# A. **INTRODUCTION**

1. Since the late 1980s, Central and Eastern European countries have experienced rapid and substantial economic transformations as part of the transition process from a centralized planning system to a new competitive market economy. Along with such changes, these countries have had to adjust their institutional structure to the new circumstances. In the context of the labor market, this implied that a social security system had to be set up to cope with the new phenomenon of unemployment, since workers laid off by contracting firms were not immediately rehired by expanding or newly created businesses. Moreover, having to deal with a new system of unemployment benefits and social assistance schemes in a rapidly evolving environment caused numerous countries to change the system several times during the 1990s.

2. The case of the Slovak Republic responds closely to the model described above. After independence from the Czech Republic in 1993, the Slovak government inherited the social security system in place in the former Czechoslovakia. Then, during the 1990s, they modified most programs in response to changing economic, political, and social conditions.

3. Like other social security systems, the role of the Slovak system is twofold. It provides income for those who are not employed and whose income falls below the poverty level,' and gives them social protection. On the other hand, it aims to stimulated these individuals to find a job and obtain their own means of subsistence. As argued by Steele (World Bank, 2001c), the safety net has been tremendously effective in achieving the first goal. Poverty in Slovakia would increase from 10 to 19 percent were social assistancesupport and unemployment insurance to disappear.<sup>2</sup> 4. However, so far not a lot of research has been done on the potential incentives/disincentives effects of the Slovak safety net. Lubyova and van Ours (1997) examine the effects of unemployment insurance reforms on the exit rate from unemployment and argue that the tightening and loosening of the system did not affect re-employment probabilities very much. In a different paper, they also find that there are no disincentives effects associated with unemployment insurance and social assistance recipiency (Lubyova and van Ours, 1998).

5. In contrast, Erbenova et alia (1998) show that, in the case of the Czech Republic, "social assistance benefits are fairly generous for low income families with many children", and that "individuals with these characteristics tend to stay unemployed longer than those with fewer dependents", hence concluding that there are disincentives effects associated with social assistance for some groups of the population.

6. In this paper we revisit this issue in the context of the Slovak Republic, using new, very detailed data on benefits recipiency from the Unemployment Registry (1990-2000) and the Labor Force Survey (1996, 1999 and 2000). In order to do so, we propose a flexible methodology that allows us to identify behavioral changes that may occur as the quantity and

> 1 Although there is no official poverty line in the Slovak Republic, the Minimum Living Standard (MLS) is used as such for the purpose of benefit eligibility, etc.

> 2 It is important to notice that the total income figures used for this calculation _include_ pensions.

3