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Analyzing labor markets in Central and Eastern Europe.

Political and economic reform is proceeding rapidly in much of Central and Eastern Europe. Beginning in the 1988-89 period in Hungary and Poland, and later in other countries, a series of radical changes has been introduced to dismantle old systems of central planning and lay the foundations for the development of Western-style market economies. Now a new triannual publication of the Commission of the European Communities, Employment Observatory: Central and Eastern Europe,(1) helps track these changes by providing up-to-date information on labor market and social conditions in five nations--Bulgaria, Czechoslovakia, Hungary, Poland, and Romania--making the transition from centrally planned economies to market economies.

The Employment Observatory series comprises several regular reports covering the labor markets of the European Community (EC). The Central and Eastern Europe bulletin is an addition to the series. Although these nations are not part of the EC, production of the bulletins indicates how important developments in these countries are to the EC.

The three 1992 bulletins on Central and Eastern Europe present the most current labor market statistics and analysis on employment, unemployment, wage, and price developments. Officials, statisticians, and economists in the five countries provide the data on, and interpretations of, what is happening in their countries. Alphametrics, a private research organization under contract to the European Commission's Directorate General for Employment, draws the information together into a comparative analysis.

The Central and Eastern Europe bulletins will help readers understand the nature and scale of economic developments in these nations. The bulletins also provide background information for technical and financial support from the EC, the United States, and other non-EC countries. In addition, policymakers in the transition countries will benefit from information about developments in other parts of the region and how their countries compare with others going through this difficult process. Combining information may help forewarn officials and economists about potential problems and help improve the design of policies.

The January 1992 bulletin describes how officials are modifying data systems to meet the requirements of emerging market economies. It warns readers that existing statistics on employment, unemployment, wages, and prices must be interpreted with caution. Much remains to be done before all the required statistics necessary for labor market analysis are in place. The analytical sections of the bulletins are careful to point out the shortcomings in the data and the directions of bias.

The January and July bulletins contain between 30 and 40 pages, including 10 to 12 pages of labor and economic statistics and numerous comparative graphs showing data for the five transition countries separately, and averages for the EC. Contrasts between the EC and the transition countries are highlighted.

The International Labour Office (ILO) and Organization for Economic Co-operation and Development (OECD) also have begun to track labor market developments in Central and Eastern Europe. But the ILO'S quarterly Bulletin of Labour Statistics includes only data for a few of the five transition countries; for example, unemployment data are shown for Bulgaria and Hungary, and employment data are presented for Czechoslovakia, Hungary, and Poland. Both the employment and unemployment figures are grossly understated, compared with those in the Central and Eastern Europe bulletin. The ILO data on employment are confined to the state sector, and no analysis is provided.

The OECD'S annual Employment Outlook publications of 1991 and 1992 present analyses of labor market developments in the five transition countries. The OECD intends to continue this annual monitoring. The new Central and Eastern Europe bulletins combine the advantages of the up-to-date ILO bulletin with the more comprehensive coverage and analysis of the OECD'S annual reviews. Employment data, where possible, have been adjusted to include estimates for the private sector. Attempts also have been made to improve the comparability of the data.

The Central and Eastern Europe publications present annotated labor statistics for the five countries from 1989 to the first quarter of 1992 (in the July edition). Some data for 1980 and 1985 also are shown, and many footnotes are included to improve understanding of the data.

The presentation of data is not without fault. Figures for 1980, 1985, and 1989 are shown in an initial table, and a second table shows data for 1989 through the latest quarter of 1992. This seems repetitious and inconvenient to the data user because the 1989 data are identical in both tables. In addition, the footnotes to the two tables lack consistency. For instance, the July edition includes a footnote to Bulgaria's "active population" in the first table indicating that women on maternity leave are included. But this note is not applied to the "active population" in the second table, although the figure for the overlapping year, 1989, is the same in both tables. Romania's employment data in the first table include a footnote that the armed forces are excluded. No such note appears in the second table, although the figure for 1989 coincides with the number in the first table. Numerous similar instances appear. Combining the two tables would eliminate much of this confusion.

The following summarizes the main findings of the first two editions of the Central and Eastern Europe bulletins.

