This document analyzes worker flows in transition economies based on data from the Life in Transition Survey. It aims to understand if existing theories like Aghion-Blanchard or Caballero-Hammour can explain the data. The document finds that job-to-job flows dominated reallocation rather than flows between sectors, and demographic changes like new entries and exits better explain the data than theoretical channels. Existing theories make simplifying assumptions and do not fully capture the heterogeneity and complexity of transition processes.

1. Can we really explain worker flows in transition economies?
Can we really explain worker flows in transition
economies?
Evidence from the Life in Transition Survey
Joanna Tyrowicz
Lucas van der Velde
GRAPE
Group for Research in APplied Economics
February 2015,
41st EEA, New York

2. Can we really explain worker flows in transition economies?
Table of contents
1 Stories of reallocation
2 Hypotheses
3 Data and methods
4 Results
5 Conclusions

3. Can we really explain worker flows in transition economies?
Introduction
Motivation

4. Can we really explain worker flows in transition economies?
Introduction
Motivation
Analyses so far is highly selective - few countries, few periods

5. Can we really explain worker flows in transition economies?
Introduction
Motivation
Analyses so far is highly selective - few countries, few periods
Lack of a solid, complete theoretical basis.

6. Can we really explain worker flows in transition economies?
Introduction
Motivation
Analyses so far is highly selective - few countries, few periods
Lack of a solid, complete theoretical basis.
Transition theories better than universal labor market theories?
When is transition over?

7. Can we really explain worker flows in transition economies?
Introduction
Motivation
Analyses so far is highly selective - few countries, few periods
Lack of a solid, complete theoretical basis.
Transition theories better than universal labor market theories?
When is transition over?
Our goal: to understand better worker flows in transition economies

8. Can we really explain worker flows in transition economies?
Introduction
Motivation
Analyses so far is highly selective - few countries, few periods
Lack of a solid, complete theoretical basis.
Transition theories better than universal labor market theories?
When is transition over?
Our goal: to understand better worker flows in transition economies
Advantage: new, comprehensive retrospective data: Life in
Transition Survey (EBRD)

9. Can we really explain worker flows in transition economies?
Very selective choice of countries analyzed
Table: Countries analysed by previous literature
Year N 89 90 91 92 93 94 95 96 97 98 99 00
Estonia 2
Russia 2
Ukraine 3
Bulgaria 1
Poland 3
Romania 1
Slovenia 2
Slovak 1
Note: Ticks indicate that the countryperiod was analysed in the literature. Papers were searched
for in the EconLit database with keywords: ‘reallocation’; ‘transition’ ‘job creation’ ‘job
destruction’

10. Can we really explain worker flows in transition economies?
Stories of reallocation
Aghion and Blanchard (1994) - optimal speed of transition
Inefficient (public sector) jobs collapse

11. Can we really explain worker flows in transition economies?
Stories of reallocation
Aghion and Blanchard (1994) - optimal speed of transition
Inefficient (public sector) jobs collapse
State can subsidize firms (postpone collapse) or redundant workers
(with safety nets)

12. Can we really explain worker flows in transition economies?
Stories of reallocation
Aghion and Blanchard (1994) - optimal speed of transition
Inefficient (public sector) jobs collapse
State can subsidize firms (postpone collapse) or redundant workers
(with safety nets)
Taxes make creating jobs costly, desynchronizing JD & JC

13. Can we really explain worker flows in transition economies?
Stories of reallocation
Aghion and Blanchard (1994) - optimal speed of transition
Inefficient (public sector) jobs collapse
State can subsidize firms (postpone collapse) or redundant workers
(with safety nets)
Taxes make creating jobs costly, desynchronizing JD & JC
Limits

14. Can we really explain worker flows in transition economies?
Stories of reallocation
Aghion and Blanchard (1994) - optimal speed of transition
Inefficient (public sector) jobs collapse
State can subsidize firms (postpone collapse) or redundant workers
(with safety nets)
Taxes make creating jobs costly, desynchronizing JD & JC
Limits
Simplifications concerning the role of sectoral reallocation

15. Can we really explain worker flows in transition economies?
Stories of reallocation
Aghion and Blanchard (1994) - optimal speed of transition
Inefficient (public sector) jobs collapse
State can subsidize firms (postpone collapse) or redundant workers
(with safety nets)
Taxes make creating jobs costly, desynchronizing JD & JC
Limits
Simplifications concerning the role of sectoral reallocation
Simplification of the dynamics of the two sectors

16. Can we really explain worker flows in transition economies?
Stories of reallocation
Aghion and Blanchard (1994) - optimal speed of transition
Inefficient (public sector) jobs collapse
State can subsidize firms (postpone collapse) or redundant workers
(with safety nets)
Taxes make creating jobs costly, desynchronizing JD & JC
Limits
Simplifications concerning the role of sectoral reallocation
Simplification of the dynamics of the two sectors
Workers homogeneous: no demographics or changes in education -
inconsistent with empirical evidence Jurajda and Terrell (2003);
Schaffner (2011); Turunen (2004)

