Abstract
How severe are costs to workers when the economy undergoes a large recession? In this paper, we try to provide an answer to this question using as an example Latvia, a new EU member state, which faced the most severe recession in Europe and globally in 2008. We employ individual-level Latvian Labor Force Survey and EU SILC data over the years 2002–2016 and 2007–2015, respectively, and analyze transitions in the labor market and their determinants as well as occupational mobility. Our results show that adjustment takes place predominantly at the extensive margin since it is driven by flows to unemployment. We also show that by 2016 the labor market has bounced back to its pre-crisis performance and that for the average worker Latvia’s macroeconomic policies that focused on internal devaluation did not impose large costs in the medium run. However, the young, ethnic minorities and the less skilled were particularly affected by the crisis. Wage regressions suggest that job mobility is not associated with an increase in wages, i.e., with increased labor productivity.
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Notes
In this paper, we do not discuss emigration from Latvia. A detailed analysis of Latvian emigration and its impacts is available in Hazans (2013, 2016 and 2019). Hazans and Philips (2010) discuss migration experience of the Baltic states after their accession to the EU, while Zaiceva and Zimmermann (2016) describe return migration during the crisis in the new EU member states. In the analysis that follows, unfortunately due to data limitations, we are not able to include emigration. Indeed, emigration potentially could constitute an additional labor market state in transition matrices. Nevertheless, we attempt to proxy potential emigration by looking at panel attrition. At any rate, as long as out-migration is an additional safety valve regarding large labor market shocks, which is clearly the case in Latvia, our analysis essentially shows lower bounds of labor market flows and labor market adjustment. In addition, when out-migration is not systematically correlated with the estimated labor market transitions, the presented adjustment trends over the Great Recession and in its aftermath remain credible. Indeed, as we show below, attrition only marginally affects the estimated transitions.
Note that sometimes for the same individual there are two possible transitions across two consecutive years: that is, the transition between the first and third interview, and the transition between the second and fourth interview. Both transitions occur with 52 weeks/1 year of distance or slightly more. In these cases, we use all transitions but implement some reweighting: for instance, to an individual with two possible transitions in the same year (e.g., 2007/2008) we assign weights equal to 0.5 to each of the two transitions. If only one transition is available, we assign a weight equal to one. Thus, the analysis is based on annual transitions. Note that analysis with annual data can be subject to the time aggregation bias (Shimer 2012) or seasonality issues, and there is a strand of the literature that reveals the importance of these issues (see, for example, Nordmeier 2014 and the references therein).
We also drop observations with inconsistencies in the sequence number (e.g., the sequence number changes across waves or individuals with the same sequence number change gender or age category). The number of such cases, however, is small accounting roughly for 2% of all observations.
The descriptive statistics and proportions of certain demographic groups in our sample with the LFS data as well as the EU SILC data are available upon request. The shares are comparable across the two datasets, apart for the Latvian/non-Latvian variable with the proportion of non-Latvians being larger in the LFS dataset. These two categories, however, are not directly comparable due to the fact that using the LFS data enables us to define Latvian and non-Latvian ethnicity, while the EU SILC variable refers to the country of birth.
We follow Brown et al. (2006) in defining discouraged workers as individuals “not working, available but not searching for the following reasons: they believe that there are no available jobs, they do not know how to search, they believe they do not have suitable skills or are too old to find a job, they sought a job before but did not find one” (Brown et al., p. 449).
Probit regression results (available upon request) indicate that males and younger workers have a higher incidence of unemployment as do non-Latvians and workers with low educational attainment.
Involuntary temporary workers are individuals in temporary jobs who could not find permanent jobs, while involuntary part-time workers would like to work full time but could not find full-time jobs. Finally, underemployed workers are employed persons who work less than 40 h per week but would like to work this amount of hours and are available to do so within 2 weeks.
See, for example, Lehmann and Zaiceva (2015) for different measures of informal employment in Russia. Their findings suggest that the incidence of informal employment depends crucially on the definition used.
One form of “partial informality” is “envelope payments”, i.e., when part of the wage is paid under the table to partially evade the payment of social security contributions. Unfortunately, there are no direct questions regarding envelope payments in the Latvian LFS or SILC questionnaires. Lehmann and Zaiceva (2015) show that in the Russian labor market this incidence reaches roughly 20% of all salaried employment in 2011.
The online appendix is available at http://ftp.iza.org/dp9588_app.pdf.
It is important to note that out-migration played also a very important role. Without the option to emigrate the unemployment rate would have been even higher (Hazans 2013).
“Round-tripping” means that an individual moves over the year back to the original labor market state and hence appears as a non-mover.
These results are available upon request.
The transition from 2006 to 2007 is missing due to different coding of households. We, therefore, can only use the time interval between 2002 and 2006.
Fadejeva and Opmane (2016) analyze determinants of flows from employment to unemployment and from unemployment to employment for the pre-crisis, crisis and post-crisis periods estimating Cox proportional hazard models.
We have also estimated transitions and their determinants disaggregating employment into four mutually exclusive states: permanent wage employment, temporary wage employment and professional and non-professional self-employment (available upon request). In all periods, the states permanent wage employment, professional and non-professional self-employment as well as inactivity were relatively “stable.” In contrast, temporary wage employment was always very volatile since between 2007 and 2011 more than 70% of workers who are originally in this state exit it for other destinations. In other words, more than two-thirds of all workers who at the beginning of the year were in temporary wage employment found themselves in another state at the end of the year. During the crisis period of 2008–2009, both for workers in permanent wage employment and in non-professional self-employment the inflow rates into unemployment triple, while around a quarter of workers originally in temporary wage employment flow every year into unemployment throughout the entire period. Overall, this analysis also suggests that the only relevant adjustment for the large majority of workers who are in permanent wage employment is at the extensive margin, that is, through flows into unemployment.
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Acknowledgements
We are grateful to Paolo Falco, Mihails Hazans, Herwig Imervoll, Artjoms Ivlevs, Daphne Nikolitsa, Christopher Pissarides, Andreas Wörgötter and participants of the “Conference on Employment in Europe” in Protaras, Cyprus in 2016, for valuable comments. The comments by three anonymous referees have greatly helped us to improve the paper. We thank Georgios Tassoukis and the IZA IDSC for help with the Latvian Labor Force Survey data. The usual caveat applies. Lehmann is grateful for partial financial support provided by the Russian Academic Excellence Project ‘5 - 100’ within the framework of the HSE University Basic Research Program.
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Lehmann, H., Razzolini, T. & Zaiceva, A. The Great Recession and Labor Market Adjustment: Evidence from Latvia. Comp Econ Stud 62, 149–181 (2020). https://doi.org/10.1057/s41294-019-00106-y
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DOI: https://doi.org/10.1057/s41294-019-00106-y