# **Inflows into unemployment are high while outflows are limited**

The level of unemployment depends on the probability of becoming unemployed, and on the expected duration of the unemployment spell. The latter in turn depends on the probability of escaping unemployment. Accordingly, the level and the durational structure of unemployment vary depending on the relationship between the inflow rate and the expected duration of unemployment (probability of escaping unemployment). In a simple way this relationship is depicted in Table 4.

**Table 4  Labor flows and unemployment**

|**Inflows into unemployment**<br>•<br>employment to unemployment|**Outflows from unemploy**<br>•<br>unemployment to jobs|**ment**|
|---|---|---|
|•<br>inactivity to unemployment|•<br>unemployment to inact|ivity|
||**High: dynamic labor**<br>**market**|**Low:**<br>**stagnant**<br>**labor**<br>**market**|
|**High**|moderate unemployment|high unemployment|
|**Low**|Low unemployment|moderate unemployment|

Unemployment can have different durational structure. For example, in a _dynamic labor market_ the risk of losing a job may be high, but so is are the chances of finding a new one. Accordingly the expected duration of unemployment will be short, which will result in a “moderate” unemployment rate (or low unemployment rate if inflows into unemployment are low).

An opposite example is that of a _stagnant labor market_ . In such a market the risk of losing a job may be low, but the prospects of finding a new one are poor. The expected duration of unemployment spells will be long and level unemployment will be elevated despite low inflows into joblessness. If inflows into joblessness increase (e.g. due to economic downturn, restructuring, or demographical pressures), unemployment will reach a high level.

A typical example of a flexible, dynamic labor market is the U.S. Indeed, 66 percent of the unemployed find a job within a year (Boeri and Terrel, 2002). The median duration of unemployment fluctuates around 10 weeks and correspondingly the incidence of long term unemployment is very low (less than 10 percent).

Labor markets in transition economies are in sharp contrast to the dynamic labor market, such as the US.<sup>6</sup> Expectedly, flows from employment to unemployment are higher, as transition economies undergo rapid restructuring, which be its very nature is associated with a high rate of job destruction. For example, the flows from employment to jobs in Poland or Russia in the mid 1990 were roughly twice those in the US. However, the outflow rate from unemployment to jobs is also much lower in the transition economies than in the U.S., showing that the rate of job creation is too low to absorb the accumulated unemployment pool. The chance that a worker finds a job within a year after entering unemployment is in virtually all transition economies substantially smaller that in the US. Roughly speaking, the probability that an unemployed persons find a job is in transition economies half that in the US. Thus, all else being equal, if the outflow rate from unemployment to jobs in Poland, say, were the same as in the US then the

> 6  Data on labor flows is available for CEE countries and Russia but not for other CIS countries.

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