metadata: authors: 0: author: Commander, Simon
1: author: Coricelli, Fabrizio
2: author: Staehr, Kar
count: World
docna: 0: docna: Wages and employment in the transition to a
            market economy
docty: Policy Research Working Paper
subtopic: Taxation & Subsidies,Administrative & Civil Service Reform,Public Sector Administrative & Civil
            Service Reform,International Trade and Trade Rules,Inflation,Employment and Unemployment,Democratic Government,Public Sector Administrative and Civil
            Service Reform,De Facto Governments
teratopic: Macroeconomics and Economic Growth,Urban Development,Environment,Governance,Finance and Financial Sector Development
abstracts: cdata!: This report focuses on the implications
            for wage bargaining and policy of inherited ownership
            arrangements and rules about wage setting during the
            transition of socialist economies. The authors discuss the
            strong tendency toward overemployment and wage drift in
            socialist systems. They focuses on the market-based
            transitional economy, exemplified by Poland since 1990,
            setting up a series of models capturing the behavior of
            worker-controlled firms. They develop a simple policy game
            in which government policy is conditioned on output, through
            a subsidy instrument. This reflects the problem typically
            faced by reforming governments of whether to enforce a hard
            budget constraint or whether to resort to subsidies and
            associated departments from fiscal targets. Finally, they
            emphasize the way wage tax rules can affect employment and
            wage and how critical is their design. The authors conclude
            that because of the inherited ownership structure and the
            uncertainty associated with reform, market-based regimes
            will continue to need centralized controls over wages in
            worker-controlled firms (the socialized sector).
            Unemployment and an expanding private sector alone are
            unlikely to provide a sufficient restraining mechanism for wages.
repnme: repnme: Wages and employment in the transition to a
            market economy
display_title: Wages and employment in the
            transition to a market economy
listing_relative_url: /research/1991/08/699893/wages-employment-transition-market-economy
topicv3: Inflation m1326709 0870F4727ACED1CF8525815C00471347,Trade m1326924 698,Employment and Wage Data m1327013 2055,Unemployment m1504051 2747,Vouchers m1504820 3553
publishtoextweb_dt: 2010-07-01T00:00:00Z
historic_topic: Macroeconomics and Economic Growth,Urban Development,Environment,Governance,Finance and Financial Sector Development
origu: Policy, Research & Ect Affairs
no_of_pages: 46
model_extractions: **|Policy,, Research, and External Affairs**

**| NtioalEconomic Management**

# WPS 736

This paper -- a joint product of the National Economic Management Division, Economic Development - Institute and the Macrocconomic Adjustment and Growth Division, Country Economics Department was prepared for a seminar on Central and Eastern Europe: Roads to Growth, sponsored by the Austrian National Bank and **lihC** International Monetary Fund, and held in Baden, Austria, Apiil 15-18, 1091. Copies are available free from the World Bank, 1818 **II** Street NW, Washington DC 20433. Please contact Olga lDel Cid, room M7-047, extension 39050 (38 pages).

Certain inherited features ol the socialist economies - socialized ownership, full employment, restricted job mobility, and de facto wage indexation - mean that drastic refonn of the labor market must figure prominently in overall economic reform.

The qucstion is how to implement that range of reformiis to ensure compatibility. One such tension relates to the fact that governments must demonstrate their commnitmeart to a more passive role in the economy while rnaintaining direct controls over wages and possibly job decisions.

Commander, Coricelli, and Staehr focus on the implications for wage bargaining and policy of inherited ownership arrangements and rules about wage selting during the transition.

**In** imposing unemployment on the system, by repudiating tlhe soft budget constraint, th1e refonning governmentt tries to teach workers and managers that behind it all lies a Phillips curve. But fiscal and political constraints limit the govemmen t's tolerance (if not stimulatiop) of - unemployment so agents may be skeptical about government adherence to announced policy.

Commander, Coricelli, and Staehr discuss the strong tendency toward overemployment and wage drift in socialist systems. They focus on the market-based transitional economy, exemplifled by Poland since 1990, settinig up a series of models capturing the behavior of workercontrolled firms.

They develop a simple policy game in whichi government policy is conditioned on output, through a subsidy instrument. This reflects the problemn typically faced by reforming govemments of whether to enforce a hard budget constraint (and hence tolerate higher unemployment) or whether to resort to subsidies and associated departures from fiscal targets.

Given **thc** commitment to p.ivatization and the consequent uncertainty about future claims on capital, they also develop -in a two-period model the conditions under which the workercontrolled firms will deplete capital stock, possibly through excessive wage growth. They indicate how an appropriate tax rule - in this case, a wage-per-worker rule can restrain decapf alization. They also discuss the possible utility of contingent claims on capital-- such as vouchers - in offsetting capital depletion promoted by uncertainty about property rights.

Finally, they emphasize the way wage tax rules can affect employment and wages and how critical is their design. A wage bill tax, as used in Poland through 1990, not only reduces employment but will probably raise wages. By contrast, a wage-per-worker tax will tend to raise er.ployment and lower wages. These effects are ikely to be reinforced in a two-sector context, where worker-controlled firms and private firms coexist and where relative wage considerations are important.

The- conclude thiat because of the inherited ownership structure and the uncertainty associated with reform, market-based regimes will continue to need centralized controls over wages in worker-controllllled firms (the socialized sector). Unemployment and an expanding private sector alone are unlikely to provide a sufficient restraining mechanism for wages.

The PRE Working Paper Scrics dissenlinates **thc** findings of work under way in the Bank's Policy. Rcsearch. and Extemal Affai s Complexx. An ohjectivc ofthe serics is to gel thesc findings out quickly, cven ifpresentations are less dtan 'ully polished. The findings, interpretations, and conclusions in **these** papers do not necessarily reprcsent official Bank policy.

Produced by thc PRE D,sscmination Ccntcr
# Wages and Employment In the Transition to a Market Economy*

by Simon Commander Fabrizio Coriceli and Karsten Staehr

# Table of Contents

|Section 1 Introduction|2|
|---|---|
|Section 2 Wage Determination<br>under Socialism|4|
|2.1<br>Centrally<br>Planned and Partially Reformed<br>Regimes|4|
|2.2<br>The Market-Based<br>Regime:<br>Poland 1990-91|7|
|2.3<br>Unemployment|8|
|<br>2.4WagesandWage Policy|9|
|Section 3 Wage and Employment<br>Decisions<br>in the Worker-Controlled<br>**Firm**|12|
|3.1<br>The Worker-Controlled<br>Firn|L2|
|3.2<br>A Simple Poliey Game|17|
|3.3<br>A**Single**Period Policy Game|19|
|3.4<br>Concluding<br>Comments|23|
|**Section**4**Tax**Rules and the Worker-Controlled Firm|25|
|**Section 5**Ownership Reform and DecapitalHzatlon|27|
|**S.**1 A Two Period Model with the Worker-Controlled<br>Firm|**28**|
|5.2<br>The Firm is Worker-Controlled|29|
|**5.3**The Firm is Privatized|29|
|5.4<br>The WCF's Problem<br>|**30**<br>|
|**5.5**<br>**Some**Results|30|
|**5.6 Tax**Policy|31|
|5.7<br>Vouchers|32|
|**5.8**<br>Concluding<br>Comments|33|
|**Section**6 Conclusion|33|
|References|36|

# References

* This paper was prepared for the seminar on "Central and Eastern Europe: Roads to Growth," sponsored by the Austrian National Bank and the International Monetary Fund, Baden. Austria, April 1I-18, 1991.
# Section 1 Introduction

The scale of the reform<sup>agenda in the erstwhlle uocLalist economies and</sup> the complemntary nature<sup>of policy changes makes the ordering of reforms</sup> pecullarly **complex.** Yet it is not diffLiult<sup>to understand that certain basic</sup> features of the inherited<sup>system</sup> _the_ presence _ex_ ante of socialized ownership, full mployment,<sup>restricted labor mobillty and de facto wage</sup> indexation nmcessarily imply that drastic<sup>refoms in the labor market area</sup> must feature promLnently and at an early stage ln any viable reform program. To a ceortaln extent, thLs is not a matter<sup>of cholce. The questLon turns rather</sup> on ensuring the compatLbility<sup>of LnterventLons over particular time horLzons.</sup> Reforming govrnments characteristlcally seek to establilh a c*mitment to prudent macroeconomie policies, amongst whLch restrLetlve fiscal targets figure prominently. AchLiving these targets Ln turn will reflect their ability to onforce hard budget constraLnts on the sociLiLzed enterprLeas and thereby simultaneously tolerate unemployment. However, to the extent that it is believed that structural features will prmote myopic or short iun behavLor on the part of workers and managers, the governmnt is facod with the task of balancing lts desire for demonstrating its coemitment to a more passLve role in the economy wlth maLntenance of dLrect controls over wages and<sup>possibly</sup> employment decision.

