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The Jobs Crisis: Household and Government Responses to the Great Recession in Eastern Europe and Central Asia

The financial crisis, which began in the United States and Western Europe swiftly expanded into an economic crisis throughout developing countries. Eastern Europe and Central Asia was the hardest hit region in the world, and the crisis led to unprecedented fiscal pressures. The macroeconomic deterioration led to household pain as labor markets deteriorated and as governments implemented austerity measures.

One of the primary transmission channels of the crisis was through the labor market. Unemployment increased sharply, and unemployment lasted longer. Those workers who kept their jobs took home smaller paychecks, as firms controlled labor costs by reducing the number of hours of work, shifting worker status to temporary contracts, and accumulating wage arrears. Men became more highly represented among the unemployed, and youth struggled to secure their first job.

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Families made significant adjustments during the economic crisis. While private food and health expenditures declined in many instances, families made every effort and most often successfully protected school attendance of their children and related expenses. Close Quotes

Ihsan Ajwad
World Bank Senior Economist in the Europe and Central Asia Region and lead author of the report

Confronted by an income shock, families tried two strategies. First, families took steps to increase incomes, by inserting non-working members of the family into the labor force, by increasing the number of hours of work, borrowing, and tapping formal and informal safety nets. Second, families took steps to reduce expenditures, but some of those measures (food expenditures, health care utilization) could have an impact on nutrition and health in the long run.

Many Eastern European and Central Asian countries took steps to protect human welfare and long-term human capital. Measures to protect affected households included gearing up automatic stabilizers such as unemployment insurance, scaling up active labor market programs, strengthening last-resort social assistance, or maintaining or increasing minimum pensions. In addition, evidence from a few countries shows steps to ensure access to health and education services, especially for the poorest in the population.

Effective crisis responses are those fiscally responsible measures that are timely, targeted, and temporary. There are three pillars to an effective crisis response: (i) automatic stabilizers, (ii) adjusters, and (iii) starters. Governments in the region can improve their crisis responses by making automatic stabilizers more responsive and broad based; adjusting program parameters to the conditions on the ground; and starting new programs to fill coverage gaps that emerge. However, to enable an efficient and flexible crisis response, governments can benefit from fiscal discipline during good times and reliable and timely monitoring systems.

Key findings from the report

Unemployment in Europe and Central Asia rose sharply during the global economic crisis:

  • Unemployment rates more than doubled between 2008 and 2009 in Estonia, Latvia, and Lithuania.
  • More men were unemployed because the male-dominated construction and manufacturing sectors were the hardest hit
  • Youth unemployment reached record highs as first time jobs were hard to find
  • Long-term unemployment increased as re-entry into the labor market became exceedingly difficult

Workers who kept their jobs took home smaller paychecks:

  • Although a lot of people lost their jobs, a much larger group of people suffered an income shock because their paychecks shrank as they worked fewer hours or were paid less
  • Firms tried to control their labor costs by:
  • Increasing the use of part-time workers and temporary workers (Latvia, Hungary, the Czech Republic)
  • Reducing real wages (Latvia, Lithuania) and
  • Accumulating wage arrears (Russia)

Families tried to increase incomes and reduce household expenditures:

  • Families tried to increase their labor supply by working more hours or by finding jobs for non-working family members, but the strategy was not always successful

Reductions in expenditures on food and healthcare were most significant:

  • Families generally reduced the quantity and quality of food purchased
  • 20 percent of poor families in Bulgaria reduced their number of doctor visits when there was an illness in the family
  • 25 percent of poor families in Montenegro reduced their use of preventive healthcare

Unemployment insurance programs responded well in most countries:

  • In Estonia, Poland, and Russia unemployment insurance benefits were among the first benefits available to families affected by the crisis
  • To respond to a weak labor market, Romania and Latvia increased the duration for which unemployment benefits were paid out

Social assistance programs played a crucial role in helping families whose incomes fell below the poverty line:

  • In Bulgaria, Montenegro and Serbia, poverty targeted social assistance programs responded to increased demand from families affected by the crisis.
  • However, there were delays in some crisis responses because of bottlenecks in existing poverty targeted social assistance programs.

Crisis responses can be improved by:

  • Making automatic stabilizers, such as unemployment insurance and last-resort social assistance, more responsive and broad-based
  • Adjusting program parameters, such as the duration of unemployment benefits, to the conditions on the ground
  • Starting new programs, such as public works or youth apprenticeships, to fill any coverage gaps

Efficient and flexible crisis responses require:

  • Building up savings for hard times
  • Factoring in efficiency costs
  • Collecting reliable and timely monitoring indicators

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