After the start of transition, in Central European Economies the restructuring process of large state enterprizes was accompanied by high unemployment all through the '90s. Social policy expenditures, particularly targeted to the non-employed, grew faster than expected due to the need to finance the out-of-labor categories. The reallocation of workers from the state to the private sector called for the establishment of an adequate social safety net. In this paper, unemployment dynamics, speed of transition and non-employment policies are modelled based on the assumption that the labor force is shrinking over time. Dismissed workers have the opportunity to choose an outside- option, i.e. an alternative to the labor force participation. Individual uncertainty is assumed in a first phase of the model, while aggregate uncertainty generating opposition to restructuring is modelled in a second phase. The model predicts a slow down of the speed of transition. Starting from 1992, after the reforms concerning Passive Labor Market Policies (PLMPs), a reduced pace of transition appeared: the reasons why this happened have not yet been explained by the Optimal Speed of Transition (OST) literature.
Unemployment Model of Transition Social Safety Net