ThiL paper concentrates on the<sup>Lmpllcations of those inherited wage</sup> setting rules and ownership arrangements<sup>for wage bargalnLng andpolicy</sup> ln the transltion. Several tonslons<sup>in the system are given prominence. In the</sup> first place, wage and employment<sup>decisLons have to be set Ln a context of a</sup> departure from full employment and<sup>where any trade-off between wages and</sup> employment is only partially or perversely<sup>pereived by agents. In effect, by</sup> imposing unemployment on the system<sup>through repudLation of the soft budget</sup> constraint, the reformLng government attempts to teach workers and managers that behind it all lLes a Phllips curve.<sup>Yet while this Lmplies LnLtLal</sup> tolerance, if not stimul&tion,<sup>of unemployment on the part of the government,</sup> fiscal and polltical constraLnto<sup>will tend to place bounds on this tolerance,</sup>
-3

possibly **leading** agents to believe that adherence to announced policy will be weakened and loosening of stabilization measucrs pursued.

Secondl, the extent of worker partLcip&tion or influence in managment **decisions** reqires appropriate analytical treatment whon tracing the likely outcomes _f_ bargaining between goverment end firms and ln wage bargaining within the firm. In so far as the flrm is **worker** managed, this tends to **glve rise** to a joint maximization problem over wages and employment. It **also has** impartant implications for the likely wage and employment outcme once uncertainty over ownership rights is introduced. Thlrd, the goverment faces a dilma with regard to its wage **policy.** On the one hand, given low wage dispersion and inadeqate relative returns to skills, wage controls can tend to dilute incentives for firms to expand **while** also conserving a sub-optimal wage structure. however, if the structure of current ownsrehip iL conducive to capital depletion and maximization of labor rents, as is conly asserted I# a contralized wage pollcy would be critLcal for restraining inflationary preEsursE, avoidLng a lower capital stock and ultimately lower aggregate Employment, ae well as the mergence of classical unemployment derived from excessive real wage claim. Xn this light, the appropriate queotion concerns the docign of the wago policy, its lncidence and degree of prmanence.

Tho paper iL organized as follows, In Section 2 we provide a summary discussion of the main features **of** wage Getting in types of socialist economies. These initial conditions are shown to be critical in shaping the labor market policieo of a roforming government moving to a market-based system. We draw on recent Polish experience since January 1990 highlighting the behavior of Wagese and employmont during the initial phase of **the** stabilization program. In Section 3 we set up our basic model of a worker controlled fLrm (WCF) and develop a one period policy game between the government and the WCF. Section 4 discusess the implications of a number of simple tan rules for the tlcF's wage and omployment docicions. Section 5 Por instance, by Hinds (1990); Lipton and Sacho (1990).
-4-

explicitly accounts for uncertainty over ownership rights and models this in a two period context. We indicate sosi possible means by which decapitalization of the firm can be avoided.

Section 2 Wage Detoseation umader socaiaLm in this section, we lay out the range of initial condltions from which more accelorcated pisodes of reforms have comeanced. We focus on the wage setting fr rmk and outline in very stylied form the manner ln which wage bargaining arose in these systems. For clarity of exposltion, a simple distLnctlon between three types of regims -- the centrally planned economy (CPE)i the partially reformed socialist economy (PR) and a market-based economy -- is drawn. **2** 2.1 Centrally Planned and Partially Reformed RegLmes In the case of the CPE and the PRE certain common features hold. Full employment is a given. Excess aggregate demand for labour predominates alongside selective labor shortages. Further, there is no evident a3sociation between output and prico with no endogenous mechanism of equilibration in the system. Prices are largely administered and explicitly follow a cost-plus routine. The full employment regimes tend also to be associated with low mobilLty exacerbated by infrastructural constraints, particularly housing.<sup>3</sup> In both oystems, wage levels tended to be low with minimal dispersion, thereby distorting the intortemporal accumulation of skills. Labour allocation and sorting largely occurs independently of prices.

It would oee reasonable to assume that in the controlled economy wages could be considered exogenous. This is incorrect.4 In the CPE world of vertical controls and exhaustion of labor reserves, the planner generally had 2 For example, Bulgaria could be classified as a CPU until 19901 Hungary and Poland up to 1989 could be classofied as partially reformed regimes and Poland, the forer CDR and possibly Hungary since 1990 as market-based regimes.

3 Mayo and Stein (1988) indicate jiouoing and labor market linkages in the case of Poland.

_4_ A fuller discuooion is contained in Commander and Staehr (1990).
-5-o

recourse to piece rates to motivate workers and to circumvent the monitoring problem. Managers of enterprises were effectively transmission bolts and lacked autonomy in negotiating wages. The wage-bile of enterprises, comprising base wages plus piece rate adjustments, was the control variable employed by the planner. **S** In the more decentralized world of the PRE vertical controls were relaxed and greater autonomy to enterprlse. and manager. was granted. In Hungary and Poland this was also associated with the transformation of the majorLty of enterprises Lnto management by workers' councils. Wages were gonerallr explieLtly associated with productLvLty or profitability indLcators. Decentralization opened up a number of tensions with regard to wage policy. EnterprLses faced dLstorted prices complicating simple association of warranted wage growth to profitability or productivity Lndicator.. Soft budget coastraLnts and the redLstributLor 8 of profits through the budget generated perverse LncentLves for enterprlses and generally subverted the assocLatLon between the wage distrlbutLon and plant or industry-level performance. 6 The absence of a hard budget constraLnt and the explicit use of cost-plus pricing reqpired that th governmenit continued to regulate wages through centrally given norm to avoid wage drift and cost-side inflationary pressures. Average wages in the dominant socialized sector remained characterized by low dispersLon. 7 In both CPE and PRE regimes social cash and kind transfers and subsidies further tended to equalize gross household income and not personal income In Hungary, for example, where social Lncome expanded to around 49% of total household income for the period 1980-1990, the

# 5 Adam (1979) contains a detailed discussion.

6 KartesL and Cukor (1987) show that in Hungary short run tensions in goods markets and with respect to enterprise performance have guLded wage policy.

**?** Note, however, that the gap betwon private and pubiLe sector wages tended to expand. See, for example, Falu-SzLikra (1986).
-6-

Gini cooffLcient for gross houaehold income at the end of the period fell from 0.29 for main wage earnings to 0.23 when including social inco and taxes. The mergence of more cor.plex bargaining behavior in the PRB turned around the interactlon kitween managers, workers and government. Enterprise managers, were motivated through bonus payments associating their wages with performance or synthetic lndLcators. By lmpooirg an approprLate Lneentive structure the goveranmnt hoped t2 engage workers and managers in a cooperative bargain over wages and effort. For the most part, thio structure was given through tax policy conditioned on tho wage, elther on the **level** or, **at** timos, on the rate of growth.<sup>9</sup> Wages paLd out above an announced norm were taxed by the government. Most comonly a tax (t) was levied on that share of the wage bill above the warranted amount (wP), This Lmplied in terms of cost per employee; w+t(w **-wP)** , for w3wP This tax fcrmula wo%Ald have only been fiscally neutral Lf a rebate or subsidy per employee had been offered.10 A rebate or subsLdy was obvLously not applied ln the full employment regime as an explicLt objectLve of tax based wage policy was to motivate labour sheding by enterprLsoe.

Experience with applying an exogenous incentlve structure and regulating wage development by tax based wage policies was very mixed and generally dLappoLnting. In general, It would be appropriate to see workers and managers playing cooperatLvely against the goveranment. Non-cooperative settings invariably prevaLled when, as In Poland, there was no underlying agreement over the dLitrLbution of rescurces Ln the economy. While the broad 0 The dLfference for personal not Lncome wLth and wlthout<sup>social income</sup> was 0.18 and 0.23. See World Bank (1991).

**9** A bewllderLng range of wage tax formulas have been applied; for further details, see Adam (1979)1 IMF (1989a and 1989b;.

