Labour market flows and adjustment to macroeconomic shocks in the Baltic States

This article presents a comparison of worker flows in all three Baltic labour markets before and after the 1998 Russian crisis. Our evidence helps us to understand the micro impacts of macroeconomic shocks in the late-transition countries and sheds light on labour market flexibility in the Baltic states. While there has been much research on the labour markets of transition economies, including Estonia, the other two Baltic economies have been largely left out so far. In spite of the common assumption viewing the three Baltic countries as one homogeneous group, we find the Russian crisis had dramatically different effects across the three labour markets. As a result of the crisis, the Estonian outflow from unemployment declined and the unemployment pool became more stagnant. In contrast, in Latvia the unemployment outflow remained relatively high, but there was an increase in the inflow to inactivity. One explanation for this situation in Latvia, where unemployment has been substantially higher than in Estonia, is that the macroeconomic shock resulted in widespread worker discouragement.