Labor markets and market oriented reforms in socialist economies

The movement of countries in Central and Eastern Europe (CEE) and the former Soviet Union (FSU) to a market economy will require a number of important changes in labor markets. These changes include: the linking of wages more closely with productivity; the allocation of social goods, e.g. housing, education, child care, outside the wage bill; and the development of new safety net institutions to replace the role played by socialist full employment and job security policies. The objective is to focus labor markets on improving allocative efficiency, while new institutions address income inequality and poverty. The transition to a market economy has initially produced falling output, employment, and real wages in CEE economies and the FSU. Layoffs and open unemployment have emerged once enterprises have been forced to adopt hard budget constraints by stabilization and adjustment programs. The social cost of the transition is measured by the decline in aggregate production and incomes. As these economies respond to new market incentives, however, the expectation is that these costs will be offset by accelerated growth, rising employment, and higher incomes producing gains in social welfare. Socialist economies can choose how the benefits and costs of adjustment are distributed among workers, employers, and society at large. Three examples are provided in the paper from experience in industrial market economies. Managing the cost of unemployment in the transition will be important to the political sustainability of economic reforms. Effective strategies will be required to re-train displaced workers, provide employment services and labor market information facilitating labor mobility, and encourage employment creation. Deciding who will bear the cost of implementing these strategies is a decision each socialist economy will have to make.