Gross Worker and Job Flows in a Transition Economy: An Analysis of Estonia

Abstract

Estonia shows that intense restructuring after the opening of product and labor markets need not lead to massive increases in unemployment. The evidence suggests that flexibility in the labor market is vital in a transition's success, especially in a country undergoing rapid reform. With the transition in Estonia, worker flows increased greatly, driven by an increase in job flows. As the situation stabilized, the job and worker flows converged at rates similar to those observed in Western economies. In 1989, job reallocation accounted for only a small fraction of overall worker reallocation, which was less than 15 percent. By 1993, the worker reallocation rate exceeded 35 percent, more than two-thirds of it attributable to job reallocation.

The dramatic increase in job flows was the result of increased separations, as jobs were eliminated. In 1992, early in the transition, the situation looked ominous but in only a couple of years new jobs and hires surged as well. By 1994, the hiring rate exceeded the separation rate, and jobs were being created faster than they were being eliminated. Increased job and worker reallocations did not affect all sectors or types of employee the same way. More jobs were eliminated in large state manufacturing firms and more jobs were created by smaller, private service and trade-oriented employers. Virtually all of the new jobs came from the private sector (although many jobs were eliminated there, too). The elimination of so many jobs accounted for about half the increase in direct job-to-job transitions (from less than 5 percent in 1989 to 15 percent in 1994). Opening product and labor markets in Estonia led to a remarkable surge in worker and job flows. Early in the transition so many jobs were eliminated that things looked ominous, but within a couple years small private firms led the surge in new jobs and hiring.

This paper - a product of Poverty and Human Resources, Development Research Group - is part of a larger effort in the group to investigate labor markets. The study was funded by the Bank's Research Support Budget under research project Labor Market Adjustment in Estonia (RPO 679-71).