'° A rebate, such as rw-t(w-w"), would have net the cost per worker at; w+t(w-w0<sup>)-rw,thereby</sup> being neutral wLth regard to employment.
-7-

rule **appears** to have been an indexation of **wages** to **price., the ability** to **enforce wage** norms through tax pollcy varied widely." **2.2** The **Market-Based** Regies _Polmad_ 1990/91 Central to the regime change lo the tolerance of unemployment and **the** gradual **emergence** of **a Phillips** cuxrve. AddLtionally, **labor** allocation **ia meant** to **be** largely **market** driven withLn the constraints Lmposed by limLtations on **mobilLty** and plant-opecific non-wage benefLts. Partial wage **lberalization** is **likely** to occur. In thl sectiLon, w8 concentrate on **the recent** Pollsh stabliLzatLon experience focusing oan the way ln **whLch wages are determined** once unemployment is tolerated and the government **signals** a repudiation of the **soft** budget constraLnt and accommodatlng **monetary policy.** The broad features **of** the PolLih etablILxatLon program are **covered** elsewhere **132** In thLs context, it suffices to underlies the use of wages, together with the exchange rate, ao nominal anchor to the otabilizatLon in the context of a radical trade opOnLng and the assocLated, **if** incomplete, importatLon of a new relative prlce structure,

**Wages** were controlled at the outeet of the program to arrest the develoyent of a prlce-wages plral. In the flrst four monthe wages could **be** adjusted _Ln_ relation to inflation by a coeffLciont oLgnifLcantly lower than one, except for July. 11 Centralized control on wages was carrLed over and justified mainly ln terms of dampenLng inflation gLven the ownership structure, uncertaLnty over the scale of restructuring and the cost-plus pricLng routine followed by produearo.

The outcome of the program ln its _fLrat_ year can be summarized.

11 For Hungary and Poland, ace Conddar and CoriceIlL (1991). 12 Lipton and Sacho (1990); CorE1olli and Rocha (1990) 13 The inLtlally weak LndexatLon cooffLciont and the low exchange rate delLvered a vory low wage level with an average daily wago of under US$4.
- e Real wages foll by 31% over the full year 14;

- Output in the oocializod octor fell by 25%t

- Employment fell much lese than output and therefore productivity dropped by about 20 praccnt;

- O UnAmployment rose from almost &erS to over 6% of the labor force on a risLng trend.

- inflation was 250% ovor the **yoar,** with a monthly rate of **6%** by early 1991.

- Slzeable budget and trade surpluses were generated.

**The** first year has been characterized by stagnation of output and persistent lnflation. Real **wages** proved to **be** highly flexible downward in response to the initial shock to the economy, while **employment** dropped only marginally Ln the first two montho of 1990 deopLte a steep decline in output. After March real wages began to increase while employment contlnued to decline. As a reoult, ln the second half of 1990 one can observe a rapid increase in real wageo together with a rapid increase in unemployment. Overall, the behavior of wagos, employment and productivity during 1990 _seem_ to have reflected more a generalized recession than a shake-out of **the** economy associated with structural reforms. Indeed, output dropped in every sector of the economy.

# 2 o 3 1y8eml8Xyl08t

The rise in unemployment, though subsetantial and significantly more rapid than in other reforming economiee 13, wao not associated with a single bankruptcy in 1990, even though mase layoffs increased in the latter part **of** the year and accounted for roughly a third of cumulative unemployment over the

**'4** Measuremnt L complicated when comparing with the ohortage regime of 1989 and the fall in the inflation tax on households over this **period.** It is also not clear what has happened to non-wage components of **income;** traditionally a large share of household income.

IS In Hungary unemployment moved from under 0.4% in January 1990 to around 2% of the labor force in January 1991 and io projoected to reach between 3.54.5% by tho end of 1991.
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-9

year. I St li important to note that the fall ln output Ln the socLalized secttr (25 percent) *xceeded the drop ln eployment. (14 percent), implying not only a fall in productLvLty but likely contLnuLng oveguanning. Sectoral data consLstently show output falling more than employment (see Tablo 2.1). Moreover, the variability of output across osetors (measured by the coeffLcient of variation ln Table 2.1) **was** twLce as large as that of employment0 Overall, the domlnant strategy appears to have been to reduce output rather than mployment. **1'** Flows into unemloyment have consequently to be further related to new entrants, ao poseLble laor supply effects and the Lnduement to reglster as unemployed created by a fairly generous replacment Eatio. 10 2.4 wages and Wage Policy The sharp and programud fall in economy-wide rcal wages disguL se a rather more complex set of developmnts. First, after March 1990 real consumer cnd producer wages rose signifLeantly, falLng again only in December (vliguro 1). By November real wageo were barely 20% below the average for 1989 and above the level in January 1989 not takLng Lnto account dLfferences in offective purchasing power over these period. due to the elLmLnation of shortages. Second, wages and profits movd Lnversely following March (Figure 1)o SeCtoral data (Table 2.1) do howver show profLts and wages movLng together but thLi can largely be aserLbod to priLe changes rather than productivity growth. Product wages exhLbLt far greater variance than 1a Note that for most branches profLt margins increasod ln 1990 as output declined. The stronger than expected profit performance of the soclalized sector can generally account for the absence of bankrupteces. See Coricelli, de la Calls, Pinto (1990). :7 Layoffs have been concentrated ln a number of sub-sectors; principally, retail trade, construction, transportation, engineerlng and coal.

10 The benefits schem _Li_ of LndfiLnLto duration wLth a 70% replacemnt ratio at the start falling to 40% after nlne months. There iL however no indexation above a 30n floor. In Hungary the gross replacemnt ratio _i1milarly_ ranges from 70% unindexed at the outset to 40% by the _and_ of the eocond year. ClaLms can only be made for up to two years.
Table 2.1 Potand: SQctoral date, January-Deceirrer 1990 1/ Jan-Dec. 1989u100

|.................................................................................................................................|
|---|

|<br>|Eaoltoy2nt<br>P<br>|roductivity|Productfon|Produceor<br>Pricoo|Real<br>Profits|Product<br>"|Consuinr<br>wage|Nominal<br>tdages|
|---|---|---|---|---|---|---|---|---|
|................<br>.......................................................................<br>COAL|.................................................<br>91.80|78.00|71.60|1,078.3|42.1|46.8|63.4|441.3|
|FUEL|99.70|78.74|78.50|1,190.8|168.1|52.0|75.8|527.9|
|P09ER|101.80|88.41|90.00|1,272.1|313.8|44.9|68.7|478.1|
|FERROUS KETALLURGY|94.40|88.03|<br>83.10|1,098.1|117.9|55.2|74.7|519.6|
|NMO-FERROUS METALLURGY|97.20|78.50|<br>76.30|1,090.6|113.7|51.3|72.9|507.6|
|METAL PRODUCTS|90.60|79.25|71.80|836.5|75.6|64.3|67.5|470.0|
|ENGINEERING|89.20|90.36|80.60|781.8|74.2|69.4|68.5|476.7|
|PRECISION INSTRUMENTS|89.70|92.75|83.20|650.1|60.8|80.9|65.7|457.1|
|TRANSPORT EQUIPMENT|91.50|80.77|73.90|885.0|70.4|63.8|68.7|477.9|
|EL-TECH ENS. & ELECTRONICS|<br>92.00|85.54|78.70|734.6|57.4|70.9|65.5|456.0|
|CHEMICALINDUSTRY|93.90|80.19|75.30|938.9|80.6|59.1|68.2|474.7|
|BUILDINGMATERIALS|93.20|82.40|76.80|892.1|91.9|60.6|67.6|470.8|
|GLASS & GLASS PRODUCTS|94.60|76.53|72.40|873.0|58.3|62.5|67.0|466.2|
|POTTERY&CHINA|97.00|76.39|74.10|734.1|51.7|72.4|66.8|465.0|
|WOWD<br>&WOOMPRODUCTS|89.80|84.19|75.60|730.7|35.4|73.9|66.0|459.6|
|PAPER & PAPER PRCPt(CTS|92.30|83.75|77.30|949.8|70.5|58.8|67.7|471.1|
|TEXTILE PRODUCTS|88.90|66.93|59.50|638.1|21.3|78.0|61.8|429.8|
|WEARING APPAREL|89.20|77.80|69.40|496.8|27.4|97.7|62.1|431.9|
|LEATHER PRODUCTS|90.10|73.58|66.30|565.3|17.6|84.6|60.3|419.8|
|FOOD INDUSTRY|98.20|75.66|74.30|727.6|52.0|82.2|66.0|459.2|
|,,,,,,,,,...............................|...............................|.......................|||<br>|<br>|||
|<br>Umweighted<br>averages|,,<br>93.26|<br> <br>80.89|<br>?S.4|8S8.2|......<br>...<br>80.0|.......<br><br>66.5|............<br>67.2|463.0|
|<br> <br>Std. deviation|3.70|6.03|6.33|204.62|63.98|13.46|3.85|26.82|
|Cooff.<br>of variation,<br>in%|3.96|7.45|8.39|23.84|79.9S|20.21|5.73|5.73|

- 1/ Oue to uwavaflabitity of data On produrer pricoo by actcore for Oecczbar 1990, the product wage referS to JanUary-Noves5ar.
10 cOnsumption wages. Real wagee aloo eahlblt greateg variance acroos oectors than employmnt.

