Labor Market Adjustment in Estonia
Ref. no. 679-71C
Many economies in transition have experienced massive dislocation of workers and painfully high unemployment. Few, if any, will avoid these outcomes. In contrast to Central and Eastern Europe, little is known about recent labor market adjustments in the former Soviet republics. This research aimed to fill that void. Using the data generated by the Estonian retrospective labor force survey of 1995, it assembled hard evidence on the patterns of labor mobility and wage changes during the transition of one former Soviet republic--Estonia. The country not only is implementing distinctive labor market policies, generally in the direction suggested by the World Bank, but also is in the forefront among the former Soviet republics in implementing policy reforms.
The project focused on three main issues. First, it investigated the main labor market adjustments by analyzing the magnitude and the determinants of the flows among labor market states and of direct job-to-job transitions, and the changes in returns to education, experience, and gender. Second, it identified workers who are being especially hurt in the transition. Third, the project investigated the incentive effects of unemployment insurance. The analysis relied on the estimation of probit, logit, and hazard models for analyzing determinants of labor market transitions, and estimation of earnings functions for analyzing changes in returns to human capital and determinants of workers' reemployment earnings losses.
The study on the evolution of the wage structure produced four main empirical findings. First, the relative returns to education rose rapidly during transition, as did the relative employment of more educated workers. The advantages of more education occurred for all experience cohorts and across all sectors of the economy. Second, returns to experience rose for most experience cohorts, most rapidly for the young (relative employment also rose for younger workers). Third, women's employment share declined in most sectors, but their relative wages increased. Ethnic minorities lost in both employment share and relative wages; some of this decline may be due to rising relative returns to Estonian language ability in most sectors of the economy. Fourth, relative wages declined in sectors with the largest reductions in employment and rose in sectors with the largest gains in employment. The consistency of this pattern of rising relative wages associated with rising relative employment for human capital and ethnic groups suggests a well-functioning labor market responding to demand shocks.
Responsibility: Policy Research Department, Poverty and Human Resources Division--Branko Milanovic (bmilanovic@worldbank.org). With Milan Vodopivec, Institute for Macroeconomic Analysis, Ljubljana, Slovenia; John Haltiwanger, University of Maryland; Peter Orazem, Iowa State University; and Kalev Katus, Rivo Noorkoiv, and Allan Puur, Population Research Center, Estonian Interuniversity, Tallinn.
Completion date: June 1997.
Report:
Puur, Allan, Peter F. Orazem, Rivo Noorkoiv, and Milan Vodopivec. 1996. "Employment and Wage Dynamics in the Estonia Transition, 198995." World Bank, Policy Research Department, Washington, DC.
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