Imagine you live in a country with two types of sectors of production: a vibrant, competitive sector and a sector, that we might call traditional, where productivity is much lower and to make things worse, it is overmaned. If you live in Europe, the task is not particularly hard. Think of Spain and the consequences of the real state bubble, as construction employs only two fifths of what it did before the crisis (its participation in total employment was reduced to less than a half of its original value); or of Greece, where manufacturing also shrank to one half its original size (by comparison, total employment only fell to 80% of its original size). Clearly, any government wishing to increase production and material well-being would like to encourage the movement of workers from the traditional sector to the innovative sector; to put the limited resources of the country to a better use, so to say. 

However, this transformation might come with a cost, in terms of a likely increase in unemployment and consequently in inequalities, as not all workers from the traditional sector might find a place in the new sector. Even if all workers find their way to the new sector, wages inequalities might still arise if workers have different productivities, which were not visible in the traditional sector.

In order to explore these links, we study the largest reallocation quasi-experiment that took place in recent decades: the transformation of Central and Eastern Europe from a planned to a market economy. Countries from this region transformed the economy at different paces. These countries constitute then an interesting quasi-experiment on the benefits (productivity gains) and cost (increased inequalities and unemployment) of radical transformation in the production structure. Moreover, while the transition process was already studied in several papers, most of them focused on just one country at a time, which makes a comparison of the results an even more valuable contribution.

Our results suggest a positive relation between job flows and inequalities, both for job creation (new employment in the innovative sector) and  for job destruction (the shrinking of the old sector: in other words, the larger the creation of new employment, the larger inequalities. Fortunately, the impact seems to fade away over time, suggesting that these increase is proper of the greater wage dispersion during reallocation. With respect to possible gains, job creation appears to act like a positive shock to productivity growth, with effects dying in the first year. Job destruction, on the other side, seems to reduce productivity in the year of reallocation, but has a positive effect on the upcoming years, suggesting that some creative destruction might take place during the period. 

 Surely, the relations described in the paper are not neccesarilly causal, as other factors might be behind both trends, for example the increase in trade with more developed countries. And sure, the comparisons between transformation in Central and Eastern Europe and other economies only make sense to a certain point as former transition economies needed to develop a market mechanism that is already in place in other countries. Nonetheless, our article presents a valuable starting point to think about on the relation between inequalities, productivity and reallocation based on empirical evidence. 

Jan Svejnar, Joanna Tyrowicz, Lucas van der Velde
Productivity and Inequality Effects of Rapid Labor Reallocation – Insights from a Meta-Analysis of Studies on Transition

From a theoretical perspective the link between the speed and scope of rapid labor reallocation and productivity growth or inequalities remains unclear. Do reallocations with more flows tend to produce higher productivity growth? Does such link appear at the expense of higher inequalities? We explore the rich evidence from earlier studies on worker flows in the period of massive and rapid labor reallocation, i.e. the economic transition from a centrally planned to a market-oriented economy in Central and Eastern Europe. We apply the tools typical for a meta-analysis to verify the empirical regularities between labor flows and productivity growth as well as inequalities. We collected over 450 estimates of job flows from the literature and use these inputs to estimate the short-run and long-run relationship between job flows, labor productivity and inequalities. Our findings suggest relatively weak and short term links with productivity for job destruction/separations. On the other hand, data reveal a strong pattern for inequalities more churning during reallocation is associated with a permanent level effect towards increased Gini indexes.