Unemployment and the Social Safety Net During Transitions to a Market Economy: Evidence from the Czech and Slovak Republics

Abstract

In this paper we evaluate the part played by the unemployment compensation systems (UCS) in the generally high unemployment rates experienced in the transition and we provide an explanation for the differences in the performances of the Czech and Slovak labor markets. Using data we collected from administrative records, we estimate the relative effects of various variables on the probability that an individual leaves unemployment in a given week (a hazard function) in each republic. We propose a new identification strategy that provides relatively precise marginal effects of the UCS (benefits and entitlement) on unemployment duration in the two republics. We compare the experience of recipients of benefits and non-recipients to obtain an alternative measure of the impact of the UCS on the probability that an individual leaves unemployment (infra-marginal effect). We conclude that the marginal and infra-marginal effects of the UCS on unemployment duration are moderate.

We also derive and implement an Oaxaca-type decomposition of the difference in the (nonlinear) expected unemployment durations between the two republics to learn what is driving the different outcome. We find that two-thirds of the difference in the durations of the unemployment spells is due to differences in the estimated coefficients (different responses of firms, individuals and institutions in the two labor markets). The remaining one-third of the difference is explained by differences in the explanatory variables. For the recipients of unemployment benefits, we find that about one-third of this difference is explained by differences in the levels of local demand variables and a variable measuring structural differences at the district level. However, among non-recipients, differences in demographic characteristics play a more important role than differences in demand factors between the CR and SR.

Keywords: Czech Republic, hazards, Slovakia, transition, unemployment duration, unemployment benefits