Throughout 1990 wagoo wero contrally reulated, nxcept for private sector wages. The meachanim of onforcemnt was a tan on wage _j)1jl_ increases in oxcoso 'j lavelo given by the eonthly coefficient or no= in). _The_ norm was inflation in a given m3onth tiomo a co0fficlont usually less than one. I' The wage bill tan tooh tho following fors gt(wn-ow,.,%zj1+nz) ) with a very steep progreosivity in tax _rates._ Designed in thio way tho tan wao not neutral vie-a-VlB employment nor vie-a-via the cowposition of tho labor force within an enterprise. The monthly indexation rule also imparted inertia to the inflationary process. A particular feature of the s6chm wae the ability of enterprise, to carry over wages from month to month whon actual wago payments fell below the norm. Actual wages fgll below the norm in tho fgirt sin months of the program. Thereaftor the accumulatod ourplus was drawn down with wage. consistently exceeding the nom. Only in November and Dcember wore accumulated wage normo excoeded, reoulting in substantlal tax ponalties being incurred by enterprioes. In thi roegard, wagoo barely anchored the stabilization at all, savo at the end of the yoar.

The factoro behind stronger wage growth _In_ the second half of 1990 are difficult to pin down. The rolativo buoyancy of profit margins and some relax&tion of crodit policy in the third quarter of 1990 ouggest some ability to pay on the p8rt of ontorpriseo. " At tho same tim, it would be logical to assume that workero would toot the govorment'o resolve to hold down wages, particularly given the rolatively gradual inerease in unemployment. The fact that fimEs were willing to pay taxes on excess wage increases, at rates above 19 The coefficiont waO 0.3 in January, 0.2 between February and April, 0.6 in May and Juno, 1 in July and 0.6 thoeoafter. 2 However, pooitivo intoroot rates would have acted to limlt credit financed wage incroasoe. A oimple chain of causality between money and wages is not obviouse
- 11 -

100 percent, supports this argument. In principle, the tax on the wage bill might explain the phenomenon of raising real wages and declining employment during the second half of 1990.

Par 1991 the wage tax has been modifLed. Plst, to eliminate the prounemployment blas and constraints an expanding fims, the average wags rather than the wage bill is subject to regulation. Second, a monthly indexation scheme ham been retained. **_a'_** Third, wage expsion _has_ been explcitly associated with the enterprise profit ratio. Fourth, private firms can set wages free of governmnt rogulation, while firms that are about to be privatized -- 'comercialized entities' -- are partially exempted from excess wage taxation. 22 By linking permissible wage growth to a firm's profit ratio (nominal profits plus wages over wages) the new polley has the clear disadvantage of allowing wage growth to depend on the price that the enterprise can charge.A Thls can be an lnvitatlon to exploLt market powor, particularly lf it is believed that workers will attempt to maximize short term wage growth. 24 Additlonally, a monthly lndexation arrangement retais inertia and ensures that the system rmaino very sensitLve to prcLe shocks. This is particularly problematic in the Polish context still subject to large temporary shocks to inflation --ouch as the increase in administrative prices in January 1991. An alternative approach would be to lengthen the indexation period but this would obviously depend an the goverment's ability to enforce a longer constant wage ceiling.

In comon with heterodox stabilization experLences eleowhere wage restraint in Poland was fairly effective at the outset of the program. 25 The

**21** A 0.6 indexation coefficient for January 1991.

22 There is an obvious adverse selection problem here. 2 The tax formula being: t((tf,+w,/w,) / (w,I/wba)) 24 in theory, monopolies are excluded but whether this will bo enforceable is another matter.

2 For experience elsewhere, see Riguel and Liviatan (1989).
12

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problems start when controls are weakened or made more flexiblo. These problems are more acute for formr socLalLt economies preisely because of tho ownership structure and worker partlcLpation in decision making. This structure has further implications for whether contralized wage control policies can be seen as short term devLces to restrain cost-push inflationary pressures or are lkely to r*spond over a more protracted period to the institutional particularities of such regimes. N Section 3 Wage and mployment Decisions An the Worker Controlled **_Viz._** We start from the stylized lnstitutional features of a market-based regime. There is a dominant socLalized sector in which workers' councils control the firm and whose lnterforence in nmagement is non-trivial. Henceforth, we refer to such firms as worker controlled (WCF). 3.1 The W@rker-Contralled FLr The implications of active participatLon of workers in management have been extensively explored elsewhere, particularly ln the Yugoslav context 27. Labour managed firms have been wldely characterized as maximizing lncome per worker rather than profits, so that the value of the marginal product of labour doeg not euate the wage rate but rather lneme per worker 29. If this was the case, it could readily be shown that mployment would be lower, that there would be a tendency to substitute capital for labour and that there would be an inverse relationship between price and output changes. However, the robuotness of these results has been questioned. For instance, distinguishing over short and long run membership can generate a positive short run output supply curve ". Further, in a static setting optimal employment, given by the employment equating the marginal revenue product of E Layard (1991) discusses these points in rather more detaLl. _"_ See, Lnter alia, Brewer and Browning (1982)1 Vanek (1970); Ward (1958) _2a gm_ (pY-(XpAi+f))/L rather than max w- VY-(wL+EpAi+f) where ruincome per worker, Ye output Le inputel f- flxed costs; **_Lu_** number of workers.

" M4iyazaki and Neary (1983) show this to hold except over a range of very low prices where the fixed cost burden implied by membership size is too Severe.
> - 13

labour with the lowoot-paid worker mr, can b ohwn to doviato relatively mildly from employmont in a convontioncil profit maimisinqr firm 1. Empirieal work hao also empha1sied the importanc of 0z9aogsnouoly givon ruleos and polibc libes.

our objectives arm more restrictive. We assume - at leact initially -- that the WCF operates in a market environmnt. Thogo Li, however, uncertainty as to consistency in governmsnt behaviour, particularly wlth regard to enforcing a haed budget constraint oanf girms. Mrorovor, there Ls uncertainty ovOr ownership and the _deggeo_ to _whleh WtoCl_ will be aeriod over lnto future poriods. These lssuae are explored further in Sectlono 3.2. and 3.3. For our purposes, worker control can be handled as equivalent to a powerful trade unlon prosenco whore wagos and amploymont are subjoct to joLnt maxmisiatLon.' In contrast with the claooical labour managod _flrmv_ the RCF also cares about employment and accordlngly maximizoo tho eopoetod utlilty of the ropreaontativa workeo in tho fiirm. Ioouming further that there is a random selectlon of workers smong thooo that aro lald off and that thoy oubosquently receive unemployment benfiLt, this allowo uo to vlow tho IYCF as a limit caseo for an offlclent bargain modol of tho typo coamonly implomonted for capitalist firms. Howavor, ln the tiCF workero will bo c0notralnod by the firm's profit level and not dlrectly by the labour demand curvo and the wage will hence equate tho average product of labour, Tho point on tho contract curvo that is picked will not result from bargalning, as in a conventional firm.

We assume that the workers maximizo the eapected utillty of a representative worker ovor prospects of omploymont at the contract wage as against unemployment with a fall-back lncome, Tho lattor is given by " _Spinnowyn_ and Svejnar (1990), who also emphasizo the importance of exioting memberehip slze in dtoerminlng employmont and the output response to a price increase.

**'** Prasnikar and Svejnar (1990).

> n Thli contraoto wlth widoly uGod rlght-to-manago or monopoly union modelB where the wage lo elthor bargained or pickod by tho union and employment oubBequently oet unilatorally by tho employlro tho outcoeo lylng on the labour demand curve. Soo Oowald (1985) for a oumeary of thlo litorature.
Figure 3.1 <!-- Start of picture text --> w<br>Il w-F' (L)<br>IC<br>L --- - a c<br>I ~~~~~~~~~~~~tatcurve<br>I<br>i~~~~~~~~~~~~~<br><!-- End of picture text -->
14 °

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unemployment bnBofLtV (8). All current workers or mbrsu (N) receive equal treatmQnt and those who will bo) oventually unemployed are randomuly selected among membero. The workers or union's utillty function it; U, - _L/f_ u(w) * (N-L)/N u(B) for L.sa (3.1) The production function P(L) iL assumed to have positive but decreasing returns I V'(L)"O, F'(L)40 and V(O)cO In the WCFQ the union maxiemises its utility (eq.3.2) wLth respect to wages and employment subject to a &ero profit conetraint 31 tl(L) - wL - 0 (3.2) where a is a prlce or productlvlty shock if the price iL normalized to 1. We set 4 constant and equal to 1. From the flrst order conditlona we obtains

- (U(w)-LU(B))/U'(w) w-F'(L)

ands umay(L) /L (3.4) Eq. (3.3) lo that for the contract curvo, whlec eq. (3.4) gives the 'rent oharLng' rul(D whleh, ln the caso of the WCY involves the workers approprlatlng all revenues.

