(LSMS)/Living in BH survey, a consistent data source that allows the accurate measurement of wage and employment dynamics, informal sector employment, unemployment and other key labor market and living standards characteristics at the individual level. It also provides a formal analysis of labor market transitions into and out of employment, unemployment, and inactivity to better understand their covariates and how labor market disadvantages are distributed across demographic groups. Second, it relates these labor market developments to broad changes, if any, in the poverty risk faced by selected groups. It speculates on the links between labor market transitions and welfare over the 2001 to 2004 period. Unlike the previous section which relies on a widely-used, formal multinomial logit model of labor market transitions, this section of the paper relies on a less formal, and more intuitive, discussion of the linkages between labor market developments and the impact on workers at various points of the welfare distribution. Such an approach reflects the technical difficulties of a comprehensive assessment of transitions in and out of poverty. A more formal modeling exercise is left for future research. Finally, this paper relates these documented labor market developments to the stalled enterprise restructuring program and explores a number policy options available to the government.

The rest of the paper is organized as follows: Section II presents an overview of recent labor market developments. Section III assesses labor market transition more systematically using a multinomial logit model. Section IV relates these labor market development and transition to broad welfare outcomes. Section V concludes with a summary of key findings and a discussion of some of policy issues and constraints faced by BH.

# **II. Labor Market Developments, 2001 to 2004**

In recent years, BH labor force participation rate has increased sharply but still remains relatively low compared to other transition economies.<sup>3</sup> Between 2001 and 2004, the labor force participation rate increased by about 10 percentage points to 59 percent (Table 1). This is a substantial increase and it is not clear what is driving it. As explained below, this increase may be driven in part by the increase in unemployment between 2001 and 2002 and informal sector dynamism over the last our years.

Despite this rapid increase in labor force participation, BH is still at the lower end of average participation rates in the Europe and Central Asia (ECA) region. Based on a sample of transition economies in 2001-2002, the labor force participation rate in BH is lower than Croatia, Bulgaria, Poland, Ukraine, Romania, Latvia, Slovenia, Georgia, Slovakia, Estonia, Czech Republic, and Lithuania and comparable to Hungary and Armenia. The unweighted average participation rate in the sample is 66 percent with Lithuania having the highest rate (71 percent). Meanwhile, the average female participation rate for the same group of countries is 60 percent with Lithuania again

> 3 The labor market indicators reported in this paper follow the standard ILO definitions, unless otherwise indicated (e.g., registered unemployment). One exception is the 2003 wave, where ILO-consistent unemployment indicators could not be computed due to “routing error.”

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