The sustainable rate of unemployment in transition countries – A case study for Macedonia

Nikoloski, Dimitar (2009) The sustainable rate of unemployment in transition countries – A case study for Macedonia. VDM Verlag, Saarbrucken, Germany. ISBN 978-3-639-09399-5


Download (41kB) | Preview


Few other themes in the theoretical and empirical literature of Economics have attracted as vast a scientific attention as the process of transition from a centrally-planned to market economy. Though transition can be assessed in each of the economic, political and social dimensions, the present research focuses on its economic aspects with an emphasis upon labour market performance. Taking into account the focus of this research, the political and social aspects of transition have not been detailed, although they have been equally important and closely related to the economic dimension. More specifically, we are interested in assessing the unfavourable labour market outcomes in South-Eastern European Countries generated by the processes of ownership restructuring and labour reallocation. Not all transition countries have been equally successful in managing the transitional transformation due either to differences in the initial conditions, contextual differences or the types and timing of policies adopted. Transition countries are a heterogeneous group, differing in their experiences as well as in their degrees of success in achieving transitional reforms. The Central-East European countries (CEECs) and Baltic states have been the most successful in overcoming the initial recession, experiencing a stylised U-shaped trend in GDP and employment growth. In contrast, most of the members of the Commonwealth of Independent States (CIS) and South-East European countries (SEECs) are still struggling with high and stagnant unemployment which stems from their low institutional capacity and modest output growth. In our study we focus on the latter group of countries, paying particular attention to the case of Macedonia. The emergence of open unemployment at the outset of transition was one of the most evident side-effects of transition and, to our knowledge, represents a historically unique event. The initial ‘transitional unemployment’ differed in several aspects from other types of unemployment in that it was characterised by pronounced labour market segmentation, long average duration of unemployment and a low probability of exiting unemployment into employment. Given the depressed characteristics of SEECs labour markets, the traditional western form of adjustment was coupled with other mechanisms, such as growing employment in the informal sector, non-participation and emigration. With respect to this, governments in transition countries have faced a challenging task in developing modern labour market institutions and providing an appropriate welfare system for their citizens. Having in mind this context, we have addressed several research questions that motivated us throughout the research. First, how can we define the sustainable rate of unemployment with respect to the characteristics of the labour markets in transition countries? Second, how do different policy packages and particularly passive labour market policies influence that sustainable rate of unemployment? Third, what is the role of the less traditional labour market adjustment mechanisms in determining labour market outcomes? Fourth, how can different labour market equilibria be explained? And finally, which measures should be recommended to the policy-makers in order to improve labour market conditions and ultimately reduce the unemployment rate. The thesis consists of eight interrelated chapters. We next briefly outline the contribution of each chapter in developing answers to these research questions. In Chapter 1 we present, as a starting point of our research, a general overview of labour market trends in transition countries, and particularly in Macedonia. Although we analyse several labour market issues concerning employment and participation, we pay special attention to analysis of the nature of, and trends in, unemployment. The second part of this chapter examines the characteristics of passive labour market policies in transition countries. According to the existing labour regulation, the generosity of unemployment benefits is assessed in terms of eligibility criteria, duration, replacement rates and coverage. Furthermore, we provide an explanation for the disparity between the estimate of unemployment based on the Labour Force Survey (LFS) and that based upon the registered unemployed. We argue that disparity between these measures of unemployment largely reflect deficiencies in the unemployment benefits system. In addition to the LFS to registered ratio, we construct two novel indices that help us to investigate the difference between LFS figures and registered number of unemployed. In Chapter 2 we critically assess two different strands of the literature concerning labour market equilibria: the Non-Accelerating Inflation Rate of Unemployment (NAIRU) and Optimal Speed of Transition (OST). By analysing the determinants and policy implications of NAIRU we arrive at the conclusion that this concept is not applicable in the case of the more backward transition countries. Furthermore, our