17. Can we really explain worker flows in transition economies?
Stories of reallocation
Aghion and Blanchard (1994) - optimal speed of transition
Inefficient (public sector) jobs collapse
State can subsidize firms (postpone collapse) or redundant workers
(with safety nets)
Taxes make creating jobs costly, desynchronizing JD & JC
Limits
Simplifications concerning the role of sectoral reallocation
Simplification of the dynamics of the two sectors
Workers homogeneous: no demographics or changes in education -
inconsistent with empirical evidence Jurajda and Terrell (2003);
Schaffner (2011); Turunen (2004)
Extensions: International migration (Bruno, 2006); heterogeneous
workers (Boeri, 2000; Balla et al., 2008); job-to-job flows (Tichit,
2006)

18. Can we really explain worker flows in transition economies?
Stories of reallocation
Caballero & Hammour (several papers)
Main concept: appropriability

19. Can we really explain worker flows in transition economies?
Stories of reallocation
Caballero & Hammour (several papers)
Main concept: appropriability
Endogenous job creation and destruction based on capital specificity
and incomplete contracts.

20. Can we really explain worker flows in transition economies?
Stories of reallocation
Caballero & Hammour (several papers)
Main concept: appropriability
Endogenous job creation and destruction based on capital specificity
and incomplete contracts.
Limits

21. Can we really explain worker flows in transition economies?
Stories of reallocation
Caballero & Hammour (several papers)
Main concept: appropriability
Endogenous job creation and destruction based on capital specificity
and incomplete contracts.
Limits
No treatment of public sector / taxes / subsidies

22. Can we really explain worker flows in transition economies?
Stories of reallocation
Caballero & Hammour (several papers)
Main concept: appropriability
Endogenous job creation and destruction based on capital specificity
and incomplete contracts.
Limits
No treatment of public sector / taxes / subsidies
Workers homogeneous: no demographics or changes in education -
inconsistent with empirical evidence (Jurajda and Terrell, 2003;
Schaffner, 2011; Turunen, 2004)

23. Can we really explain worker flows in transition economies?
Stories of reallocation
Caballero & Hammour (several papers)
Main concept: appropriability
Endogenous job creation and destruction based on capital specificity
and incomplete contracts.
Limits
No treatment of public sector / taxes / subsidies
Workers homogeneous: no demographics or changes in education -
inconsistent with empirical evidence (Jurajda and Terrell, 2003;
Schaffner, 2011; Turunen, 2004)
Sectoral changes increase productivity, which is not always true
(Dimova, 2008; Orazem and Vodopivec, 2009)

24. Can we really explain worker flows in transition economies?
Stories of reallocation
Common limitations in applying these theories to the data
Data limitations on controlling for gross (individual level) and net
(firm level) flows

25. Can we really explain worker flows in transition economies?
Stories of reallocation
Common limitations in applying these theories to the data
Data limitations on controlling for gross (individual level) and net
(firm level) flows
The different role of worker flows (reallocations) vs job flows
(privatizations)

26. Can we really explain worker flows in transition economies?
Stories of reallocation
Common limitations in applying these theories to the data
Data limitations on controlling for gross (individual level) and net
(firm level) flows
The different role of worker flows (reallocations) vs job flows
(privatizations)
Privatized vs new (de novo) firms – all private equal?

27. Can we really explain worker flows in transition economies?
Stories of reallocation
Common limitations in applying these theories to the data
Data limitations on controlling for gross (individual level) and net
(firm level) flows
The different role of worker flows (reallocations) vs job flows
(privatizations)
Privatized vs new (de novo) firms – all private equal?
What if a worker holds more than a one job during the transition
period? Which transition do we capture?

28. Can we really explain worker flows in transition economies?
Hypotheses
Our statements to be tested
1 Flows during transition were generally not AB or CH
2 Demographic changes (youth entries and elderly exits) explain most
of the reallocation
3 AB explains unemployment better than CH in transition countries,
but they both poorly explain employment
4 Channels of mediation suggested by AB and CH do not seem to be
driving the processes, demographics do

29. Can we really explain worker flows in transition economies?
Data and methods
Data sources
Life in transition Survey - 27 transition countries, 18 years
Homogeneous survey compiled by the EBRD in 2006 and 2010.
Life history in the 2006 edition. Sample covers years from 1989 to
2006.
Limitations: missing variables (e.g. wages, firm size), identification
of flows (privatized vs de novo), recall bias.
Other sources
ILO Stat and Fondazione: Wages and EPL
EBRD: Transition measures.
World Bank: GDP per capita.
Penn tables: Labour share in GDP, Employment to population ratio.