Statistics in transition

Reliable and current statistics are key factors in monitoring and understanding the changes taking place in Central and Eastern Europe. Statistical systems designed for central planning must be modified to provide new types of information about developments in the emerging market economies. The formidable challenge facing statisticians in these countries has been to provide new statistics for policymaking during the transition when inflation and relative price movements are very rapid and the pattern of employment and wages undergoes fundamental change.

Assessment of employment developments involves an element of uncertainty in all Central and Eastern European countries because the appropriate statistical systems are only now being established. Complete data are presented on employment in the state sector, which is contracting; this is not yet the case for the expanding private sector, for which a great deal of effort is being devoted to develop sample surveys.

Collecting information from the rapidly growing number of small private firms is difficult; many have fewer than five employees, and some have no employees. Even the number of small firms is generally not known due to poor response rates and incomplete administrative records.

Poland has established sample surveys of employment and wages among companies. A 10-percent sample of large and medium-sized firms in industry reports monthly, while other firms report quarterly or only annually. In Hungary, surveys of firms with more than 50 employees are conducted quarterly, while in Czechoslovakia, employment surveys attempting complete coverage of small registered firms (those with fewer than 100 employees) have yielded a 50-percent response rate. Only very limited statistics are gathered for firms outside the state sector in Romania and Bulgaria, and no sampling system has been established.

Labor force surveys have been started in Poland and Hungary, and some results for the first quarter of 1992 became available recently in Hungary. However, these results are not cited in the July bulletin, probably because they arrived too late for inclusion. In Czechoslovakia, a pilot survey will be conducted at the end of 1992, followed by quarterly surveys in 1993. The basis for sampling households is being prepared in Romania, and a first survey will be conducted later this year. Specific plans for a labor force survey have not yet been made final in Bulgaria. The fourth edition of the Central and Eastern Europe bulletin (to be published in February or March 1993) will include a special article on labor force surveys in the transition countries.

Monthly unemployment statistics are limited to those who register at employment offices. The ILO international standard defines unemployment as all persons without work who actively seek and are currently available for work. However, this definition is impossible to apply without labor force surveys.

Registration data exclude unemployed workers who are not registered as unemployed, although registration data may include individuals who would not be classified as unemployed under the be definition. The balance of these two opposing factors varies by country. Registration data usually understate unemployment, but in a few cases, they overstate unemployment under ILO standards.

The incentive to register as unemployed depends on benefit entitlements, which are not universal, and available jobs in the state sector, where opportunities are shrinking. Private firms often do not use the labor offices to recruit new employees, relying instead on personal contacts. These factors result in registrations understating unemployment. Registrations also may overstate survey-based unemployment because some workers in informal or marginal activities may be registered to find other work and some may register to collect benefits while not seeking work. Overwhelmed by increases in the number of claimants, employment offices have not had time to check for such abuses of the system.

Some mixed evidence is emerging on the difference between registration statistics and survey statistics on unemployment. The January bulletin cites a 1990 preliminary survey finding that approximately 4 times as many Hungarians were unemployed under the ILO definition as were registered at labor offices. The bulletin points out that this finding is not necessarily applicable to the situation in Hungary. Indeed, recently released labor force survey data, which were not available for inclusion in the first two bulletins, show an unemployment rate of 8.9 percent for the first quarter of 1992. This compares with a registration figure of 9.8 percent. However, the survey is so new that it should not be considered as a highly reliable indicator of unemployment under ILO concepts.

Estimates in Romania and Bulgaria Put unemployment at around twice those registered as unemployed. For Czechs, on the other hand, registration data may be overstated because the data include some who register only to draw benefits, and others who receive benefits while working part time. A more reliable guide to unemployment must await the labor force surveys in the transition economies.

Changes in wages and prices are critical issues in all transition countries. These changes also are very difficult to measure accurately because rapid and significant changes in consumption patterns are creating problems with weighting and aggregation. Surveys conducted monthly or more frequently monitor consumer prices closely throughout Central and Eastern Europe.

All five countries measure wage movements annually and quarterly and are establishing monthly indicators. But the data collected so far cover only the state sector, and little or no evidence exists to present what is happening to wages in private firms. In Czechoslovakia, 8,000 small firms were registered toward the end of 1991 and are included in the wage survey. However, more than 1 million registered private entrepreneurs (with fewer than 25 employees) are not yet included in the survey.

