Download Labor markets, Inequality and Income Distribution in

Labor markets, Inequality and Income
Distribution in Transition
1
I. Labor Markets
1. The Labor in the Command Era characteristics
–
major element was education, especially technical training,
the transition started with major stock of human capital
•
–
The issue in transition is how to use the human capital in very
different environmental setting.
full employment-underemployment in a setting where the
dismissal of workers, whether productive or not was
generally difficult
wage differentials were used to reward differential inputs
and to motivate effort, but even so the outcome was
generally egalitarian, compared with market economies
–
•
But the distribution of income changed as mkt arrangements were
introduced during the 1990’s.
2
2. The labor in transition
– conflict between labor market adjustment and command
economy "job right constraint" (full employment)
– distribution of income changed sharply
– Movement of labor from state sector to private sector;
considerable unemployment created.
– As a result of transition or structural changes the unemployment
has increased. Reasons for increase in unemployment rate in
transition
•
•
•
•
decreased state employment (closure of state enterprises)
decreased private employment (closure of private enterprises)
job quitters’ entry into unemployment
the imposition of hard budget
– problem of financing unemployment benefits
• The transition economies have generally developed system of
unemployment compensations. These programs differ from country to
country and have been typically more generous in EE than in the FSU.
With high unemployment rate poverty becomes a greater treat.
3
• Aghion-Blanchard model
“On the Speed of Transition” Aghion P. & O. Blanchard, NBER Paper
1994;
– State firms that dominated the econ. are struggling with mkt
forces. A new private sector quickly emerged. Unemployment
which did not exist is high and increasing.
– Model analyzes the movement of labor from the former state
sector to the private sector; the levels of unemployment and
change in wages. It includes:
a) The speed with which production and hence inputs will be
transferred from the state to the emerging private sector.
b) The nature of the mechanisms involved changes in wage
level in the declining state sector and in the emerging private sector,
and the level of unemployment.
• The speed with which labor can be released from the state sector and
absorbed into the emerging private sector depends in part on wages in both
sectors. Unemployment can lead to lower wages, therefore, increased
demand in private sector.
4
• Model:
– Relative cost and demand changes with hardening the budget
constraint have forced firms to substantially reduce
employment.
– The same relative cost and demand changes have led to a rapid
initial increase in private employment (small scale trade and
services) but further growth of private sector is constrained by
lack of expertise and external finance.
– The net effect of these changes has been an increase in
unemployment that affects the speed of restructuring and rate
of private sector growth. The increase in private sector
employment has not offset the decrease in state employment
E+N+U=1 labor force
E-state sector employment; N- private sector employment;
U-unemployment
5
Before transition E=1 and N=U=0
During transition:
• State sector-restructuring, decrease in employment
• New private sector-increase in employment
–
–
–
–
Job creation
Private wages depend on labor mkt conditions
Higher unemployment→ lower wages→ faster private job creation
Higher unemployment→ unemployment benefits→ higher taxes per worker→
c.p. decrease in private job creation.
• Unemployment and speed of restructuring (s)
– When the firm restructures it reduces employment to λ workers
– The flow into unemployment s(1-λ) depends on the speed of restructuring and
the proportion of workers loosing their jobs in the process
– The flow out of unemployment is equal to the private job creation, H
• Private job creation depends on unemployment thought 2 channels-wages and
taxes:
– The higher unemployment, the lower is the wage. Hence, higher private job creation
– the higher unemployment, the higher are taxes. Hence, lower private job creation
– As unemployment increases, the effect that dominates initially is the direct
effect on wages, so that private job creation increases; as unemployment gets
sufficiently large, the effect on taxes dominates, and private job creation
6
declines.
Figure 1 –The authors characterize the dynamics of unemployment; the flow into
unemployment is a horizontal line s(1-λ). Two conclusions:
1. There is a max speed of restructuring (s). If s is such that s(1-λ) exceeds the max
rate of private job creation, therefore, the transition eventually fails. Starting from low
unemployment (U), private job creation is initially positive and increasing. But it
remains smaller than the flow into unemployment, coming from restructuring, and the
U becomes so large that the taxes are increasing. Private job creation declines leading
to a faster increase in U. At p. C the fiscal burden is large than the new and the
privatized sectors become unprofitable and close down. The conclusion is– too fast a
rate of restructuring can lead to too high level of U, that will lead to a collapse of the
private sector.