Figure 3.1 io a standard diagram in wage-employment space contrasting the non-Pareto optimal outcome on the labour demand curve and efficient bargains given by the tangency of tho firm's lsoprof lt curves and the workers or union's lndifference curvsoo. The locus of the polnts of tangency defines the contract curve, The looprof1t curves have a poiLtlve slop, until the wage equates the marginal revenue product of employment, (E"L). The lowest point on the labour demand curve, 0, is the competltlve euillbrlum. Thle can be thought of as that point where the workers' have no bargaining power and where B is the supply prlce of labour or the reservation wage. The contract curve emanates from thiB polnt end slopes upward therafter, given w'w (the _sj_ The firm would fold below thLs levoll ln other words, the hard budget constraint binds,
W 15 W competitive wage) I wasF'(L). Any point along the contract curve above D implies a wage above the magglnal revenue product ca labour. Thls illustrates **the** nature of the molution to Oeff1eient bargmlnin9.' The solutlon io efficient for the firm and the given met of m ug it li however lnegffLcent from a sociol point of view as there is oeessive employment. The model seam to accord **well** with the 'stylLzd' fact of ove ing and labor hoarding in soclalist econamies. **The** outer polnt 3 on the contract curve is that **given** by **the** tangency of **the** zero Lsoprof it curve and the workers' lndliferonce curve. It can **be** seen as that polnt at which the workers' approprLate the **maximum** rent **above** the reservatlon wage subject to the slope of the zero isoprofit **curve** and thus **the** zero proflt conditlon.

In **the** literature on market economies, the precise point On **the** contract curve is generally undetermined. Most authors have opted for a Nash-ZkuthenHarsanyi solutLon to the bargaining problem. Thls maxLmizes the product of the gains from a contract subject to the respective bargaining powers and threat polnts of the parties to the contreet.'4 The threat polnts and union size are given exogenously. Further aosumptions are, that the threat polnt **for** profit arners is eWual to zero, that profit earners are **risk** neutral and their utility linear in profits and that there is a representative worker. 35 In this setting, wlth s-l, the maximLzatlon over w and _L,_ under the constraint that L is maller than total mbership, iL as followel L[U(w)-U(B) 1 (F(L)-wLJ **(3.5)** From the first order condltlons we obtains

- (U(w)-u(B))/U'(w) _w-F'(L)_

(3.6) W **a** (F(L)/L + F'(L))/2 (3.7)

**Eq.** (3.6) gives the contract curve, while (3.7) lndicates the speeLfic **point** on the contract curve resultlng from the solution to the Nash bargain. **The** latter takes the form of a sharing rule and means that under a cooperative

" Thli can be wrLtten ass Has ( (fi f U° [I. -U.1"O' ) ' Aoki (1986) has an lntereotlng fiscuasion of themo Easumptiono.
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melutLon the wage would equal the mean of the gLnal and average products of labour.6 a more general formulation of the sharing ules, without asoumLng either a zero threat polnt for proflt earnege or risk neutrality, would be "I w 0 1/(14-)C(F(L)+6 PMIM)/L (3.8) with 6 measuring the telative bargainlng poer of the union. Ralilng the workers' bargaining r or throat point would obvlously imply that average productlvlty will matter more than mrginal productivlty ln the determination of the wage. In the caos of the WCP, golng to the zero proflt point on the contract curve wLil be eqivalent to setting wages and employment on the average revenue product of labour curve. A Figure 3.2 illustgates the wage-employment outome aesociated with eq. (3.8)." Wages ln the _WCF_ w1il be on the average product of labour curve at a polnt such as _0._ The classical labour mnaged firm, whlih does not care about employment, will set wage. at Z, that point givlng the _mazLmum_ feasible wage _peg_ worker. A comptLeLve fLrm will mat wages eqal to the reservation wage, B. Employment will be on the labour de d curve, F'(L), for the labour managed firm and the c gptitLve fiLm, but thLs will not be so for the WCI. For the latter, wages will ha above those for the compaetitLve firm, but lower than for the clasalcal labour managed flrm. The highest employment level li associated wLth the MCF.

We can now trace through the likely implieatLons for the wage and employment of varlous shocks. Two types of shocks have been etudLed in the 36 The sharing rule Ls generated by the cooperative settLng and by the assumptLon of riLsk neutrality. Note also that the average revenue product curve is downward sloping so that the bargalned outcome is at the LntereactLon of the upward sloplng fficLoeney locus and a downward sloping locus reflectLng bargainLng strength (McDonald and Solow, 1981) n FollowLng AokL (1986).

**"** Precisely because of the institutional arrangement, one can also note that the problem of the flrm reneging en poet on the employment associated wLth this outcom and moving back to the marginal revenue product curve is not an issue. " Flguge 3.2 li adapted from Aoki (1986).
Fig.2 <!-- Start of picture text --> W :I<br>i LMF<br>"Power curve"<br>\ ~ ~~ ., F(L)/L<br>EB'-<br>B<br>C\<br>F'(L)<br><!-- End of picture text --> L
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context of the) prooont modal. '° One involves a shock to the labour market, ouch ao an lncroeae in unemployment benefits, the other a change in goods markets, such as an advorso demand _ahock._ A productivity ohock will be equlvalent to the dewand shock. An inorasoo in unemployment beneflts will chift the contract curvo up to _tho_ left. This clearly implies that at any lovol of employment wages an the new contract curve will be higher. An adverae product market shock would aloo lndue6 a shift to the left (northwest) of the contract curvo, lmplying a lower level of employment at any given wags. Wlth riok neutral workero (i.e. a linear utillty function) real wages are independent from product market shocks. Wa1ge would thus be rigid ln the face of changed product market condltiono. If labour and goods market shocks occur cimultaneously -- as is the case in Pollsh-type stabilization programmes -- employment will decline, while the effect on wages will be unclear. introducing considerationo of membership oize obvlously modifies the result and would gonogally make wagso flenible. Xn partlcular, lf current members discount _the_ future, tho prospect of unemployment next perlod motivates a real wage fall. Having oat out the basic model, we now provldo a series of extensions that explicitly assoclato tho rooponos of the _WCP_ to government pollcy and pollcy lnotrumonts, partlcularly subsldies and tax-based wage rules. _3.2_ A Simple POIicy fen In much of the existing policy game literature it is worth noting that the cholce of railing output above the natural rate can generally be attributed to labour market rigiditles. However, in the transitlonal economy, no player knowe whoro the natural rate lloe -- there _is_ a learning process underway -- and a cimple mdodl _ln_ whlch inflation and output enter the utllity functlon and whoeo tho economic causallty and tradeoffs are obvlous has llttle M fcDonald and Solow (1981).
to offor gOg Structural change and the niois ' cooociatod with that chango obscure conventLonal, erging colationshlps. At the oam tim, political and institutional complaxitie make mdeolling mre@ dlgficult.

in the reforming sconomy, the governmnt otarts neceoooArily with low credibliLty 0 Agonts not only are uncertain with regard to the charaeteristics of the governrent but also have impergect inoagmtion regarding exogenous shocks to the system. 4 ' If credibility io a stmet variable that lo time dependent **the** larger the departure frm steady state values at the outset, the larger and possibly more ;)rotracted the likely demonstration effect. This can partially explain why a reforming government may wish to super-correct first period **--** actually prefer output losses -- with the size ag that correction testifying to the policy maker's adherence to announced goals **4.** It is clear that to acquire credibilLty a reforming government of the Polish variety has to convince agents that it is in effect a wolf but not in **sheep's** clothing. Zn particular, the<sup>government seekstoimposoahard budget</sup> constralnt oan producers and hence will not resort to deficit finance. The government deals wlth organised labour via & trade union or worker-managers.1 It **seeks** to shock enterprise managers<sup>andworkersinto</sup> behaving like true profit-maximizers. It may choose to use toloranc6e of bankruptcy me an instrument for demonstrating its resolve. It will correspondingly accept that unemployment is above any implicit target lovel. 4' Agents will seek however 41 Such am a Barroa-Grdon set-up with output given by VV04+(n-zO) and a governmant one period function; - **-($.0O)** ° a(y-y), - 0 a" -_ **4** a(n-2 )

**4'** Note that if the policy maker has no superior information regarding exogenous shocks then a rule-based approach could merely impart greater rigidity to **the system. 4 See** Vickers (1986) **for** a discusoson of separating and pooling **equilibria** in a two period model.

