15 be more difficult and incur greater<sup>social cost. Furthermore, in addition to measures</sup> already adopted by the Government<sup>to facilitate dismissals, labor reallocation must be</sup> permitted within firms in order to<sup>adjust the employment and wage structure without having</sup> to resort to dismissals. These steps<sup>require that the internal wage structure be more</sup> flexible, which in turn necessitates<sup>softening or eliminating the tariff-wage system.</sup> A third important aspect of the labor<sup>market policy in the short run is related</sup> to the unemployment impact of the<sup>adjustment. The Government has already adopted a</sup> series of policies regarding unemployment<sup>benefits and employment services. Government</sup> proje4 .ons, which have been used<sup>to make all necessary fiscal allocations, are consistent</sup> provided that dismissals concentrate<sup>heavily on retired persons. However, the actual</sup> unemployment rate, independent of<sup>the eligibility criteria for receiving compensation</sup> payments, will be higher than expected,<sup>especially because employment creation will be</sup> slower than expected. It must be<sup>determined whether society will be prepared to accept</sup> this fact as a necessary outcome of the<sup>adjustment process.</sup> As regards longer term policies, this<sup>paper has argued that three areas are</sup> vital for progress:

- (i) Design of the future institutional framework<sup>for the labor market, already</sup> being studied, must be realistic about<sup>the future market environment. In</sup> particular, in an economy in which collective<sup>bargaining at the firm level will</sup> be the basic means for determining wages,<sup>the coordination and the degree of</sup> centralization are important issues,<sup>which connect with both union</sup> organizational structure and the extent<sup>and timing of state intervention. In</sup> addition, adequate institutional mechanisms<sup>must be established for managing</sup> the minimum wage. This price<sup>must be used as a signal of economic</sup> developments and of the basic price<sup>for unskilled labor, and not as an</sup> instrument of income distribution;

- (ii) Unemployment will be a feature of the<sup>CSFR economy in the future because</sup> of structural reasons, short term skill mismatches,<sup>and the normal fallout from</sup> the economic cycle. A scheme integrating<sup>Government subsidies and an</sup> insurance system with participation of<sup>both employee and employer could</sup> initially be developed;

- (iii) An adequately designed system<sup>for monitoring the labor market is a</sup> fundamental tool for policy making. This system<sup>must include firm-based data</sup> which takes into account firms regardless<sup>of their property holdings and size.</sup> In addition, the system must require periodic<sup>labor force surveys.</sup>

The crucial role of the labor market during<sup>the transition of CSFR to a market</sup> economy is twofold. First, the observed<sup>labor market results will be a paramount factor</sup> concerning the political sustainability of the<sup>overall transition. Second, the efficiency of</sup> transitional policies in obtaining a rapid<sup>supply response depends upon the flexibility</sup> observed in the labor market to produce<sup>an adequate labor reallocation. Tberefore,</sup> adoption of a suitable set of labor market<sup>policies and establishment of an adequate</sup>