2. Figure 1—there are two equilibriums Ua and Ub. Ua is stable equilibrium, Ub is
unstable. Uo is initial level of U. If the initial net decrease in employment is so large
that Uo is to the right Ub, then private job creation insufficient to avoid a further
increase in U and eventually collapse of private sector. But as long as Uo is less than
Ub, the economy converges to the lower level of unemployment Ua. At Ua, flows in
are equal to flows out, the private sector grows steadily from two sources,
restructuring/privatization (sλ) and private job creation (H). Unemployment remains
at Ua until restructuring has been achieved and the state sector has been fully
transformed.
7
8
• Equilibrium rate of unemployment and speed of restructuring—the
flow into unemployment from restructuring is just absorbed by the rate
of private job creation—p. A
– The model implies that the initial adjustment can lead to initial unemployment
rate that exceeds the equilibrium rate. In that case restructuring does not take
place until job creation has reduced unemployment to low levels. If
unemployment is high and private creation slow, this adjustment will take a while.
• Policy implication
– the initial phase of adjustment, priority should be given to private job creation.
Trying to increase the speed of restructuring may not be feasible (opposition of
workers in state firms).
• Poland
– The evidence suggests that unemployment that has resulted from labor shedding
far exceeds equilibrium unemployment. The exit rate from unemployment to
employment is extremely low; private wages are lower than wages in state firms.
It is not surprising that workers in most state firms are resisting restructuring and
the associated risks of unemployment.
– The model forecasts that the restructuring will remain limited until private job
creation has sufficiently reduced the unemployment rate to make restructuring
less unattractive. In major cities unemployment is lower—labor mkts are closer to
equilibrium unemployment.
9
3. Empirical Evidence:
“Value of human capital in transition to market: Evidence from
Slovenia,” P. Orazem and M. Vodopivec, European Econ Review
41.
Goal: How transition has altered returns to human capital? It focuses on
changes of labor mobility and wage structure.
•
Human Capital and Labor Market Transitions
• Changes in patterns of mobility--identifying the
determinants of exit from both unemployment and
employment (multinomial logit and hazard models)
• Education—more educated, more likely to find a job; the
share of university graduates among unemployed declined
• Experience—the least experienced group faced significantly
higher probability of job loss
10
• Human Capital and Transition Wages
• Dramatic changes in the structure of earnings
– Returns to education—average returns to years of education rose
relative to earnings of the least educated group
– Returns to experience—returns to the most experienced rise relative to
those with the least experience, for men and women.
• Conclusions
– Transition dramatically increased the wage and employment
premium attached to skilled labor. More educated workers have
not only experienced an increase in relative wages, but they have
experienced greater relative success in switching jobs, lower
probability of layoff, and better chance of finding a job if
unemployed.
– The increase in the premium to job experience is much less
pronounced than for education, but still shows up in higher
probability of exit from unemployment to job and in lower
probability of exit from employment to unemployment.
– Relative wages have grown dramatically for the most educated.
11
“Winners and Losers in Russia’s Economic Transition,” E. Brainerd,
American econ Review 88(1998): 10-94-1116
Goal—to answer the questions: “Have Russian workers benefited
from the changes?, “Who are the winners and losers of the
transition?, “Is increased inequality in Russia real?
Data-cross-section household surveys conducted before and after the
transition
Findings:
a) Overall wage inequality nearly doubled 1991-1994 and reached a
level higher than that in the US
b) Returns to both measured skills (education, occupation) and
unmeasured skills within groups have increased.
c) Relative wages for older workers have declined
d) Wages of women relative to men have declined
e) The winners-young well-educated men; the losers-older workers
(men) and women
12
II. Human capital-demographic characteristics
Human capital endowment was and remains high by international
standards in the transition economies, even though its skill mix
may not always correspond optimally to the requirements of a
market economy. Despite a temporary negative effect of the
transition process—particularly in western CIS countries, where
indicators of life expectancy and adult mortality have worsened
since the onset of transition
1. Health and education conditions are generally still favorable
compared with other countries at similar levels of income
2. Demographic patterns -life-expectancy in transition countries
decreased dramatically and recovered modestly.
•
•
increase in death rates and decrease in birth rates
these patterns have been much more severe in CIS than CEE
13
III. Social problems
1. Increased poverty
– Definition-it is necessary to establish a poverty line in terms of appropriate
variable, such as income, health conditions
– Measurement-means determining what portion of the population is in poverty
and thus fall falls below the established minimum
– Incidence of poverty is significant in CIS & less significant in CEE
2. Problem of maintaining adequate spending on health, education and
pensions.
– The command economies provide significant social programs, the modes of
adjustment (e.g. increasing unemployment, severe inflation, increase in
retirement) created pressure on available benefit programs.
3. Income inequality increased during early years of transition
14
“Impacts of Economic Reform in Poland; Incidence and Welfare
Changes within a Consistent Framework,” Huffman S.& S.
