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Labor Markets in Transition. Pradeep Mitra Chief Economist Europe and Central Asia Region World Bank

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Labor Markets in Transition

Pradeep Mitra

Chief Economist

Europe and Central Asia Region

World Bank

Opening address at a conference on “Social Inclusion in Eastern Europe and Central Asia-Towards Mainstreaming and Results” hosted by the Ministry of Social Affairs and Labor, Government of Hungary and the World Bank

Hotel Flamenco

Budapest, Hungary

September 25-26, 2007

Income per capita is less than half of the EU-15 average for even the wealthiest subgroup of ECA countries and a quarter of the EU-15 average for the other ECA middle income countries
Growth in GDP per capita from 1998 to 2006, the most rapid for CIS countries recovering from a deep transitional recession, owes more to growth in labor productivity (GDP/EMPL) than improved employment rates (EMPL/Working POP) or favorable demography (Working POP/POP)(Growth in GDP/POP) = (Growth in GDP/EMPL) +(Growth in EMPL/Working POP) + (Growth in Working POP/POP)
Indeed the employment rate (EMPL/Working POP) continued to fall inmany countries even after 1998. Slack labor markets are manifest in either open unemployment, falling labor force participation or low-productivity employment. While the employment rate is generally higher in CIS countries compared to Eastern Europe, many jobs in the CIS are in low-productivity occupations.

Employment Rates: Early Transition, 1998 and 2006

Note: The earliest years (blue bars) for each country are as follows:

1990:Azerbaijan, Belarus, Bulgaria and Estonia

1992: Hungary, Russia

1993: Armenia, Czech Republic, Kazakhstan, Poland and Slovenia

1994: Albania, Lithuania, Romania and Slovak Republic.

1995: Moldova and Ukraine.

Source: ILO LABORSTA database, World Development Indicators

Note: The employment rate in Moldova between 1998 and 2003 shows a decline based on LFS but an increase based on household survey data on account of a likely more restrictive definition of informal sector employment in the LFS.

Labor Force Participation Rates are lower in Eastern Europe compared even to the EU15 and are particularly low for older age groups and women
While the population is expected to decline by over 15 percent by 2025 in Ukraine, Bulgaria and Georgia on account of aging, it is expected to expand by over 30 percent by 2025 in Turkey, Turkmenistan, Uzbekistan and Tajikistan

Percentage Change in Population in ECA Countries, 2000-2025

Source: UN Population Prospects

The share of working age population to total population is expected to decline rapidly after 2015 in all subgroups of countries except Turkey and (Azerbaijan and low income Central Asia), with potentially adverse consequences for growth.
Increasingly dynamic labor markets in transition economies were reflected in rise in the sum of job creation and job destruction rates to levels broadly comparable to those in developed countries and lagging slightly below those in developing countries

Source: Bartelsmann and Scarpetta (2007); Brown and Earle (2007)

New firms played a major role in job creation in the early years of the transition – 70% to 90% in Hungary and Romania; 60% to 80% in Ukraine and 50% to 70% in Russia. This share fell later to 20% except that in Russia and Ukraine it increased when firm entry rose following the 1998 Russia crisis. This underlines the importance of the demand side of labor markets in transition.

Source: Brown and Earle (2007)

  • Rapid economic growth during 1998-2006 has been driven more by increases in aggregate labor productivity than job creation.
  • The employment rate has continued to fall in many countries even after 1998. While the employment rate is generally higher in CIS countries, many jobs in the CIS are in low-productivity occupations. Participation of older and female workers is particularly low in Eastern Europe.
  • Aging and the associated decline in the share of working age population in total population expected after 2015 in Eastern Europe and middle income CIS countries, taken together with limited utilization of labor reflected in low participation, has the potential to derail convergence to EU15 living standards.
conclusions cont
Conclusions (cont.)
  • Entry of new firms has been important for job creation, particularly in the early years of transition and also in Russia and Ukraine during the recovery from the 1998 crisis. Whereas new firms have expanded employment, existing firms have, on average, improved productivity by shedding labor. Hence the business environment facing firms is an important “demand side” determinant of labor market outcomes.
  • Activation policies (that encourage job seekers to become more active in their efforts to find work by providing job search support and requiring regular contact with employment services as well as compulsory participation in programs after a certain period of unemployment) can increase labor utilization, but only in conjunction with improvements in the business environment to address the demand side of the labor market, as well as policies to alleviate shortages of labor skills that are increasingly emerging in the new EU members.