POLIcy RESEARCH WORKING PAPER 2946

# Abstract

Lithuania is a transition economy undergoing rapid enterprise restructuring associated with substantial job turnover. At the same time, unemployment in Lithuania is high and of long duration. This presents a puzzle: high job turnover epitomizes labor market flexibility, while high unemployment indicates labor market rigidities. What are the reasons behind this paradox? Why do the unemployed not benefit from job opportunities created by high job turnover, which entails high rates of job creation and hiring?

To answer this question, Rutkowski looks at three perspectives on labor market flexibility:

* The macroeconomic perspective-A flexible labor market is one that facilitates full use and efficient allocation of labor resources.

* The worker perspective-A flexible labor market means ease in finding a job paying a wage adequate to the worker's effort and skills.

* The employer perspective-A flexible labor market does not unduly constrain the employer's ability to adjust employment and wages to changing market conditions.

Rutkowski looks at all three dimensions of labor market flexibility by analyzing job reallocation, worker transitions across labor force states, wage distribution, and regulatory constraints faced by employers. He focuses on the issue of job creation and job destruction, using micro level data on all registered firms. He finds that flexibility in one dimension can concur with rigidities in the other. Specifically, employers in Lithuania have a substantial degree of flexibility with employment adjustment coupled with limited flexibility to wage adjustment due to a high statutory minimum wage. The relatively rigid wage structure locks low productivity workers who are preponderant among the unemployed. The low-skilled long-term unemployed have become marginahzed and unable to successfully compete for available jobs, while the high job turnover is accounted for largely by job-to-job transitions. As a result, a dynamic labor market coincides with a stagnant unemployment pool.

This paper-a product of the Human Development Sector Unit, Europe and Central Asia Region-Is part of a larger effort in the region to examine labor market performance and its contribution to economic growth and poverty reduction. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Jan Rutkowski, room H7-170, telephone 202-458-4569, fax 202-477-3387, email address jrutkowski@worldbank.org. Policy Research Working Papers are also posted on the Web at http://econ.worldbank.org. January 2003. (82 pages) _Th7e Policy Research Working Paper Series dissemninates the findings of work in progress to encourage the exchange of ideas about development issues. An obhective of the series is toget the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors They do not necessarily represent the view of the World Bank, its Executtve Directors, or the countries they represent_ Produced by the Research Advisory Staff