30. Can we really explain worker flows in transition economies?
Data and methods
LiTS and other data sources
Country Year
Services Industry Private Services Industry Private
(LFS) (LFS) (SES) (LiTS) (LiTS) (LiTS)
Bulgaria
2000 51.8 39.6 57.2 36.0 48.7
2002 54.9 38.3 55.9 60.0 34.4 53.5
Estonia
1997 53.1 33.1 58.4 30.6 52.7
2002 56.0 32.9 91.8 59.8 30.9 62.2
Latvia
1998 47.4 30.1 67.1 23.6 51.2
2002 49.0 27.7 88.0 67.1 24.4 59.7
Poland
2000 46.1 40.1 59.6 34.6 50.0
2002 51.5 37.8 47.1 59.0 34.3 53.4
Romania
1997 48.4 22.8 54.1 39.7 44.2
2002 58.0 24.7 65.3 58.8 36.1 54.8
Slovakia
1998 50.2 29.2 62.6 30.1 39.7
2002 52.7 27.7 63.0 65.6 28.6 45.9
Note: Own calculation on the basis of data from LiTS, the EU-Labour Force Surveys (LFS) and
the Structure of Earnings Survey (SES).

31. Can we really explain worker flows in transition economies?
Data and methods
Definitions
AB: public ⇒ private sector (within the same industry)

32. Can we really explain worker flows in transition economies?
Data and methods
Definitions
AB: public ⇒ private sector (within the same industry)
CH: manufacturing ⇒ services (within the same sector)

33. Can we really explain worker flows in transition economies?
Data and methods
Definitions
AB: public ⇒ private sector (within the same industry)
CH: manufacturing ⇒ services (within the same sector)
ABCH: public manufacturing ⇒ private services

34. Can we really explain worker flows in transition economies?
Data and methods
Definitions
AB: public ⇒ private sector (within the same industry)
CH: manufacturing ⇒ services (within the same sector)
ABCH: public manufacturing ⇒ private services
NONE: private service ⇒ public manufacturing

35. Can we really explain worker flows in transition economies?
Data and methods
Definitions
AB: public ⇒ private sector (within the same industry)
CH: manufacturing ⇒ services (within the same sector)
ABCH: public manufacturing ⇒ private services
NONE: private service ⇒ public manufacturing
SAME: within sector and industry

36. Can we really explain worker flows in transition economies?
Data and methods
Definitions
AB: public ⇒ private sector (within the same industry)
CH: manufacturing ⇒ services (within the same sector)
ABCH: public manufacturing ⇒ private services
NONE: private service ⇒ public manufacturing
SAME: within sector and industry
EXIT: To retirement

37. Can we really explain worker flows in transition economies?
Data and methods
Definitions
AB: public ⇒ private sector (within the same industry)
CH: manufacturing ⇒ services (within the same sector)
ABCH: public manufacturing ⇒ private services
NONE: private service ⇒ public manufacturing
SAME: within sector and industry
EXIT: To retirement
ENTRY: Into employment

38. Can we really explain worker flows in transition economies?
Results
Our statements to be tested
1 Flows are generally not AB or CH
2 Demographic changes (new entries and early exits) explain most of
the reallocation
3 AB explains unemployment better than CH in transition countries,
but they both poorly explain employment
4 Channels of mediation suggested by AB and CH do not seem to be
driving the processes, demographics do

39. Can we really explain worker flows in transition economies?
Results
H1: which flows dominate? How much the models explain?
Figure: Relative importance of different flows (averages over time)
0 .2 .4 .6 .8 1
AZE
ARM
TJK
GEO
MKD
BIH
MNE
KGZ
ALB
MDA
SRB
SVK
BLR
HRV
UZB
SVN
POL
LTU
UKR
ROM
BGR
KAZ
CZE
EST
RUS
HUN
LVA
AB CH SAME ABCH
NONE To retirement From school

40. Can we really explain worker flows in transition economies?
Results
One speed of transition? + job-to-job flows dominate!
Figure: Evolution over time (averages over) countries)0246
1990 1995 2000 2005
AB
CH
ABCH
SAME
NONE

41. Can we really explain worker flows in transition economies?
Results
Our statements to be tested
1 Flows are generally not AB or CH
2 Demographic changes (new entries and early exits) explain most of
the reallocation
3 AB explains unemployment better than CH in transition countries,
but they both poorly explain employment
4 Channels of mediation suggested by AB and CH do not seem to be
driving the processes, demographics do

