17 high unemployment levels in the event of negative shocks to productivity, as demonstrated in the example described in the previous section.

# **Section VI: Conclusion**

32. The analysis of the Algerian unemployment insurance system presented here evaluates the system's ability to affect employment decisions of both firms and workers, to promote enterprise restructuring with careful regard to long-term labor market implications, and to finance itself, in order to estimate the future evolution of the unemployment crisis in Algeria. The main conclusion can be summarized as follows: industrial restructuring has serious and persistent implications for the labor market, and in an environment where multiple equilibria are possible, there is a real danger that a hysteretic, high unemployment equilibrium will be reached. This serves as cautionary advice when designing policies that affect the evolution of unemployment in an economy. The big bang experience of structural adjustment in the transitional economies of Central and Eastern Europe resulted in large scale unemployment; despite considerable progress in restructuring, labor markets are still characterized by structural rigidities as well as persistent long-term unemployment. Boeri (1993) labels this phenomenon "transitional" unemployment, and argues that it is very difficult to eliminate through reintegration into the labor force. The Algerian labor market is characterized by rigidities and regulation similar to those found in the CEE countries, but unlike its counterparts, it faces the challenging initial condition of high unemployment. While this magnifies the need for effective policies, it also raises the risk of failure.

33. The big bang approach has advantages in speed of adjustment, but its negative consequences for unemployment may prove too costly for the economy, especially in view of its persistent nature. A more moderate "mixed bang" approach incorporates the active employment measures that mitigate entrenched unemployment. One of the crucial functions of these policies is to maintain or enhance human capital through working (i.e. learning-bydoing), thus avoiding the skill obsolescence that accompanies idleness. Programs that introduce flexible working-time arrangements succeed in maintaining a degree of attachment to the labor force which, however minor, enables workers to avoid the traps associated with long-term unemployment. The policies adopted in the CEE aimed to reduce labor supply in the short run in order to ease employment pressures in an environment of overemployment and labor hoarding inherited from the old regime. The resulting decline in labor force participation is undesirable in the medium term, however, because of the associated budget costs of social assistance, and the productivity limits imposed on the labor market. Although the CEE countries typically have very high participation rates for both men and women, Algeria does not. In fact, while 80 percent of working age men are in the labor force, the participation rate for women is only 10 percent.

34. To minimize the risk of marginalizing an important segment of the labor force, active labor market policies should be pursued from the outset to address transitional unemployment typically arising from enterprise restructuring. Empirical evidence from several cross-country studies (Burda, 1988; Jackman, _et al.,_ 1990) suggests a significant negative correlation between average unemployment rates and expenditure on active labor market policies. The