Internal Devaluation and Labor Market Outcomes: Evidence from Latvia

Quaderni - Working Paper DSE N° 1095

58 Pages Posted: 4 Mar 2017

See all articles by Hartmut Lehmann

Hartmut Lehmann

University of Bologna - School of Economics, Management, and Statistics; IZA Institute of Labor Economics

Tiziano Razzolini

University of Siena

Anzelika Zaiceva

University of Modena and Reggio Emilia; IZA Institute of Labor Economics

Date Written: March 1, 2017

Abstract

This paper analyzes the policy response and labor market adjustment of Latvia, which faced the most severe recession in Europe and globally. Latvia’s adjustment and recovery from the 2008 economic crisis represents “a rare case study”, which “has been an object of intense attention” (Blanchard et al., 2013) as country’s authorities, despite many experts’ recommendations, decided to maintain its currency peg and adjust through fiscal austerity and internal devaluation implementing major structural reforms. Three years later Latvia returned to a positive growth path and in 2014 joined the Euro zone. The main question in the literature is whether this adjustment represents a success story and can provide a lesson for other countries in the Euro area. We provide details on the adjustment in the Latvian labor market employing individual level data over the years 2002 to 2012. We show that with flexible labor markets, weak unions and relatively low employment protection, adjustment takes place predominantly at the extensive margin since it is driven by flows from permanent wage employment to unemployment. Underemployment constitutes another important adjustment channel, while the evidence for informal employment is more mixed. Wage regressions suggest that job mobility is not associated with increased labor productivity during and immediately after the crisis. We also identify groups particularly affected by the crisis and provide suggestions for the right mix of policy interventions.

Keywords: Unemployment, Labor Market Flows, Latvia, Crisis

JEL Classification: J6, J21, P16

Suggested Citation

Lehmann, Hartmut F. and Razzolini, Tiziano and Zaiceva, Anzelika, Internal Devaluation and Labor Market Outcomes: Evidence from Latvia (March 1, 2017). Quaderni - Working Paper DSE N° 1095, Available at SSRN: https://ssrn.com/abstract=2926365 or http://dx.doi.org/10.2139/ssrn.2926365

Hartmut F. Lehmann (Contact Author)

University of Bologna - School of Economics, Management, and Statistics ( email )

Piazza Scaravilli 1
40126 Bologna, fc 47100
Italy

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Tiziano Razzolini

University of Siena ( email )

Via Banchi di Sotto, 55
Siena, 53100
Italy
+393493277244 (Phone)

Anzelika Zaiceva

University of Modena and Reggio Emilia ( email )

Viale A. Allegri 9
Modena, Modena 42121
Italy

IZA Institute of Labor Economics ( email )

Schaumburg-Lippe-Str. 7 / 9
Bonn, D-53072
Germany

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