42. Can we really explain worker flows in transition economies?
Results
H2: which flows explain employment?
Table: Movements to employment
N⇒ E U⇒ E E⇒ E
AB 0.968*** 0.868*** 0.917***
CH 0.649*** 0.662*** 0.594***
ABCH -0.623*** -0.592*** -0.531***
Same industry - Manufacturing 0.102*** 0.348*** 0.479***
Same sector - Public 0.883*** 0.882*** 0.916***
Same Sector - de novo 0.854*** 0.892***
Reincidence of unemployment -0.207*** -0.004***
Personal characteristics Yes Yes Yes
Country dummies Yes Yes Yes
Year dummies Yes Yes Yes
Number of id 15,131 9,968 13,107
R2
between 0.825 0.276 0.641
R2
within 0.834 0.314 0.641
Notes: Panel linear probability models (RE). Robust standard errors used but not reported.
Asterisks denote 1 % confidence levels

43. Can we really explain worker flows in transition economies?
Results
H3: which flows explain unemployment (better)?
Table: Link between unemployment rates and flows
AB CH SAME ABCH NONE EXIT ENTRY
flow2
0.057*** 0.089 0.009 0.220* 0.026 0.006 0.037*
flow -0.789*** -0.688 -0.533*** -1.067** -0.595* -0.060 -0.762***
N 486 486 486 486 486 486 486
R2
0.888 0.885 0.890 0.886 0.886 0.885 0.889
Notes: In all cases the dependent variable was detrended Unemployment Rate. The independent
variables are the total number of flows of each type in each country.

44. Can we really explain worker flows in transition economies?
Results
Our statements to be tested
1 Flows are generally not AB or CH
2 Demographic changes (new entries and early exits) explain most of
the reallocation
3 AB explains unemployment better than CH in transition countries,
but they both poorly explain employment
4 Channels of mediation suggested by AB and CH do not seem to be
driving the processes, demographics do

45. Can we really explain worker flows in transition economies?
Results
H4: do the channels of mediation work?
Table: Durations models
VARIABLES TOTAL CH AB (de novo)
Unemployment rate 8.850*** 9.035*** 8.435***
Unemployment rate 2
-12.305*** -18.396*** -16.145***
Entry 3.727*** 8.737*** 6.219***
Exit 2.950 0.676 7.472**
ULC dynamics -0.062 0.878 -0.601
Public 0.472*** 0.346** 2.917***
De novo 0.049 -0.001 0.486
Manufacturing 0.455*** 0.190 0.522***
Construction 0.457*** 0.190 0.834***
Services 0.527*** -0.283* 0.756***
High skill jobs -0.340*** -0.210 -0.143
Personal characteristics Yes Yes Yes
AIC 39362.182 6618.8377 8937.4545
BIC 39517.767 6774.4224 9093.0392
Notes: Estimates from a proportional hazard Cox model with country specific baseline hazard
ratios.

46. Can we really explain worker flows in transition economies?
Conclusions
Summarizing
1 AB and CH movements are the smaller part of transiton
2 school-to-work transition very important for successufl transformation
3 while some of the correlations predicted by the theories hold, but the
transmission mechanisms should be reconsidered

47. Can we really explain worker flows in transition economies?
Conclusions
Questions or suggestions?

48. Can we really explain worker flows in transition economies?
Conclusions
Questions or suggestions?
Thank you for your attention!

49. Can we really explain worker flows in transition economies?
References
Aghion, P., Blanchard, O. J., 1994. On the speed of transition in central
europe, 283–330.
Balla, K., K¨oll˝o, J., Simonovits, A., 2008. Transition with heterogeneous
labor. Structural Change and Economic Dynamics 19 (3), 203–220.
Boeri, T., 2000. Structural Change, Welfare Systems, and Labour
Reallocation: Lessons from the Transition of Formerly Planned
Economies. Oxford University Press.
Bruno, R. L., 2006. Optimal speed of transition under shrinking labor
force and uncertainty. Economics of Transition 14 (1), 69–100.
Dimova, R., 2008. The impact of labour reallocation and competitive
pressure on tfp growth: firm-level evidence from crisis and transition
ridden bulgaria. International Review of Applied Economics 22 (3),
321–338.
Jurajda, ˇS., Terrell, K., 2003. Job growth in early transition: Comparing
two paths. Economics of Transition 11 (2), 291–320.
Orazem, P. F., Vodopivec, M., 2009. Do Market Pressures Induce
Economic Efficiency? The Case of Slovenian Manufacturing,
1994-2001. Southern Economic Journal 76 (2), 553–576.
Schaffner, S., 2011. Heterogeneity in the cyclical sensitivity of job-to-job
flows. Zeitschrift f¨ur ArbeitsmarktForschung 43 (4), 263–275.

50. Can we really explain worker flows in transition economies?
Conclusions
Tichit, A., 2006. The optimal speed of transition revisited. European
Journal of Political Economy 22 (2), 349 – 369.
Turunen, J., 2004. Leaving state sector employment in russia. Economics
of Transition 12 (1), 129–152.