Johnson, The Review of Economics and Statistics, Vol. 86, 2, May,
2004
• Goal—how do households adjust their behavior when the
opportunity sets of consumption goods change? How do
consumption patterns change in response to increased variety of
goods? Are the households better off or worse off under the new
system?
– This study focuses on the consequences of removing rationing
for demands of goods and for the household consumption
patterns generally and then on welfare.
– Welfare implications of the transition are derived from a model
of household consumption that explicitly reflects the effects of
rationing.
15
– In answering the question of how consumption patterns change
we have to consider the following:
• Increased availability of consumption goods: quantity &
variety.
• What did household's "resources buy" before and after the
reforms (change in the household’s budget constraint)
• Consumer patterns during the transition in Poland
– Decrease expenditure share on food, clothing and footwear
– Increase expenditure share on fuel, electricity, transport,
communication and other goods
– Growing demand for housing and durables
16
•
Empirical specification
– The final specification of the equations for estimating of the
AIDS with virtual prices is
S
k
wit | pV   i 0   is Dst   iVj log p 
1
s 1
V
1j
j 1
n

j k 1
ij
log p2 j   i log[ I tV / P( p1V , p2 )]  uit ,
where i = 1, ..., n goods, and t = 1, ..., T observations.
–
The standard demand system is
S
n
wit      Dst    ij~ log p j   i~ log[ I t / P( p1 , p2 )]  uit~ .
~
i0
s 1
~
is
j 1
17
• Calculation of virtual prices
– Definition-the price at which the consumer voluntarily
chooses the rationed level
– external prices- from Germany
– Hausman method for calculating virtual prices.
• Data
– Polish Household Budget Survey 1987 – 1992
– Variables-the budgeted shares for six expenditure groups
• food
• alcohol and tobacco
• clothing and footwear
• housing
• fuel, electricity, communication, and transportation
• other
18
•
Findings
– The results show that over 1987 to 1992 the CLI, ignoring the
rationing effects, is biased upward from 1.53 to 3.71
percentage points per year.
– Compared to the estimates of welfare loss that neglect the
rationing effects during the prereform period, the estimated
welfare losses that reflect the rationing are reduced by 50
percent using Hausman’s virtual prices and by 75 percent using
external proxy virtual prices.
– The Incidence of Impacts of Transition for Selected Household
Groups
19
80
virtual price of food
from external source
(Germany)
70
price index
60
50
virtual price of foodHausman approach
40
30
actual price of food
20
10
0
1
2
3
4
5
6
7
8
9 10 11 12
Quarters, 1987-1989
20
price index
90
80
70
60
50
40
30
20
10
0
virtual price of
housing from external
source (Germany)
virtual price of
housing-Hausman
approach
actual price of
housing
1
2 3 4
5 6 7
8 9 10 11 12
Quarters, 1987-1989
21
1.60
1.40
Index
CLI w ith Actual Prices
1.20
CLI w ith Virtual PricesGermany
1.00
CLI w ith Virtual PricesHausman approach
0.80
0.60
1987
1988
1989
1990
1991
1992
Year
22
“Returns to skills and the speed of reforms: evidence from Central and
Eastern Europe, China and Russia,” Fleisher B, K. Sabirianova
and X. Wang. Journal of Comparative Economics 2005, 33.
I. Introduction.
•
Econ reforms—enterprises operate under fewer constraints.
Therefore, returns to schooling should have increased.
•
The time path of returns to schooling has not been uniform.
–
–
•
Studies of CEE and Russia (CEER) indicate a trend for returns to
schooling to rise almost immediately after reform, but at different
speeds.
Studies of China in the period covering approximately the first 15
years of its econ transition report low rates of return to schooling.
Post-reform time paths of major economic variables were
also quite different
– In China, a relatively small proportion of workers experienced
declining real incomes in the early transition whereas, in CEER, the
opposite was true.
– The role of econ reforms, the speed of relaxation of the old planning
constraints, and the new forms of ownership in promoting changes in
relative wages.
23
• The path of returns to schooling in transition economies has
evolved in two phases
– The early phase (initial, disequilibrium phase of econ transition)--the
period in which the transition economies moved from wage setting toward
a phase in which wages reflect the relative marginal products of workers.
– In the latter phase, the relative wages are expected to match more closely
the relative marginal products of skilled and unskilled, or highly educated
and less educated, workers.
24
• Hypothesis
– Speed of the reforms —the higher the speed of reforms, the
faster should returns to schooling be adjusted to market rates. To
explain wage adjustments during the first phase-- the speed of
relative wage adjustment to the ratio of marginal products
reflects the speed of the relaxation of legal, regulatory, and
institutional constraints on wage-setting behavior.
