Skill Shortages and Labor Market Outcomes in Central Europe
International Monetary Fund (IMF) - European Department
Federal Reserve Bank of Philadelphia
Georgetown University - Edmund A. Walsh School of Foreign Service (SFS)
Economic Systems, Vol. 33, No. 1, 2009
The new Central European members of the EU have been characterized by low employment rates, especially among unskilled workers, despite the GDP recoveries and large private sector shares in output and employment. Evidence points at skill shortages in Central Europe as a key impediment to faster labor reallocation and convergence to the EU-15 employment structures. In this paper, we develop a simple model of labor reallocation with transaction costs and show how skill shortages can inhibit firm creation and increase income inequality. We use the model to examine the impact of training subsidies and their financing on skill acquisition and start-ups of new private firms, and show that the positive effect of subsidies would be mostly offset by high wage taxes. Shifting financing from wage to consumption taxes would improve incentives for workers' training and firm start-ups, while relying more on income taxes could reduce the income gap between workers and entrepreneurs.
Keywords: Skill shortages, Employment, Central Europe
JEL Classification: P50, J23, E24, R23Accepted Paper Series
Date posted: February 3, 2009
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