Enhancing Job Opportunities : Eastern Europe and the Former Soviet Union

In the last 15 years, the countries of Eastern Europe and the Former Soviet Union have made impressive progress in their historical transition from centrally planned to market economies. In building the institutional foundations of a market economy, they have developed a vibrant private sector and opened themselves to international trade. After an initial economic recession, this has ignited economic growth, which in turn has brought about higher incomes and reduced poverty. But the transition and recent growth have been disappointing in one key area-jobs. In countries across the region, job opportunities remain scarce. This study focuses attention on the causes of these disappointing labor outcomes, and points to the solutions. Why has the job creation record of transition economies been disappointing? One reason is that the size of the new private sector that generates jobs is still relatively small in many of the Region's countries. And there is still enough room for firms to increase output through downsizing and retrenchment-what is sometimes termed "defensive restructuring." And why do firms not engage in more strategic restructuring? Often, they are discouraged by the poor investment climate-substantial risks, barriers, and costs associated with doing business. Two other factors also play a role. In countries in the Region with strong institutions and enforcement capacity, strict employment protection legislation can actually inhibit hiring. Again, for many firms in the Region, the lack of adequate skills among available workers also proves to be a significant constraint to growth. This study recommends a two-pronged strategy to create more and better jobs. First, in every country across the Region, the investment climate needs to be further improved to encourage new firms to enter the market, and for existing firms to grow. Second, countries in the Region need to have institutional and regulatory reform to develop an adaptable labor market, where core worker rights are effectively protected, but employers are not unduly constrained in adjusting the size and skill composition of their workforce to the changing product demand.