Abstract
This paper looks at the evolution of the labour markets in Estonia, Latvia, and Lithuania since the beginning of transition until 2003, with a particular focus on labour force participation. How did labour supply in the Baltic countries respond to changes in minimum wages, unemployment benefits and retirement regulation? Do the marked differences in labour market policies between the countries result in different patterns of participation? What are the obstacles to and driving forces of participation? We find that relative contribution of participation and demographic trends to the dynamics of the labour force varied substantially both over the years and across the three countries. Participation, in turn, has been shaped by sometimes complicated interactions between schooling decisions of the youth, retirement, policy changes, and external shocks. Resulting differences in trends and patterns are quite substantial, indicating that there is a room for increasing participation in each of the countries. Panel data analysis of determinants of participation and discouragement based on labour force survey data suggests that increasing after-tax real minimum wage has significant positive effects on participation and reduces discouragement in Lithuania. In Estonia, by contrast, a positive effect of minimum wage on participation is found only for teenagers of both genders and for young males. We do not find any evidence that partner’s wage has a negative effect on participation. Ethnic minorities, especially females, in all three Baltic countries are less likely to be in the labour force, other things equal.
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Notes
In Estonia (until 2002) and in Lithuania UB were not taxed, so the ratio of UB to average net wage is used. For Latvia, where UB are taxed, Fig. 2 shows average UB—average gross wage ratio (the ratio of after-tax UB to net wage would be almost identical).
Here the term “discouraged worker” is used loosely, referring only to the reported reason for not seeking a job. According to the standard definition, only those inactive persons, who would like to work and are available for work, are categorised as discouraged. See further sections for a more detailed discussion of discouraged worker effect in the Baltic countries.
See Prescott (2004) for recent evidence on high elasticity of labour supply in G7 countries.
In Estonia we use 15 counties, but the capital city (400 thousand population) is separated from the rest of respective county; excluding capital city, average population of these units is about 90 thousand. In Lithuania we use fixed effects for 10 counties and three large cities, but local wages and (registered) unemployment are measured at municipality level; there are 60 municipalities with average population 59 thousand.
The endogeneity of the dummy for being a student/pupil is not addressed here.
Dummy for the 20–24 age group is interacted with deviation of parental income per core family member from its mean value, standartised by national average net wage. Using deviation ensures that interaction does not distort the main effect of the age group dummy.
More specifically, those who are not employed, have not been seeking for a job (or waiting for an earlier contracted job to start within 3 months) over the past 4 weeks, and answered “Yes” to the following two questions “Would you like to start working if there was an opportunity?” and “If you would have been offered a job last week, could you have started within two weeks?” (these are the Estonian LFS questions; Lithuanian ones are similar: “Even though you haven’t been looking for a job, would you like a job if a suitable one were available?” and “If you found a suitable job, could you start working within two weeks?”).
These models might suffer from sample selection. We have estimated probit with sample selection, but have found no evidence for error correlation between participation and discouragement equations; this, however, might be because the instruments were not too strong.
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Acknowledgements
Financial support from WIFO in the framework of the 5th Framework project “Regional Labour Market Adjustment in the Accession Candidate Countries” is gratefully acknowledged. I thank Raul Eamets for help with Estonian data, Peter Huber, Tiiu Paas, Dan Rickman, and two anonymous referees for useful comments.
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Hazans, M. Looking for the workforce: the elderly, discouraged workers, minorities, and students in the Baltic labour markets. Empirica 34, 319–349 (2007). https://doi.org/10.1007/s10663-006-9029-5
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DOI: https://doi.org/10.1007/s10663-006-9029-5