Economic Restructuring, Unemployment, and Growth in a Transition Economy

IMF Working Papers, March 1, 1993

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Paper develops a model of the process of reallocation of labor from the state sector to the private sector.
Two growth regimes examined:
- Exogenously determined growth:
- In the initial stages of transition unemployment will rise over time.
- After a critical stage in the transition process, restructuring is accompanied by a decline in unemployment.
- Endogenously determined growth with human capital acquired by learning-by-doing:
- Whether restructuring eventually occurs is determined by the level of human capital in the private sector and the rate of unemployment.
The effects of various shocks and government policies on the costs, speed, and eventual outcome of restructuring are analyzed.

Initial-stage restructuring mechanically raises unemployment under exogenous-growth assumptions.
A "critical stage" exists beyond which continued restructuring reduces unemployment.
When growth is endogenous and human capital accumulation follows learning-by-doing:
- Private-sector human capital level is a decisive determinant of whether restructuring proceeds.
- The prevailing rate of unemployment interacts with human capital to shape the restructuring outcome.
Government policies and shocks can affect:
- The costs of restructuring.
- The speed of labor reallocation.
- The eventual equilibrium outcome for employment and sectoral composition.

Policies that influence the accumulation of human capital in the private sector can change restructuring trajectories and final employment outcomes.
Interventions that affect unemployment rates can alter whether and how quickly restructuring occurs.
The design of policies should account for stage of transition (initial vs. post-critical stage) because effects on unemployment differ across stages.