**4I The** union and/or worker-managers could also be seen as being concerned **with** their credibility as bargainers on the part of workers; especially given the general **legacy** of subservience to Party and State. **4'** This does not necessarily imply that the government accepZs output as being above the target level as it<sup>mayhold that</sup> thrgo iL ouch oveE-manning in the economy that productivity gains can rapidly swamp employmnt looses.
° 19 ° to test the governnt's tolerance of out.ut and employment losses ahd, implieLtly, its abliLty to enforce a hard budget conestraint on fLrms. Such dlsecontLnuity ln p eiference could be meon as rocougre to stabilisation polley and would hence give rise to disecontinuty in tho lndiffleren **c** e urves of the unLion. This motivates the use of oaboLdias &s a policy or stabilzation lnotrument in SGctlon 3.3 below.

This tensLon ia evident once a glscal polLcy target io introduced. That target encompasses the hard budget constraint ln so far as subsidies to finrs to cover operating lossoe directly show up in the budget. Moreover, we can assum that unemployment beLefit io paid to workers and iL financed through the budget. Thus, filcal balance depends oa enforclag the hard budget constraint while enforeLing the hard budget constraint lmplies lncreased unemployment and hence a call on budgetary resourcso for financing the unemployment system. Wm allude to thli tension below. 3.3 a osnle _Period polLey gam_ We now motivate a simple gam in non-cooperativo and cooperative oettingo over tho mLinmum time peilod ln which a pollcy rule can be appiled. we present solutlons wlth Nash and Stackelberg equillbrla 0 We assume a closed economy with WCWs and a government. Indlvidual workero are Ersk neutral, u(W)=VY. Unlon ebership lo constant and oet equal to 1. No taxes are levled. The WCF maximlzse the utility function ln eq. (3.9) subject to the zero profit constralnt ln eq. (3.10) with reopect to employment and wages. Ut, L LK 4 B- La (3.9) F(L) - m. + 8 - 0 (3.10) The only difference from the basic model of Section 3.1 ia that subsidles (8) now anter the zero proflt constraint. Subeidles are posittvely assoclated with employment and/or the wage.

The goverment has the following siaple utility functlons Us SL -PS, PO (3.11)
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The parameter p represents the government' trade-off betweon employment and paying subsidies. Z A hlgh P implies that the government _im_ strongly averi s to departures from fiscal balance. We assum that the governmant adept. the following rule for the payment of vubaLdles8 89 sF(L)v * P 0 (3.12) The goavernnt is **assumed** to condltion lts policy on output so that subsidies are paid as a fraction of fi rs' output.'" At this stage, unemployment b.noflts, 3, are assumed exogenous and the total payment ,f benefits (1-L)B does<sup>notenterthegovorment'eutliLty</sup> funcetion .

Finally, we use a Cobb-Douglas production function with decreasing returns to scale. We write ?(L) ast (3.13) _F(L) - AV,_ where Ai tt 0, and 0 < a 4 1 (3.13) The Mash equilibrium The WCV maLmLzes Lts utillty taking the government's choice of a as given. Consequently, eq. (3.9) li maximized with respect to W and L subject to the eq. (3.10) and the subsidy rule<sup>in eq. (3.12).Thefirm'sreaction</sup> curve Lo s3 W a B/a (3.14) The union', choles of employment as a functLin of the subsidy parameter io _given_ by eq. (3-15), where an increased subsidy parameter, a, will always be associated with increased employment.

L ((1 +)Aa/BJ"" (3.15) 46 Only positive subsidies are considered. Note that this implies the fLocal trade-off alluded to above.

7 Relating subsidies to employment, the wage-bill or an amount independent of W, L or F(L) would not markedly alter the results.

* We will later consider what happens if the payment of unenployment benefits enter the governemt'S utility function.

Z Calculations are avaLlable from the authors.
° 21 The government knows the zero proflt constraint of the _LC?_ but ln this uetting Can only lnfluonce pLoymet, taking wage s given.'<sup>0</sup> The government's reaction curve is hence found by malmising its utllity in eq. (3.12) wlth respect to a, subject to the subsidy rule in eq. (3.13) and the zero profit constralnt (eq. (3.11)). The govornmnt reacts to a gLven W by the _choLe-_ of s lmpleitly **glven** by eq. (3.16) belows 105 W X ~~~~~~~~~~~~~~~~~(3.16) In (s,W) space the government's reactlon curve will be downward eloping slnce dW/ds ' 0. The governmnt's cholce of s as a functonL of th employment level is implieLtly glven by eq. (3.17) below. _L-_ [OA(1-a+s) 1J"4) (3.17) Ig a/B 6 p s 1/(1-a)(a/8) there exlsts a unlque Nash equillbrlum (with s a 0) which in stable. That eWulibrium iWliLes a subsidy aameter NB", an employment level L's, and a wage W s L tF _- (Oa I_ (O)B)/(sB-) * a<sup>2</sup> /(B) o (a)

> WNE - B/a

a > 0 implles payment of positive subsidles to the firgm a soft budget constraint.5" The employment ln the NE (L;89) is greater than if no subsidies are pald (4L), vlz; _LNJ_ a L0. _The_ wage is B/a since the unlon's choLie of wage does not depend on the subsidy parameter. An increase in 0 lowers both 8<sup>NW</sup> and LIe. Emphasizing flscal balance will be assocLated with lower subsidLes and employment.

These points are graphlcally presented ln Figure 3.2.

T his is somewhat ad hoc. One justlficatLon could be the government conditloning subsldy polLcy on output, hence mployment. In the later Stackelber; setting with government as leader, wages are no longer taken as given. _0 fong_ * 1 1/(l=&)(a/B).
_-_ 22 _-_ <!-- Start of picture text --> f \ ~~~~~~~NE<br>,NB a sUnion's reaetion curve<br>Government's reaction curve<br>\ 0s ~~~~~~~~~~e<br>'0<br>Union<br>L Government<br><!-- End of picture text --> Tho lnteruectlon between the reactLon curves ln the upper panel is the Nash equLlibrLum. SubeLdLes are on the horLzontal and wages on the vertical axis . In the lower panel the curves show the optlmal relatLonshLp between employment and the subsidy parameter for, respectLvely, the union (eq. (3.15)) and the government (eq. (3.17)). The LntersectLon between these curves represents **_the_** subsLdy parameter and employment for the Nash equilibrium. An increase of i will lead to a horizontal shLft of the government's reactLon curve to the left (and likewLie for the curve for eq. (3.17)) and hence lead to lower employment.

The Stackelberg equilibriu, with the government as the leader We now assum that the government sets Lts subeldy parameter before the WCP sets the wage and employment. The government acts as a Stackelberg leader maximizing its utllity takLng into account the fLrm's reaction to Lts polLcy _s0_ if 1/8 e S /(l='a)(1/8) subsLdy parameter 5%, employment L and wages W4 are saLmlar Ln thLe Stackelberg equillbrLum to the solutLons for the Nash equlILbrLum. ThLi can be grasped from Flgure 3.2. The Stackelborg '2 Calculatlons for both Stackelberg settLngs are avaLlable on request from the authors.
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equilibrium is obtained where an indliference curve li tangent to the firmo reaction curve. This polnt can be seen to be where tho government's and the firm's reaction curves intergset.