All five nations have detailed historical data on wage distribution obtained from periodic household income surveys. However, the statistics are becoming less reliable as employment outside the state sector expands and the wage distribution changes rapidly. The household income surveys tend to be far too infrequent to monitor developments. In Czechoslovakia, for example, the survey is conducted every 4 years. One of the most important aims in all transition countries is to provide a safety net for family incomes and identify those who fall below a minimum standard of living. More extensive surveys are planned.(2)

Employment, unemployment trends

Deep recession continues to affect all of Central and Eastern Europe. Gross domestic product (GDP) declined sharply throughout the region in 1991, and continued to fall in early 1992. Signs of moderation in the rate of decline appeared only in Poland and Czechoslovakia, although of course, GDP declines may be overstated because they do not yet fully reflect the growth of private sector output. Job losses have been considerable, and unemployment has risen rapidly, particularly in agricultural and old industrial regions.

Employment declined overall by 7.5 million for the five nations from 1989 to the first quarter of 1992, and unemployment increased by more than 4 million. The wide gap between the fall in employment and the rise in unemployment reflects the undercount inherent in the registration statistics and problems of recording the growth in private sector employment. The rise in unemployment is probably understated, while the decline in employment is probably overstated.

Employment. With the possible exception of Poland, the drop in employment appears to have increased as the transition has progressed. From 1989 to 1991, Bulgaria experienced an employment decline of 20 percent, while employment in Poland and Hungary fell 10 percent, and Czechoslovakia had a slightly smaller decline of 8 percent. Romania's figures show a slight decrease in employment in 1990 and a rebound in 1991. Employment declined in the first quarter of 1992 in all five countries.

Virtually the entire decline in employment has been due to job losses in state enterprises. Although an expansion in the private sector has probably been understated in official statistics, the growth has not been nearly enough to offset the decline in the rest of the economy, even in Poland and Hungary, where the private sector is most developed. In Poland, employment in private companies rose by about 563,000 during 1991, an increase of approximately 30 percent, but this compares with an overall reduction of more than 1.5 million workers in state and other organizations. Similarly, in Hungary, additional jobs created in the private sector were equivalent to between 20 and 25 percent of the reduction elsewhere in the economy.

The rapid growth of private enterprise throughout the region primarily comprises very small firms, employing one or two workers--often part time--and concentrated in basic services, such as retailing or catering, and craft industries. In all countries except Poland, where about half the work force is employed in private, mixed, and cooperative enterprises--primarily as farmers --the state sector still accounts for by far the major proportion of employment. Approximately 90 percent of the work force in Romania is employed in the state sector, while approximately 80 percent of the work force in Czechoslovakia and Hungary works for the state. However, the Central and Eastern Europe bulletins fail to note that these figures may overstate the importance of the state sector because many workers, particularly in Hungary, hold jobs in the private sector in addition to their state sector jobs.(3)

The Central and Eastern Europe bulletins also analyze sectoral changes in employment, and the different impact of the transition on employment of men and women.

Unemployment. The inevitable consequence of the transition to market economies--unemployment--has risen rapidly and continually throughout the region as employment has declined. Registration figures reached 14 percent of the measured labor force in Bulgaria and 12 percent in Poland by March 1992. The rate was 10 percent in Hungary and 6.5 percent in Czechoslovakia.

Although the rate was less than 5 percent in Romania, this number almost certainly understated the true circumstances. It excludes not only the substantial number of jobseekers who did not register but also approximately 1 million employees, some 10 percent of the work force, who were given 2 to 3 months leave (termed "technical unemployment") at 60 percent of their former wage.

All the nations have introduced active labor market measures to help the unemployed. The most common action has been training and retraining programs. However, every country faces serious problems of finding sufficient funds and qualified people to run the programs, and officials have had difficulty determining what type of training to offer. As a result of these problems, only a small proportion of the unemployed have undergone training. For example, in Czechoslovakia, Bulgaria, and Romania, only 5 percent of the registered unemployed in 1991 received training.

The analysis of unemployment in the bulletins also covers the different effects on men, women, and youth. The duration of unemployment and regional unemployment developments also are addressed.

