As the transition to a market system began in the early 1990s, all Central and East European (CEE) economies, except for the Czech Republic, registered unemployment rates that rose dramatically from zero to double digits and were accompanied by long periods of high unemployment. The Czech Republic was an intriguing outlier, with its unemployment rate hovering in the 3-4 percent range, well below the 6–8 percent OECD average, and with only short periods of high unemployment throughout the early to mid-1990s. The CEE unemployment crisis contributed to a political backlash as voters rapidly ousted the first reform governments. Analysts and policymakers have wondered whether the Czech experience provides any policy lessons that could be useful for other transition economies. The studies profiled in this review have focused on answering the following questions:

Why has the unemployment problem associated with the transition been much less severe in the Czech Republic than in other transition countries?

Comparing the experience of the Czech Republic to the experience of other CEE countries, it is difficult to account for differences in relevant laws, institutions, and definitions of variables. To minimize this difficulty, Ham, Svejnar, and Terrell, (1998, 1999) collected and analyzed parallel microeconomic data sets from a sample of about 6,000 individuals in the Czech and Slovak Republics.

Slovakia is a natural country for comparison with the Czech Republic because the two republics were one country from 1918 until January 1993, except during World War II. They thus shared the same laws and regulations, institutions, currency, and government programs for many years. Despite the common history, their labor markets have performed differently since the Velvet Revolution of November 1989, with the Slovak labor market resembling those of the other CEE economies in terms of unemployment rates and periods of high unemployment.

With the average high unemployment period lasting three to four times longer in Slovakia than in the Czech Republic, the studies show that nearly 50 percent of this difference is explained by differences in labor market demand and demographic conditions in the two republics. For example, the Czech Republic, unlike Slovakia and other CEE economies, was able to provide jobs to low-skilled workers at a rate similar to skilled workers. The remaining difference is accounted for by the behavior of firms, individuals, and institutions in the labor market. For example, in the Czech Republic the private service sector grew faster, foreign investment was higher, and the impact of the decline in military production was less, and enforcement of labor regulations was stricter than in Slovakia. Also, Czech factories were newer and better located than those in Slovakia. There were greater opportunities for Czechs than for Slovaks to work in neighboring western economies.

To what extent is the unemployment compensation system striking the right balance between (a) reducing government intervention and introducing market incentives and (b) providing an adequate social safety net that ensures public support for the transition?

The Ham, Svejnar, and Terrell studies calculate the effect of marginal changes in unemployment compensation on the duration of unemployment, and they estimate the impact of removing unemployment benefits altogether. In both republics unemployment benefits have only a moderate effect on lengthening a high unemployment period. Thus, policymakers in both low and high unemployment transition economies have considerable latitude in providing an adequate social safety net without jeopardizing incentives and efficiency. The studies also find that married women in the Czech Republic are more responsive to changes in benefits and entitlement than single women are—which is the pattern of behavior in market economies—whereas in Slovakia the response patterns of married and single women to these changes are similar.

Terrell and Sorm (1999) focus on the effects of both passive labor market policies, based on unemployment compensation, and active labor market policies —but in the Czech Republic only. The two important policy questions they address are: (1) To what extent did the unemployment benefits deter people from leaving unemployment and increase the duration of the unemployment period? (2) To what extent did the active labor market policies help employ people more rapidly than they would have been employed on their own, without the assistance of the district labor office? More specifically, to what extent were hard-to-employ people targeted for assistance through active labor market policies, primarily through finding jobs from labor offices, and, to some extent, receiving assistance in the form of job subsidies?

Terrell and Sorm’s work complements the studies of Ham, Svejnar, and Terrell by examining the effects of unemployment compensation using the same methodology, applied to an identically drawn sample of individuals. Those individuals, however, became unemployed one year later, when the transition was in a more mature phase and the economy was growing rather than declining. The authors confirm that unemployment compensation allows individuals to search for jobs without substantially prolonging their duration of unemployment. Moreover, they conclude that these benefits do not have a greater impact on the durations of unemployment in periods of economic growth as compared with periods of recession.

Terrell and Sorm find that education is important in the unemployment equation: in general, the less educated the individual, the longer his or her duration of unemployment. While previously unemployed men find it difficult to find a job, previous unemployment did not affect a woman’s chances of finding employment.

The paper also examines the differences in duration of men and women’s unemployment, and finds women are unemployed an average of 8.6 weeks longer than men. One-third of this difference can be attributed to dissimilarities in the demographic characteristics of men and women, with educational differences seeming most important, and to variations in local labor demand. Two-thirds of the difference in the unemployment rate is due to differences in the behavior of the unemployed individuals, employers, and institutions.

The Terrell and Sorm study is the first to evaluate active labor market policies in terms of their effective targeting and ability to reduce the length of unemployment duration of different groups in the Czech Republic. To address this issue, they estimate and compare the probability that an in a given week an unemployed individual finds a job with the help of the district labor office to the probability that someone finds a job on his or her own. People who find jobs on their own reflect the preferences of the market. To the extent that the characteristics of each group differ, one can learn how the labor office intervenes in the market to help certain groups of unemployed people over others.

The authors find that active labor market policies lower the unemployment duration of the groups that tend to have longer unemployment periods: women, Romanies, the handicapped, the less educated, and those who have been unemployed before. Moreover, the labor offices assist more individuals who receive unemployment benefits than those who do not. This finding is consistent with the hypothesis that the labor offices are motivated to reduce the costs of assistance programs.