The Stackelbeag eqpuilbrium with the NCw mae as leader In this case the WCF is assumed to mova first taking into account the reactions og thin government. The firm maximises its utility with respect to L and V subject to the zero profit constraint and subject to the subsidy rule in eq. (3012), and subject to the governmat's reaction curve (eq. (3.16) or eq. (3.17)). IXf 1/B 1 < 6 (/(1°a)+1) (1/B) S tackaberg euilibrium with s a 0 exists and is unique. Denoting the subsidy parameter, the employment and the wage for the Stackelberg equilibrium where the WCF ls the leader mu, Lu, and _WV_ we haves

- Son &,2/ (1!Bl) (l-a) V1 C PAa2,/ ( 13-1) 4<

The suboLdy and cmployment prmeters are blggew than for the Hash equlibbrium. ThiL occurs because the firm effectively endgoenizes the government policy rule and hence the willingness to pay subsidles conmdLtioned on output. The wage V lo however lower than foe the Mash equlilbrlum; a function of the downward sloping government reaction curve. Hence whles subsidies and mployment increave, the firm, will aloo accept a lower wage. 3.4 con6udLu coets The aove results hold for non-cooperative settLngs. A Nash bargaLning solution wlth eqal bargainlng powers delivers subsidy and employment parameters hlgher than in any of the non-cooperatLve settLngs. Wages are found to Le somewhere between the Stackelberg euillbgLrum with the fLrm as leader and the Nash squillbrium. U The very simple policy game presented in this section obvLously suffers from not explieLtly enterLng a cost term dlrectly lnto the goverment n Detailed results are available from the authogs.
^ 24 function. A more elaborate treatment, along the lines pursued by DrLf ill (1985), would be to incorporate a social welfaxe function in whiCh a cost term, associated wlth departures from fiscal balance, would figure. '5 A more tractable way of proeentLng the problem in the light of the prosent model would be to lncorporate any negative utllity attaching to the government from payment of unmployment beneflts. This is obvlously a more restrletLve approach. Wrltlag unemploayment benefits (l-L)3 the goverment's utility function now reads# us - L - *(S*l-L)B), * a 0 (3 18) collecting toe, divLding through wlth (pB+1) and defLinng Us/(0B+1) as Us, s us - L - 0/(0B+1)8 - 0B/(8+1) (3.19) We see that the parameter in front of S has decreased compared to the utlilty functLon in sq.(3.11). The obvious LntuLtLon is that if the government has a wLillngness to pay unemployment benefLts this will be associated with a lower weight on budget balance and thLs in likely to imply a higher subsidy parameter It does not of course capture any of the more complex offsetting effects.

The polley game developed above has clear limitations. Nevertheless, Lt seeks to _formallse_ a basic dLiama for transitional governmentag the trade-off between employmnt and subsidies, where subsidies are in effect continuation of the soft budget constraLnt. A cooperative solution can be shown to yield relatLvely low wages but hlgh employment and hence hlgh subsidies. Both the Nash equilibrium and the Stackelberg _setting_ with the goverrment as leader, will delLver hiLgher wages than the cooperative setting, with employment and subeLdiLes lower. When the WCF is the Stackelberg leader it prceLves the government rule and endogenLzes polLcy when optimizLng. In effect the WCF optlmize. against a steeper employment/subsidy curve. Higher employment and subidies result wLth a lower wage than for the Nash Equlilbrlum and government Stackelborgo sttLngs. Expressed simply, if the WCW understands U For example a *o,al welfare functions Vs _-(L-L) 2 -_ aD<sup>2</sup> where the second captures the costs of fiscal imbalance.
- 25

that the governmnt cares about employment<sup>(dspiLto</sup> possible announcomnts to the contrary) this wLil result ln the government offering subsLdLes to firms and hence balling them out. Such subsLdles permit hlgher than warranted employment. It La clear -- but **_here_** lnadequately devloped that the fLscal costs can be non-trivlal. By being unable<sup>to</sup> mplemnAt a hard budget constraint on the WCls the credibility of the reform program -- and **hence the** signaliLng of a regim break -- would be undermined. Se otLos 4: 'ax **Rles** amd the Worker Controlled **_Vim_** We have already alluded to the widespread **use** of tax-based Lncome polLeLs ln partLally reformed socialist economies. TheLr use can be traced to a multipleicty of objectives. These Lncludeg restraLAt on the appropriation of labor rontsj regulation of firm leel labor demand and regulation of offectLve demad, To the extent that the market-based economy lacks fully endogenized restraints on pricing and ownership remaLns largely socialized, tax-baed incmes policies retain relevance, as recent Pollsh **experience** testLfies.

In this section we provide a very sumary treatment of tax rules and indicate the lLkely dLfferLng outcome wlth respect to employment and wages. We work with the model discussed in sectLon 3. For simplicity, we assume individual workers are riLk neutral. The tax enters dLrectly into the zero profit constraLnts (4.1) F(L) - IlL - T - 0 (4.1) We consLder the followLng four tax rules us (i) Wage-bill tax, where the tax is levLed on that share of the wage bill (WI) above a preannounced norm. 0 represents the norm so that; T - t(WL - _A1,_ when WL Z A a 0. ThLi type of tax was widely used Ln<sup>**the**PREsetting</sup> and in Poland ln 1990 (see Section 2), (iL) Wage per worker tax, where wages in excess of a norm (s)<sup>are taxed so</sup> that: T a tLW - w, when W a a a 0, 'i More complicated rules s such as those Lncorprating value-added or productivLty - are Lgnored.
- 26

(ILl) Production taxg T a t(F(L) y], when F(L) a y a 0 and where y is **the** norm or threshold level, (Lv) A lump sun tax, equal to a contantg T * t.

In Table 4.1 we derive the multlpliors from the VCF' maximization subject to the toro profit constraint and the particular tax rule. " Note that the tax parameter. are taken as **exogenous** by the WCP ln this arrangment. We distinguish between the tax rule itself and a prameter for the tax norm or threshold. The multLpliers in brackets are for specific functional form for the production function, namely a semi-Cobb-Douglas "I those outslid of brackets relate to a generic production function with decreasing returns to scale. 2 Several results stand out. A wage bill tax and a productlon tax have exactly similar effects and clearly result in lowr employment and a likely increase of wages. This equivalence is useful to illustrato the negative supply-sAe implications of the wage-blll tax. Thli tax rule effectively motivates firms to shed laborl not necessarily a desirable component for a market-base reform economy. Change ia the taxable norm (a and y) proves neutral vie-a-vim employment but wages unambiguously increase with an increase in 2 or y.

For the tax per worker, by contrast, an increase in the tax rate clearly lowers wages and raises employment. An increase in the norm (s) leads to higher employment but the impact on wages is ambiguous. This tax rule clearly has an emplayment bias in sharp contrast to the wage bill. It can be noted that so long as the wage coiling is above the resorvation wage or unemployment benefit, an increase ln the ceiling will stimulate employment and reduce wages.

" Detailed calculations available from the authors. 5 viz; F(L) - ALI, whore A > 0, and 0 < a < 1. F(0) a0, ' (L) D1 0, FR (L) < 0.
27 Finally, a lump sum **tax merely** lowers the<sup>wageand is neutral for</sup> employment. Note that a **lump-sum** tag is<sup>equLvalent</sup> tO a **fixed** cost, whlch has been widely studied in **the** literature oa **labor** mnaged figmo. It is ales a negative subsidy, and can thus be interpreted in conection wlth the reduction of subsidles whlch accompanies the shLft to a market-based **systam.** Our **model** LndLicates that an increase in any type **of** fized costs# **such** as the **reduction** of subsidies that is a feature of **the shift** to **a market-based system,** will lower wages without affecting employment.

T_able 4,1: NE feat of tag riles on Aaes* **'d** eMfilovue

||Effect<br>of<br>**of**parame|lnere<br>ter<br>t|ase<br> <br>on|**Effect**of<br>in norm,<br>o|**increase**<br> <br>ns|
|---|---|---|---|---|---|
||employ..|wag|es|employm.|**wages**|
|Wage-blll<br>tax|C-)|7|(+)|0<br>(0)|4<br>(+)|
|Wage**per**worker|<br>7 (7)|7|(7)|+<br>)|7<br>(\|
|ProductLon)<br>ax||7|()|0<br>(0)|4)|
|Lump sum tax|0(0)|.|-na||na|

# Section 5 OwoenashL Reor. and Decapita1Lsatiom

There **Ls** a well reheagsed sot of arguments as to why socialized **flrms** tend to be subject to decapitalLzation. **These ran as** follows. **Workers** can only enjoy the banefits of capital Lf they work in **the** enterprises where that capital Le employed. An absent capital market dilutes the longer-term Lnterest of workers in the firm. Both features wL1 tend to favour an appropriation of those benefits into current earnings. **Wage pressure ln the** system w1il conequently be **severe, subject** only to **the effectiveness** of external restraints, such **as** tax policy and rules **regarding reLnvestment.** s Thoso rules w1il tend not to **bind** _Ln_ **more decentralzsed** settlngs.

