concentrated in the early stages of the transition, and in the future declining labor force participation is not likely to play as significant a role in dampening the growth of unemployment.
One can see three forms of evolution of unemployment in Eastern and Central Europe. In Poland, Hungary, and the Czech Republic, the state sector is declining while the private sector is growing robustly. The key questions are how much labor must be shed from state firms and what will happen to private sector growth when the stock adjustment process ends. In Bulgaria, and to a lessor extent, Slovakia, the decline of the state sector has been strong while the growth of the private sector has been weak. The key issue here is whether the economic and political weight of unemployment and depression will allow reform to proceed. In Russia, and to a lesser extent, Romania, a soft budget constraint for the state sector is allowing state firms to maintain employment. The key questions in these circumstances are the implications for macroeconomic stabilization and the incentives for restructuring.
The flow through unemployment and the duration of workers' spells of unemployment have significant implications. The labor markets of Eastern and Central Europe are characterized by a relatively low level of flows into and out of unemployment. Much of the process of labor reallocation is taking place through job-to-job shifts that do not involve a spell of unemployment. On the other hand, a significant share of workers are experiencing long spells of unemployment. Long spells of unemployment increase the hardship of unemployment for workers and their families and lead to deterioration of work skills.
One factor contributing to the long-term duration of unemployment appears to be major geographic imbalances in the distribution of the ununemployed and vacancies. The high costs of relocation, accentuated by the underdevelopment of capital and real estate markets, contributes to this problem. Active labor market policies, such as retraining and the provision of alternative jobs, need to be focused on the long-term unemployed.