Rapid Labor Reallocation with a Stagnant Unemployment Pool : The Puzzle of the Labor Market in Lithuania
Lithuania is a transition economy undergoing rapid enterprise restructuring associated with substantial job turnover. At the same time, unemployment in Lithuania is high and of long duration. This presents a puzzle: high job turnover epitomizes labor market flexibility, while high unemployment indicates labor market rigidities. What are the reasons behind this paradox? Why do the unemployed not benefit from job opportunities created by high job turnover, which entails high rates of job creation and hiring? To answer this question, the author looks at three perspectives on labor market flexibility: 1) The macroeconomic perspective-A flexible labor market is one that facilitates full use and efficient allocation of labor resources. 2) The worker perspective-A flexible labor market means ease in finding a job paying a wage adequate to the worker's effort and skills. 3) The employer perspective-A flexible labor market does not unduly constrain the employer's ability to adjust employment and wages to changing market conditions. The author looks at all three dimensions of labor market flexibility by analyzing job reallocation, worker transitions across labor force states, wage distribution, and regulatory constraints faced by employers. He focuses on the issue of job creation and job destruction, using micro level data on all registered firms. He finds that flexibility in one dimension can concur with rigidities in the other. Specifically, employers in Lithuania have a substantial degree of flexibility with employment adjustment coupled with limited flexibility to wage adjustment due to a high statutory minimum wage. The relatively rigid wage structure locks low productivity workers who are preponderant among the unemployed. The low-skilled long-term unemployed have become marginalized and unable to successfully compete for available jobs, while the high job turnover is accounted for largely by job-to-job transitions. As a result, a dynamic labor market coincides with a stagnant unemployment pool.
| Summary: | Lithuania is a transition economy
undergoing rapid enterprise restructuring associated with
substantial job turnover. At the same time, unemployment in
Lithuania is high and of long duration. This presents a
puzzle: high job turnover epitomizes labor market
flexibility, while high unemployment indicates labor market
rigidities. What are the reasons behind this paradox? Why do
the unemployed not benefit from job opportunities created by
high job turnover, which entails high rates of job creation
and hiring? To answer this question, the author looks at
three perspectives on labor market flexibility: 1) The
macroeconomic perspective-A flexible labor market is one
that facilitates full use and efficient allocation of labor
resources. 2) The worker perspective-A flexible labor market
means ease in finding a job paying a wage adequate to the
worker's effort and skills. 3) The employer
perspective-A flexible labor market does not unduly
constrain the employer's ability to adjust employment
and wages to changing market conditions. The author looks at
all three dimensions of labor market flexibility by
analyzing job reallocation, worker transitions across labor
force states, wage distribution, and regulatory constraints
faced by employers. He focuses on the issue of job creation
and job destruction, using micro level data on all
registered firms. He finds that flexibility in one dimension
can concur with rigidities in the other. Specifically,
employers in Lithuania have a substantial degree of
flexibility with employment adjustment coupled with limited
flexibility to wage adjustment due to a high statutory
minimum wage. The relatively rigid wage structure locks low
productivity workers who are preponderant among the
unemployed. The low-skilled long-term unemployed have become
marginalized and unable to successfully compete for
available jobs, while the high job turnover is accounted for
largely by job-to-job transitions. As a result, a dynamic
labor market coincides with a stagnant unemployment pool. |
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