Regional Labour Market Developments in Transition: A Survey of the Empirical Literature

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Abstract

We summarize the empirical literature on regional labour market development in transition. This literature suggests that transition has been associated with increased regional disparities and there is some indication of polarisation. Capital cities and regions closer to EU-borders developed better and increased integration has also contributed to divergence. Spill-overs within countries, however, tend to be small. Regional disparities are also unlikely to diminish through migration, wage flexibility and capital mobility. Migration is lower in most transition economies than in the EU and capital mobility tends to reinforce existing regional disparities. Only wage flexibility is higher than in most European labour markets.

JEL Classification: P25, R23, P23

Keywords: Regional Labour Markets, Transition

1. Introduction

Over the past decade the transition countries experienced significant structural change due to transition to a market economy and increased integration in the world economy. In virtually all of these countries this led to a substantial increase in regional disparities. Starting from a situation of an extremely equal distribution of economic activity as measured for instance by employment rates and wages during socialism, these economies developed regional disparities which parallel or even exceed those of many European economies.

This development raises a number of issues relating to the causes for regional disparities, the efficiency of labour market mechanisms such as wage flexibility, migration and new firm creation in equilibrating regional labour markets and appropriate policies to deal with the uneven development of regions in transition. Assessing labour market conditions, as well as the ability of labour markets in transition countries to deal with regional disparities, is of primary importance from an economic point of view, because regional mismatch of workers and work opportunities may be a cause of high and persistent unemployment and because in many countries substantial funds are devoted to subsidising poorer regions with the aim of reducing regional disparities. Thus understanding the workings of regional labour markets in transition may be an important contribution to combating national unemployment and may help to increase the efficiency of regional as well as labour market policy.

Furthermore, with the accession of a number of transition countries to the European Union (EU) additional issues arise. These concern the use and administration of EU structural funds, the optimal timing of accession to the European Monetary Union and the end of derogation periods for freedom of movement of labour and services. Analysing regional developments in the new member states can contribute to a better understanding of each of these issues. For instance, analysing regional labour market adjustment mechanisms can provide insights on the flexibility of labour markets, which is important for an assessment of the viability of a monetary union as well as of the appropriate structural funds policy. In addition, high and persistent regional disparities may have repercussions which go far beyond narrow economic analysis, which may reach as far as the disintegration of existing countries.2 Thus understanding the causes and potential remedies of regional disparities is also of a wider political importance.

Finally, from an analytical point of view, the experience of the transition economies of Central and Eastern Europe and the former Soviet Union provides an opportunity to analyse the workings of nascent market economies. In these economies in the last one and a half decades a market system was gradually developed from a centrally planned system. This was accompanied by output decline, resource reallocation, trade reorientation and institutional reforms (see: Campos and Coricelli, 2002). As a consequence transition economies provide a natural testing ground to address some of the central questions of regional economics such as the role of institutions in regional development, the effects of trade re-orientation and globalisation on location of economic activity and on the capability of regional economies to adjust to increasing regional disparities. …