Real wages and inflation

Freeing price controls was a first major step in the reform process in all five countries. The resulting surge in inflation has eroded real incomes and has made it difficult for governments to protect those most affected. According to the official figures, which have their shortcomings, the timing, pattern, and scale of inflation varied significantly across countries.

After price controls were removed, consumer prices increased about 600 percent in 1990 in Poland. Prices rose more than 300 percent in 1991 in Bulgaria, and by nearly 200 percent in Romania. But in Hungary, where the liberalization process started earlier and was spread over a longer period, inflation has remained under 40 percent annually. In Czechoslovakia, the annual increase has been limited to under 70 percent, despite a faster pace of liberalization. In each of the five countries, the inflation rate fell after the initial removal of controls, and continued to decline at the beginning of 1992, although it remained high throughout the region.(4)

Although all governments in the region tried to protect real wages from the worst effects of price increases by permitting nominal wages to rise, government officials accepted the need for real wages to fall. This was seen as necessary to reduce excess demand in the economy, and, once goods and services became available for purchase, to contain the inflationary spiral. But the rise in inflation was much greater than expected, except perhaps in Hungary.

According to the official statistics, average real wages declined by about 25 percent in Poland in 1990, but rose slightly in 1991. In contrast, wage erosion accelerated in Bulgaria, Czechoslovakia, and Romania in 1991, with a particularly severe decline of more than 40 percent in Bulgaria. In Hungary, where the peak in inflation has been lower than in the other countries, the fall in real wages was approximately 5 percent in 1991.

All countries, to varying degrees, have informal economies that potentially provide an additional, unmeasured, source of income. This is particularly the case in Hungary and Poland, but much less true of Bulgaria and Romania. It is impossible to judge the extent to which informal activities have moderated the decline in real incomes.

The outlook

A concluding section in the second bulletin, "Employment Prospects," points out that much remains to be done to establish efficient enterprises that are competitive in world markets. Analysts and observers foresee the extension of privatization of state enterprises from the small to the medium- and larger-sized units. However, efforts by former state enterprises trying to reduce excess labor and other inefficiencies in pursuit of profitability could lead to increased job losses and even higher unemployment.

Some favorable signs appear. Inflation is abating; the fall in real wages is slowing or is being reversed; some countries, notably Poland and Hungary, and to a lesser extent, Czechoslovakia, have significantly shifted their trading relationship to the West; and investment from abroad, although small, is increasing.

Continued close monitoring of these developments will play an important role in the process of fundamental reform now underway. Based on the first two issues, the Central and Eastern Europe bulletins could effectively contribute to this monitoring and to a better understanding of the challenges facing the transition countries. A complete understanding may still be hampered by inadequate statistics, particularly in relation to measurement of unemployment and the growth of the newly emerging private sector. These bulletins will be especially useful if, along with the statistics, they continue to comment on the development of statistical methodologies, concepts, and standards.


(1) Employment Observatory: Central and Eastern Europe, Commission of the European Communities, Directorate General for Employment, Industrial Relations and Social Affairs, Brussels, Belgium. Copies may be obtained free of charge from Alphametrics Ltd., 37 rue van Campenhout, 1040 Brussels, Belgium. Published three times annually: January, July, and November. This review covers the first two bulletins, January and July 1992. (2) For further information on statistical problems and developments in transition countries see "Statistical needs in Eastern Europe," by Susan Powers, Monthly Labor Review, March 1992, pp. 18-28; and Edwin R. Dean and John T. McCracken, "Cooperation between the Bureau of Labor Statistics and Eastern European Statistical Offices," paper presented at the 1991 American Statistical Association Annual Meetings, Business and Economic Statistics Section, August 19-22, 1991, Atlanta, GA. (3) Consult the article by Janos Kornai, "The Hungarian Reform Process: Visions, Hopes, and Reality," Journal of Economic Literature, December 1986, pp. 1687-1737. (4) For a discussion of the problems associated with price collection and measurement in Eastern European countries, see Susan Powers, "Statistical needs in Eastern Europe," Monthly Labor Review, March 1992, pp. 21-22.
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Author:Sorrentino, Constance
Publication:Monthly Labor Review
Date:Nov 1, 1992
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