The Slovenian labor market in transition : issues and lessons learned

Yugoslavia (including Slovenia) has been more market-oriented than the rest of Eastern Europe, with little or no planning and healthier development of product markets. Until recently, however, the labor market in Slovenia was subject to formidable constraints. But sweeping legislative changes and a dramatic change in the climate of the Slovenian economy have produced major shifts in the allocation of Slovenia's labor force. Most important, the Rubicon of job security has been crossed: Slovenian workers - who like other Yugoslav workers were more protected from job loss than workers in most socialist countries - can now be laid off. Partly as a result of layoffs and bankruptcies, there has been a dramatic increase in unemployment - from 1.5 percent in the mid-1980s to 12.5 percent in January 1993. Moreover, social sector employment decreased 17.6 percent from December 1989 to December 1991, and the labor force participation rate dropped by nearly 8 percentage points. The following lessons were learned about the labor market in Slovenia's transition to a market economy. Governments in transitional economies tend to preserve current jobs through employment subsidies and by subsidizing early retirement. To stimulate the efficient reallocation of labor, they should redirect resources away from programs to preserve jobs into programs to create new jobs. And to increase the flexibility of adjusting firms'work forces, transitional economies should legislate simple layoff procedures and should not assign firms the responsibility for financing redundant workers. It may be easy to demolish the old system of determining wages, but it is difficult to develop a new, well-functioning system. One country cannot simply copy another's methods. It is important to provide for a minimum wage, but it is inefficient to establish a complete wage structure, or to provide for automatic cost-of-living adjustments which hinder wage moderation and make the wage structure inflexible. Moreover, while state and social ownership prevail, an incomes policy is a must. The trial and error approach to finding the right mix of active labor market policies is unavoidable. But governments should evaluate the effectiveness ofsuch programs and weigh them against alternative policies aimed at reducing unemployment - notably increased public spending and investment tax credits. Unilateral government action is counterproductive. To overcome mutual hostility and achieve cooperation, governments should, among other things, consult with trade unions on the legislation and programs to be introduced, and wage a public relations campaign to demonstrate the unavoidability of reform and to emphasize program successes.