# **2. GROWTH IN SEGMENTED LABOR MARKETS**

# **The 'dual' labor market**

From the picture presented in the previous section, it may be argued that the CIS-7 rolled development back by perhaps 20-30 years within a few years in the 1990s and that the memory of industrial development present in these countries is not the kind of industrialization process that these countries need now. The early 1990s have witnessed a deep process of _de-industralization_ and the challenge of the late 1990s has been how to generate a process of _re-industralization_ not only in the more traditional manufacturing sectors but also in more modern sectors.

If we leave aside for a moment the transitional path and we assume that the CIS-7 are simply countries in an early stage of economic development, we should imagine a future development process similar to the path followed by most countries that moved from a prevalently agricultural society to an advanced industrialized one. The development process transits through a first phase of agricultural development and the improvement of agricultural production, productivity and value added, the subsequent generation of an agricultural surplus and the creation of an excess supply of labor, the development of a processing industry absorbing excess labor and production and the subsequent development of an urban industrial sector fuelled by savings generated by mass production in manufacturing. Indeed, this is the development path observed in the transition from agricultural to industrial societies in the 19th century in Western Europe, in the 1960s and 1970s in South-East Asia and more recently in China and Vietnam.

In the course of the transition from agricultural to industrial societies, the rural/agriculture and urban/industry dichotomy is one useful framework to read transformation. In fact, one of the frame works that has been traditionally used in development economics to look at labor markets in developing countries is the dual labor market framework. The labor market is expected to be segmented into a primary and a secondary market where the primary market is found in urban and industrialized areas and the secondary market is found in rural and agricultural areas. Segmentation is generated by entry barriers in the urban sector, skills mismatch, distances and other frictions and imperfections that prevent the two markets from functioning as a single market and wages from equalizing. One test of dual labor markets is precisely the existing wage differentials between the two sectors which is evident and significant in all the CIS-7.<sup>12</sup>

# **Dual performance**

Given that the CIS-7 have been able to grow almost continuously since 1997, a number of questions arise as to the structure and consequences of growth in a dual labor market context. Is growth occurring as a result of a process of re-industrialization? Are workers being pulled out of agriculture and into urban and industrial areas and are their wages improving? What are the other key development aspects characterizing this growth phase?

A **first** aspect to notice is that GDP growth in industry and agriculture has been very uneven. Industry has undergone a much deeper recession than agriculture and has recovered slowly during the growth period. In 2002, almost all the CIS-7 had an industrial output in between 40% and 60% below the 1991 level. Only Uzbekistan seems to have embarked into a real industrialization process having managed to increase industrial output by over 40% since 1991. On the contrary, agricultural output decline was contained within 40% of the 1991 value and in 2002 output was

> 12 National Statistical agency websites and CIS-Stat (1998 and 2004)

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