12 payment of a productivity premium based on profit may<sup>be an important mechanism for</sup> providing labor compensation under a more deregulated wage<sup>structure. However, it could</sup> be misused by large monopolies as justification for increasing<sup>prices in order to increase</sup> profits, which would present serious problems for the<sup>anti-inflation program; this situation</sup> would demand significant monitoring on the part<sup>of the enforcing authority.</sup> Another serious problem associated with the wage<sup>indexation scheme is with</sup> respect to the minimum wage. As previously stated,<sup>in February 1991 the Ministry of</sup> Labor and Social Affairs estimated that about 8 percent of the<sup>labor force earned less than</sup> the minimum wage level of Kcs 2,000 established in<sup>the General Agreement. Given that</sup> the minimum wage is fully indexed for inflation greater<sup>than 5 percent while the average</sup> wage will only be partly indexed, progressively more workers<sup>will be earning the minimum</sup> wage. Therefore, firms will have to allocate additional<sup>resources in order to pay the</sup> corresponding wage increases to workers covered by<sup>the law. This situation would be</sup> particularly true in an economy like that of CSFR since<sup>it is characterized by a relatively</sup> compressed wage structure. During a period of financial<sup>difficulty, this requirement may</sup> impose a serious burden on firms and be detrimental<sup>to their most productive labor. In</sup> addition, due to prevailing extreme wage compression<sup>with the structure of relative wages,</sup> serious problems will arise in any given quarter whose<sup>severity will be dependent upon the</sup> inflation rate.

# E. Unemployment consequences

Unemployment estimates are important in two fundamental<sup>respects. First,</sup> they are necessary for adequately assessing the fiscal<sup>cost associated with providing</sup> monetary compensation and employment services<sup>to the unemployed. Second, they force</sup> political realism into an evaluation of the short run<sup>impact of reforms. A serious under-</sup> estimate not only implies that fiscal provisions will be<sup>insufficient, but also signals that the</sup> government's expectations will be out of line with the<sup>actual dimension of the adjustment</sup> and its social cost.

Three fundamental factors have to be taken into account<sup>in the estimates.</sup> These are: (a) elimination of existing overemployment,<sup>which is to a large extent derived</sup> from the fiscal program aimed at producing a 1 percent<sup>surplus in 1991; (b) contraction of</sup> certain activities as a result of the adjustment in relative prices;<sup>(c) the privatization process</sup> which would begin by late 1991, likely entailing some<sup>technological change and labor shifts.</sup> The estimates must also account for the impact<sup>of the recession the economy will</sup> experience during 1991, associated with a terms of trade<sup>shock and an expected decline in</sup> real GDP of between 5 and 10 percent.

Estimates presented by Riveros (1991) differ from those<sup>of the Government</sup> in two ways. First, a methodological difference is the projection<sup>of quarterly unemployment</sup> flows, as opposed to the Government's method of projecting<sup>an average stock for 1991-</sup> 92. The average estimate of the employment contraction(704<sup>thousand fewer jobs in 1991-</sup> 92 in the high unemployment scenario) differs from government<sup>projections (944 thousand</sup> fewer jobs are reported in their likely scenario)<sup>by about 25 percent. This difference is</sup> principally explained by the fact that the Government<sup>estimates assume a much larger</sup>