– Economic disequilibria —structural transformations, disruptions,
and economic disequilibria are important factors so that the
rapid increase in returns to schooling during the first phase
reflects the ability of highly-educated individuals to respond to
changing opportunities in a disequilibrium.
• Goal of the paper —to compare the relative importance of speed of
the reforms and economic disequilibria with metadata from 39
studies of 11 transition economies, linking these data to a set of
measures on reform progress and macroeconomic volatility.
25
Table 2
• Reports average returns to schooling, 11 countries, 1975-2002.
• The overall trend of returns to schooling is positive, and highly
significant with a noticeable increase in the mean and variance of the
returns to schooling over time.
Table 3
• The time path of returns to schooling has not been uniform across
countries or steady within countries over time
• Pre-reform periods, schooling rates ranged from a low of 1.5 percent
in China to a high of 6.3 percent in Hungary,
• Early reform period, schooling returns increased in China, but from
an extremely low level to one that remained far below those in other
transition economies. These returns rose much more in percentage
points in the other countries.
• Some variation is noticeable in the time paths of rates of return
among the CEER countries, particularly between low-return
countries, e.g., Romania and Ukraine, and other CEER countries.
• The biggest gap in the first phase is between the CEER countries on
the one hand and China on the other.
26
II. Returns to schooling and the speed of reforms and macroeconomic
disequilibrium
1. How cross-country variation in the growth of returns to schooling in
transition economies can be explained by the speed of market reforms
initial conditions, and degree of macroeconomic volatility during the
early reform period.
2. Reform progress is defined in terms of liberalization of prices and
wages, private ownership, enterprise reforms, and the openness of the
economy; used quantitative measures such as the proportion of GDP
produced in the private sector and the share of foreign direct
investment (FDI) in GDP as well as qualitative indices developed by
the EBRD, such as the degree of price, wage and trade liberalization,
large-scale privatization, and enterprise restructuring.
3. An overall measure of the speed of reforms, which is a composite of
all seven reform indices and variables.
27
4. Transition approach
• The big bang reform (CEER) vs growing out of the plan
approach (China, where the Chinese Communist Party has
retained political power throughout the econ transition).
5. In contrast to its relatively slow movement toward free markets,
China experienced the most rapid economic growth among these
transition economies.
Table 5
– China experienced the largest real GDP growth and real wage
growth during the first five transition years, while real wages
declined in all CEER countries except Hungary.
28
– The effects of a loss of macroecon control defined as the fraction
of total output produced under the Plan felt much more sharply
in CEER than in China. In China, where the early transition was
more gradual, inflation was lower than in any CEER.
– GDP growth and real wage growth, and inflation over the early
reform period, indicate less volatility in China than in the CEER,
the only exception being the standard deviation of real wage
growth Hungary.
– This variation in the volatility of economic development across
countries and between CEER & China may explain crosscountry differences in returns to schooling in the early reform
period.
– A rapid increase in returns to schooling may reflect the ability of
highly-educated individuals to exploit opportunities that emerge
in periods of disequilibrium.
– Hence, both disequilibrium and the speed of adjustment should
determine the payoff to schooling during the transition process.
29
III. Empirical estimation and results
• An empirical framework for explaining the cross-country and
over-time variation in returns to schooling based on differences in
the speed of reforms and the volatility of economic change.
• On average, rates of return increase by 0.2 of a percentage point
per year during the respective countries’ planning periods. Rates
of return increase by 0.5 of a percentage point per year during
early reform, by 0.3 of a percentage point during the late reform.
• Returns to schooling are estimated to have the highest rate of
growth during the early period of the transition to a market
• All the coefficients on the speed of reform and macroeconomic
volatility variables are statistically significant. Both reform speed
and volatility are positively associated with an increase in the rate
of return, but reform speed has a larger quantitative impact.
30
• Initial conditions have a substantial effect on the estimated returns to
schooling—the higher is the level of liberalization at the start of
reforms, the higher are the initial returns. Countries with less
administrative regulations on wages and prices during the planning
period are estimated to have higher schooling returns.
IV. Conclusions
• The speed of economic transformation and the degree of economic
disequilibrium measured by macroeconomic volatility explain
differences in the increase in the rates of return to schooling over
time and across countries.
• The speed of reforms and volatility are positively associated with
returns to schooling, ceteris paribus, and the quantitative impact of
speed of reforms is perhaps twice as large as that of volatility.
• China is an outlier in that its rapid economic growth is associated
with returns to schooling that remain below world average for
comparable countries.
31