Wages and employment in the transition to a market economy

Abstract

This report focuses on the implications for wage bargaining and policy of inherited ownership arrangements and rules about wage setting during the transition of socialist economies. The authors discuss the strong tendency toward overemployment and wage drift in socialist systems. They focuses on the market-based transitional economy, exemplified by Poland since 1990, setting up a series of models capturing the behavior of worker-controlled firms. They develop a simple policy game in which government policy is conditioned on output, through a subsidy instrument. This reflects the problem typically faced by reforming governments of whether to enforce a hard budget constraint or whether to resort to subsidies and associated departments from fiscal targets. Finally, they emphasize the way wage tax rules can affect employment and wage and how critical is their design. The authors conclude that because of the inherited ownership structure and the uncertainty associated with reform, market-based regimes will continue to need centralized controls over wages in worker-controlled firms (the socialized sector). Unemployment and an expanding private sector alone are unlikely to provide a sufficient restraining mechanism for wages.