Optimal speed of transition with a shrinking labour force and under uncertainty*

Abstract

In the 1990s -during the restructuring of large state enterprises -Central European economies experienced high unemployment. Social policy expenditures, particularly targeted to the non-employed, grew faster than expected due to the need to finance the out-of-the-labour categories. In 1992, after the Passive Labour Market Policies' reforms, the pace of transition decelerated. Unemployment dynamics, speed of transition and non-employment policies are modelled based on the assumption that the labour force is shrinking over time. Dismissed workers have the opportunity to choose an outside-option alternative to labour force participation. Individual uncertainty is assumed in a first phase of transition, while aggregate uncertainty -generating opposition to restructuring -is modelled in a second phase. The model predicts a slowdown in the speed of transition.JEL classifications : J41, H53, P26.