survey of the assumptions, key mechanisms and policy implications of the OST models highlights some shortcomings which suggest that they cannot be per se used in the determination of the sustainable rate of unemployment in SEECs. As prerequisite for our later research, we develop a conceptual framework in which we formulate a more appropriate definition of the sustainable rate of unemployment. In addition, we explicitly state our main research questions and introduce and justify the methodology that we pursue in developing our answers. Chapter 3 provides an assessment of the labour market flows in transition countries with specific reference to Macedonia. As our main tool for analysis we use an adapted stock-flow model in which employment in the private sector is considered as a distinct labour market state. Furthermore, we construct a stylised picture that simultaneously represents the dynamics on the demand and supply side of the labour market, according to which the transition process can be roughly divided into two phases with apparently different labour flow characteristics. In the initial phase of transition the flows mainly occurred from the declining state sector into unemployment, whilst the second phase has been characterised by a gradual growth of employment in the private sector. Our analysis of Macedonian labour market flows helps us to identify that the underlying cause of its stagnant unemployment pool and increased incidence of ‘discouraged workers’ phenomenon is the low outflow rate from unemployment to employment, creating a ‘bottleneck’ in the labour market. In Chapter 4, Chapter 5 and Chapter 6 we separately assess three alternative labour market adjustment mechanisms: employment in the informal sector, non-participation and emigration respectively. For each of them, we provide analyses of their origins, their main characteristics, as well as their consequences for labour market outcomes. For this purpose, we use officially published data from surveys and censuses and apply the standard tools of empirical analysis such as multiple regression and gravity models. Furthermore, we identify the role these labour market adjustment mechanisms play in Macedonia, compared to their general trends in the rest of transitional world. The investigation of the level of association between the unemployment and these other labour market adjustment mechanisms is of particular importance since it enables us to identify their capacity to absorb part of the unemployed workforce. Additionally, we investigate the possible overlap between these labour market adjustment mechanisms, i.e. their interactions in cushioning the economic and social consequences of persistent unemployment and their possible fiscal implications. The results obtained from these assessments are later used as a basis for integrating the labour market adjustment mechanisms within our model of sustainable rate of unemployment. In Chapter 7 we formally model the sustainable rate of unemployment in transition countries by drawing together our analyses of labour market phenomena. We fill the gap in the literature by building a model that brings together the interaction between passive labour market policies and labour market adjustment mechanisms. In our comparative static analysis we examine the interactions between job creation, market wages and participation decisions in the context of SEECs and consider the possibility of multiple equilibria. For this purpose we calibrate our model with parameter values that correspond to our findings in the previous analyses. In using the model we attempt to mimic the features of a depressed labour market, characterised by weak job creation in the formal sector. In addition, we perform dynamic simulations of labour market evolution over time and explore the nature of alternative outcomes by assuming different policy scenarios. Finally, in Chapter 8 we summarise our main findings, identify the contribution to knowledge made in our research and set directions for the future policy development in SEECs. In this context, we separately formulate recommendations for passive labour market policies and policies targeting labour market adjustment mechanisms that could be jointly undertaken as a complementary policy package. Concerning passive labour market policies, we concentrate on improvements in unemployment benefit administration and argue that policies toward the adjustment mechanisms should be designed with respect to their potential for supporting effective job creation in the formal sector. In summary, the proposed policy package should be designed to encourage labour supply and strengthen job creation in the formal sector by gradually reducing the role of the non-traditional adjustment mechanisms. We hope that the policy package championed in our research, together with other policies such as active labour market policies and reforms to the education system will improve labour market conditions and eventually decrease unemployment in Macedonia.

Item Type: Book
Subjects: Scientific Fields (Frascati) > Social Sciences > Economics and Business
Divisions: Faculty of Economics
Depositing User: Mr Dimitar Risteski
Date Deposited: 02 Dec 2019 10:00
Last Modified: 02 Dec 2019 10:00

Actions (login required)

View Item View Item