Demographic flows in transition

The transition to a market economy of former socialist countries is perhaps the most salient economic phenomena of the last century. In a matter of years, decades of central planning were left behind to adopt new market mechanisms. This lead to an overall transformation of the economy, which was also experienced in the labor markets. Labor markets experienced two forms of structural change: an ownership change, whereby state-owned enterprises (SOE) reduce their staff, at the time that demand for labor in private firms grew; an industrial change, whereby labor demand in the manufacturing sector fell, while rising in the service sector.

Against this background, our recently published article explores how these changes in the demand were met by workers. Using a novel database to this line of research (Life in Transition Survey), we explore the relative importance of different labor market flows in the transformation of nearly all former socialist economies. The results show that direct flows between ownership types and industrial sectors were not frequent. Instead it seems that most of the transformation of the economy was accommodated through changes at the extensive margin, that is the entry (from school) and the exit (via retirement) of workers.

This result puts a question mark on two elements. First, indirectly it asks whether active labor market policies made a difference in a context of large structural shocks. Given how rare flows across firms were, one could conclude that these policies might have not been sufficient. Yet, given institutional characteristics of transition economies, results can be generalizable only to a certain extent. Second, it also asks how useful insights from theoretical models were. Literature on workers flows in transition, following the lines of Aghion and Blanchard, disregarded the role played by demographics. The inclusion of both entry and exit of workers into such models could help to enrich our understanding of workers’ responses to structural shocks.

Our research, Labor reallocation and demographics , is now in print at the Journal of Comparative Economics.

Source: Lucas