3.2.1 Labour demand dynamics in transition countries
The dynamics of labour demand in transition economies (TEs) have drawn con- siderable attention in the early years of transition from plan to market of the late 1980s-early 1990s, which involved Central and Eastern Europe as well as of Cen- tral Asia. This institutional change had a deep impact on labour markets in those regions.
The labour market dynamics in these regions over the last two decades were summarized by Lehmann and Muravyev [2011] with their emphasis on the role of
labour market institutions. The authors nd evidence that there has been consider- able liberalisation of labour regulations in TEs that have currently established sets of labour market institutions and policies, which are similar to those existing in mature market economies. The authors also nd that labour market deregulation improves their performance if employment protection legislation (EPL) is relatively unregulated since rms will be more willing to hire from the unemployment pool
while lowering the tax wedge3 and shortening bene t duration have a complemen-
tary eect on unemployment durations.
Until the late 1980s, most of the TEs, apart from Yugoslavia, were characterised by large excess labour demand (due to an ineective allocation of labour), no open unemployment, and high labour force participation at the price of extremely low labour productivity and substantial labour hoarding (see Granick [1987]).
The start of the transition saw a rapidly collapsing demand for labour due to labour markets addressing the ine cient use of labour resources during the central planning period. From the start of transition in 1989 until the resumption of eco- nomic growth 15 years later, these countries lost between one fth and two-thirds of their pre-transition level of GDP, EBRD [2009a] . Interestingly, the resumption of economic growth in Central and Eastern Europe (CEE ) in the mid-1990s was not always accompanied by increasing employment and falling unemployment (here there are cross country dierences). The diverse patterns of labour market adjust- ment in TEs have caused scholars and policy-makers to look for explanations of these dierent labour market outcomes such as heterogenous labour market policies and institutions (e.g. labour unions) roles across these countries.
Evidence on how labour market institutions and policies have aected labour market outcomes in Eastern Europe and Central Asia is scarce because of data constraints. Overall, data from TEs suggest that deregulation of labour markets improves their performance (see EBRD [2009a]).
Svejnar [2002] studies the TE economic performance after the fall of communism and shows that in most transition economies, employment decline reached 15 % to 30 % in the 1990s relative to the 1980s. He also observed that when combined with GDP data, employment data suggest that restructuring in the transition economies
involved an initial decline in labour productivity as output fell faster than employ- ment and a subsequent rise in productivity as output and labour stopped declining. But the author points out that it is also possible, with production shifting from large to small rms, that the decline in employment (and output) is less pronounced than suggested by the o cial data, since small rms, a typical feature of TEs in the early stages, are harder to capture in o cial statistics.
Singer [1996] estimated a dynamic labour demand equation derived from a cost- minimization model of monthly data from Czech rms from 1992 to 1993. These estimates are presented with derived long-term wage elasticities. The author nds small, insigni cant estimates of short and long-term elasticities, that suggest the possibility of labour hoarding.
A more recent paper by Carlin and Schaer [2012] using rm level data in- vestigates the interaction between the widespread opportunities for new business activities (after the collapse of planning) in transition countries and their business environment. The business environment includes physical infrastructure, the avail- ability of an educated labour force, provision of administrative and judicial services, the control of corruption and crime, and the stability of the macroeconomic environ- ment. They compare how dierent elements of the business environment aected rms in formerly planned economies with those in economies outside transition, doc- umenting not only the challenges faced by transition rms but also the eects of the planning legacy. Their model predicts that higher quality rms report higher shadow costs of constraints.
3.2.2 The Impact of the nancial crisis on rms' labour de-
mand
There is a little evidence of the impact of the nancial crisis on labour demand both in Europe and in in TE's. Bohachova et al. [2011] studied the employment response to the nancial crisis in Germany. They estimate a dynamic labour demand function for the years 2000-2009 accounting for the degree of working time exibility and the presence of works councils. They found that employment hardly changed over the crisis because of rm's labour hoarding (due to working time exibility and the
presence of works councils).
Babetski et al. [2012] nd that, in Czech manufactoring rms, both the wage and sales employment elasticities increased during the crisis, suggesting that rms became demand constrained because of the fall in external demand, but only the
sales elasticity is signi cantly dierent (data until 20094). They also nd coe cients
on the lagged dependent variable capturing the persistence of labour demand, of beween 30 and 40%, which are quite low given that usually, in absence of a crisis, the coe cients are higher in magnitude (around 80%). This nding suggests less persistence in employment, and that both sales and wages were channels through which rms adjusted to the crisis.
EBRD [2011] examines how the crisis aected the economic well-being of house- holds, making direct reference to unemployment using the 2010 EBRD-World Bank Life in Transition Survey II (LiTS). The results show heterogeneity in the increase in unemployment. They show that an index of the strength of the crisis on house- holds and the rise in unemployment are strongly positively correlated. According
to the impact index 5, the hardest-hit transition countries during the nancial cri-
sis were those in the Baltic region and in South-Eastern Europe (FYR Macedonia, Latvia, Lithuania, Moldova, Montenegro, Romania and Serbia). Tajikistan, which saw a sharp decline in remittances due to a return of migrant workers, is also in this group. At the other end of the spectrum, countries where the crisis impact ap- pears to have been relatively mild included the Czech Republic, Georgia, the Kyrgyz Republic and Poland.
EBRD [2010] studies how unemployment rates reacted to the nancial crisis. The report nds that as early as mid-2008, unemployment rates soared in the Baltic states and other economies where growth had begun to slow in 2007 (for example, Turkey and Ukraine). In contrast, in central and South-Eastern Europe, unemploy- ment rates started to increase only in mid-2009, and even later in South-Eastern Europe. Despite gradual declines by the second quarter of 2010 in some countries, unemployment remains high. The aim of this study is to provide some microeco- nomic evidence on the scale of the adjustment labour demand process across TEs.
4This was just the beginning of the crisis in the transition region
5The crisis event impact summarises the crisis impacts, job loss, business closure, reduced wages,
Entry to the European Union (EU) could have been a source of heterogeneity in the rm's labour demand response to the nancial crisis, as either it could have given access to EU subsidies, or guaranteed more regulation of labour markets. Both access to subsidies and more regulations should have smoothed the impact of the crisis on rm's labour demand. Firms which had to face the economic downturn, the consequent reduction of sales and pro ts and the credit crunch could have bene ted from EU policies, resulting in the termination of fewer workers. Thus, this study tests the hypothesis that rms reacted dierently to the 2008/9 nancial crisis in the EU-non EU regions.