Formal Employment and Survival Strategies After Communism
by Simon Johnson, Daniel Kaufmann, and Oleg Ustenko

Abstract 

The countries of Eastern Europe and the former Soviet Union have suffered large declines in output and, in most cases, employment since the collapse of their communist regimes. Most research on labor markets in these economies has focused on changes in formal employment status. Numerous studies, using techniques developed for Western market economies, have examined the flows into and out of formal jobs, particularly in Eastern Europe (see, for example, all the papers in Commander and Coricelli, 1995; Coricelli and Revenga, 1992).

The assumptions underlying this work are clearly presented in the leading labor market model for post-communist countries (see Aghion and Blanchard, 1994; Blanchard et al., 1995). According to this model, the beginning of economic reform means a jump downward in state-sector employment, followed by a steady decline. There is a net creation of jobs in the private sector, but not enough to absorb all the people who leave the state sector. The result is steadily increasing unemployment. People who remain employed or who find new jobs do relatively well, while those who are unemployed, particularly for a long time, do badly. In this conventional model, state enterprises either keep people employed or fire them. Individuals respond to being fired by either finding a new job or not. Some individuals may also quit and move directly to the private sector. The model is therefore a sequence of discrete, zero-one choices by both firms and individuals. (This work was partly supported by the World Bank. The views are the authors’ and do not necessarily reflect those of the institution.)

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