Productivity Growth and Job Creation in Eastern Europe and the Former Soviet Union

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Productivity Growth and Job Creation in Eastern
Europe and the Former Soviet Union
Pradeep Mitra Chief Economist
Europe and Central Asia Region
Presentation at a plenary session of a conference
on Modernization of Economy and the State
organized by the State University Higher School
of Economics in Moscow, April 4-6, 2006
Views expressed are mine and do not necessarily
represent those of the World Bank.
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Growth and (mostly) no increase in inequality
have moved 40 million people out of poverty in
Eastern Europe and the Former Soviet Union during
1998-2003
Distribution of Population by Poverty Status

• Where roughly 20 percent (or 1 in 5) were poor,
  today 12 percent (1 in 8) are poor
• Poverty has fallen almost everywhere
• Much of this poverty reduction has occurred in
  the populous middle-income countries in the
  Region (Kazakhstan, the Russian Federation, and
  Ukraine)

Source Staff estimates based on World Bank
(2005a)
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Working adults and children continue to form the
bulk of the poor in the region, so that much of
the impact of growth on poverty reduction has
been transmitted through the labor market
Note EU-8 4.30 a day at 2000 PPP as a poverty
line others 2.15 a day at 2000 PPP
Source World Bank (2005a)
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Overview of the Argument (arrows run from
determinants to outcomes)
Labor market institutions (employment protection
legislation, system of wage bargaining,
unemployment benefits)
Public transfers (pensions, social assistance)
Poverty Reduction among Working families
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Growth in GDP per capita from 1998 to 2003 owes
more to growth in labor productivity (GDP/EMPL)
than improved employment rates (EMPL/Working POP)
or demography (Working POP/POP)
Growth in GDP/POP) (Growth in GDP/EMPL)
(Growth in EMPL/Working POP) (Growth in
Working POP/POP)
Average annual growth in GDP per capita and its
components, 1998-2003
1 Working age population covers the age range
15-64 Source Labor Force Survey, World
Development Indicators
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Growth in labor productivity was reflected in
real wage growth across all consumption
quintiles, while . . . .
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. . . . the employment rate continued to fall in
many countries after 1998. The employment rate
is generally higher in CIS countries, but many
jobs are in low-productivity occupations partly
because . . . .
Employment Rates Early Transition, 1998 and 2003
Note The earliest years (blue bars) for each
country are as follows 1990Azerbaijan, Belarus,
Bulgaria and Estonia 1992 Hungary, Russia 1993
Armenia, Czech Republic, Kazakhstan, Poland and
Slovenia 1994 Albania, Lithuania, Romania and
Slovak Republic. 1995 Moldova and Ukraine.
Source Labor Force Survey, World Development
Indicators Note The employment rate in Moldova
between 1998 and 2003 shows a decline based on
LFS but an increase based on household survey
data (previous slide) on account of a likely more
restrictive definition of informal sector
employment in the LFS.
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. . . . de-industrialization in low income CIS
has been accompanied by a large labor transfer
into low-productivity agriculture in the absence
of adequate social safety nets. Not so in
Central Europe where there has been a reduction
in agricultural and industrial employment, with
jobs moving to market services
Kyrgyz Republic
Czech Republic
Source World Bank (2005b)
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Shifts reflected in declining share of skilled
labor- and capital-intensive exports in low
income CIS and move towards natural resource
exports. In EU-8, increased share of skilled
labor- and capital-intensive exports.
Source Computations based on UN COM Trade
Statistics adapted from World Bank (2005c)
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The drivers of productivity growth the change in
aggregate labor productivity is decomposed into
(i) within-firm, (ii) between-firm, and (iii)
cross components, and the contribution of (iv)
entrants and (v) exiters
Sources of Productivity Growth in Transition,
Emerging, and OECD Countries
Labor Productivity decomposition shares
Manufacturing Five-Year Differencing, Real Gross
Output For Hungary and Romania the decomposition
refers to a three-year differencing which, given
significant learning and selection by new
entrants, Underestimates the contribution of
entry to productivity growth. Source Staff
estimates based on Bartelsman, Haltiwanger and
Scarpetta (2004)
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Firm entry and exit are more important in
transition countries, contributing between 20 to
45 percent of productivity growth
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The drivers of employment firm entry contributed
strongly (25-50 percent) to job creation. Job
creation1/ and job destruction2/ rates increased
dramatically in transition countries
1/ Employment gains during a year divided by
average employment during the year. 2/ Employment
losses during a year divided by average
employment during the year.
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The business environment has been improving
steadily in the transition countries, but is
generally still more difficult than in the
cohesion countries of Western Europe
The business environment was assessed on a scale
from 1 (no obstacle) to 4 (major
obstable) Source Business Environment and
Enterprise Performance Surveys 1999, 2002,
2005 Cohesion countries include Greece, Ireland,
Portugal and Spain
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Business environment in 2005 more difficult for
de novo than privatized and state firms in
regulation and institutions and property rights,
particularly in SEE and CIS and in taxation
The business environment was assessed on a scale
from 1 (no obstacle) to 4 (major
obstable) Source Business Environment and
Enterprise Performance Survey, 2005
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Re potential exiters, higher fraction of state
and privatized firms (than de novo) have arrears
to utilities the budget, employees and suppliers,
which retards their exit
The business environment was assessed on a scale
from 1 (no obstacle) to 4 (major
obstable) Source Business Environment and
Enterprise Performance Survey, 2005
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• Business environment difficulties reflected in
  FDI stock per capita
• EU-8, some SEE skilled-labor and
  capital-intensive exports and better jobs
• CIS, some SEE natural resource or unskilled
  labor-intensive exports and lower quality jobs

FDI Stock per Capita and Share of Skilled Labor
and Capital-Intensive Exports, 2003
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Conclusions

• Continued poverty reduction will depend on growth
  in labor productivity and job creation, together
  with a targeted program of public income
  transfers
• Entry of new firms and exit of obsolete firms
  important for the growth of labor productivity,
  while entry of new firms also important for job
  creation in the transition countries
• The business environment continues to be more
  challenging in the transition countries (esp. SEE
  and CIS) than in the cohesion countries of the
  EU, particularly for new firms compared to state
  and privatized firms
• The business environment also retards the exit of
  state-owned and privatized firms

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Conclusions (cont.)

• Difficulties in the business environment, not
  illiberal trade regimes, limit the FDI that would
  integrate CIS and parts of SEE into global
  networks, expand the share of skilled labor- and
  capital-intensive exports and better jobs
• Continued improvements in the business
  environment, and a level playing field for de
  novo firms are critical for productivity growth
  and job creation
• Labor market institutions not the primary cause
  of low labor market performance but job creation
  can be helped by reform of employment protection
  legislation, firm-level wage determination, and
  reform of social assistance schemes to encourage
  labor turnover