**H** inds (1990) forcefully presents this line of argument.
**2** 5

While this stylization is extreme and the degre to which mrket-basoed restraints are endogeniled in the fiLm will depend on a wide range of factors **'0,** it ls obvious that introducing uncertainty over ownegrshlp, through an announced strategy of prLvatisation, could pooibly accelerate capital depletLon ln the transition. If fILrm are worker controlled and a coertaLn proportion could expect to be prLvatised next period I hance losing access to capital given by the prior ownership tor, this might motivate consumption of capLtal ln the current priLod. By contrast, capital depletion this period would have negative implications for a firm that remained worker controlled next period. Fraom sciety's _poLnt_ of _vLew,_ a lower capital stock next perLod can valLdate a lower level of employments hence a possible source of hysteresis. The policy objective is then to reuoncile the desire for ownershlp refom (and the knowledge that thle cannot be done overnlght) with meaoures to restrict loweriAg the capltal stock as a function of the uncertainty m td by prospective owerhilp reform. We examine thli locue in relation to use of tax polLey and also the poseLble use og vouchers ae a means of restrlctLng decapLtaLzation. The overall problem can be couched acceesibly in terms of an intert ral Lmamsiation, buLldLng upon the boasic model developed in Section 3.1.

> **501** A two _period_ modl with the worker eontrlled gfism

We extend our basic model for the WCF (Section 3.1) in a two period case using a productLon functlon with labour and capital as arguments. Risk noutrality for LndiLvidual workers is assu* In period 1 the fim iL a WCF, while ownership in period 2 is uncertaLn. We assuma that the fLrm continues as a WCF with the probabilty, q, whlle being privatized has the probability, (l-q).e Throughout lower case subserLits donote the peri-od, L 1,2.

> **'0** See Blinder, et al (1990)1 Prasnikar, at aI (1990).

a PrivatisatLon could take the form of divostituroe or imple closure.

a More precisely, q is the unionle point estLmate of the firm being a WCP in period 2.
- 29 -

# 5.2 2he fia in worker controlled

If the firm la worker controlled the unlua' utlilty functLon is as follows; U?'* -L,IWI 4 B9 LAB, (5. 1) U?'* -L,IWI 4 B9 LAB, (5. 1) The production functian Le similua in both periods and includes capital (K,) as well as labour. We also include an exogenous productLvity shock (O1 > 9,(L.,,K,), i * 1,2 We assume posLtLve but decreasing marginal returns. Fo, simplicity we assue no depreciation of capital. The firm can sell (and buy) capital at the start of each period at the prLce p, i a 1,2 and the VCF has to dcide at the start of each period how much capital to sell (or buy) and how much to allocate to productLon. The WCF pays taxes to the government amounting to T,, . - 1,2. The WCF has inLtlally at period 1 a capital stock R. It decLdes to use K, for production and sells th rest, worth pl(K-K,)o The zero profLt constraint for period 1 can now be expressed ass 9 _j, ,R,)_ - _;L,W1 4_ **p,(K-K,I)** - T, - 0 (5.2) The zero profit constraLnt for period 2 when the firm is still worker controlled ios 62 F(L21,2) - Lr 2 2<sup>+4 P</sup> 2<sup>(K,-)</sup> - T' - 0 (5.3) From expressions (5.2) and (5.3) it can be seen that the WCF cannot lend to, or borrow from, sources outside the fiLrm. Flnally, we specify the tax rule as a wage per worker tax (see SectLon 4).

T, - t;jq{"lj@f), i - 1,2 (5.4) 5.3 The fire is privatised If the fLrm is prLvatLeOd new owners take over ln period 2 and there is a regime change. We **assume** that the decLiLons taken by the workers ln period 1 do not influence the utilLty of the union in period 2 if the firm is privatLzed. Further, if the firm is privatized it is not taxed. In the event of the fLrm being privatized in period 2 the exogenous utLilty level obtained is U2 *-
- 30 -

5.4 The wCFs problem The WCV mximizes its expected utility with respect to the instruments _L,, R,,_ L, K2 discounting the utility in period 2 with the discount factor 6, 0 < 6 s 1.

max { U,'c + (lq)U<sup>m</sup> 2 + **qU 2 W>C)** } **LlIJCIJA** The utillty levels U,VwL, i - 1,2 are found by inserting the tax rules eq. (5.4) into the zero profit constraints (eq. (5.2) and eq. (5.3)), isolating W,Lq and inserting these into the utility functions eq. (5.1). The first order conditions with respect to LI and Xi ares 1 (e,Fu(L,,K,) + t,i,l B- 0 (5.5) 1+tl The interpretation of eq. (5.5) is that the union chooses an employment level and that amount of capital whereby the maginal utillty of one extra employee equals Bt, (the marginal utility of being unemployed). Eq. (5.6) says that LI and K, are chosen so that the marginal utiLity from keepLng one more unit of capital (increased production and value of males next period) equals the utility of selling that unit of capital this period. 5.5 some Results we analyze how the exogenous variables influence the amount of capital kept in production in the firot period, L, and XI, where the bigger K,, the lower the extent of dcapitalization. _LI_ and RI are determined jointly by eq. (5.5) and eq. (5.6). Calculation of the multipliers yields the following results g9 dK, /dq > 0 dKI, /dS 2 0 t dK, /dp, < 0 F dKI /dpl 0p dKj/dO, 1 0 dKI/d2 a 0 a3 Detailed calculations are available from the authors.
- 31 -

As es te, the higher the probability of the firm remaining worker controlled (q) ln period 2, the lower the extent of docapitalization. Likewise, gsrater diocounting (6) by the WCW and a<sup>higher</sup> price of capltal in period 2 give pooitive multipliers. So does a positLve productlvity shock (Os) through the higher value **of** capital stock in perLod 1. A<sup>productivlty</sup> shock in period 2 ie neutral. By contrast, if the price of **capital** in period 1 li high thLs reverses the sign, LndLeatLng that the WC?F will sell capital in period 1 and honce decapitalize the firm.

# 5.6 Tax poUchw

We now consideg how a tax rule can be Lmplemented so **as** to limit any incipLent decapitalisatLon. We Lsnert a wage per worker tax **where** taxation fallo on wages above a certain norm; W, :e,. DLstLnguLshing, as in Section **4,** between the t parmeter (t) **and** the tax norm or threshold (e), the following multLpliero can bo derLvod; dKl/dt, ' 0 J if sI > B, dR2/dt 2 6 0 d1/do, 2 0 dK3Jdo2 - 0 Uoing thls tan rule it emerges that a sufggLLently<sup>hlgh tax</sup><sup>**parameter**</sup> can arrest docapitalizatLon Ln peLrod 1 but that a hlgher<sup>taxrate</sup> ln period 2 will promote decapitalisatLon. This is a result of a substitution effect making it mEOo favorable to be paid wages in pyeiod 1 than in period 2. Note also that a uniform tan increase for the two perLods (dt, a **dt2)** will redue decapLtalLsation, dKI/dt, 4 dR,/dt 2 > O if et a' **B,.** An Lncroaoo of the wage norm Ln perLod 1 **(et)** Lncreases<sup>retaLned capital</sup> whlle an Lnrease in o2 leaves RI unchanged. The reason for dKR/dwj being pooLtLve is that the marginal utliLty of labour **has** increased. **Thls implies** hLgher employment and also a larger capLtal stock.

This section makes clear that using an appropriate<sup>**tax**rule--</sup> **ln** this case a wage **_per_** worker rule -- capital depletion can be restrained. **However,** thLs requLres a somewhat dLfferentLated tax stance<sup>**across the**two perLods. An</sup> expected hlgh tan parameter Ln period 2 will certainly promote capltal depletion. The polLcy challenge is to apply a hlgh tax parametor<sup>andwage</sup>
32 -

**norm** in period 1 **relative** to those applied in **prilod** 2. **Clearly, the WVF** wlll **retaln capital** lnto period 2 only lf it **believes** that it will nat **be** subject to higher taxation that period.

_5e7_ Vouchers

**PursuLng** the line of argument **developed above,** we now consLder whether introducing a contingent **claim** On a **specified share of** the value of **capital of** the **WCF could liduce modilied** behaviour by **the 1Cr** glven uncertainty **ovor ownershlp next** perlod. **We consider** in **partiLular the case of** a **voucher** handed out to **members** of **the** weV. **The value** of **the** voucher, **V, lie V - apR** if firm **privatized, 0** if firm **still** workor controlled. a is **a constant (a a 0) expressing the** fractlon of the **value** of **the** capital represented by **the** voucher. **The** utility of the unlon ln the **caoe where the** firm is **privatized can** consequently be **exproseed am the** following **sumI** U21-o - **12+** apAK1<sup>,</sup>

where **U 2m** is **the exogenous** utility obtained in **the** abosnes **of** a voucher. Assuming that the firm **pays** no taxes lf it ia privatized, the ma&xLmiation problem of the ICF **can** now be written ass **Max** { U,1' **+** 6((1-q)U2Pf+V + qu 2<sup>))</sup> LIXI.L=KJ The first order conditlons now contain a term **for** the **value** of the voucher: 1 **--** (O1<sup>Vu(L,,K,)</sup><sup>**t**ol)</sup> - 0S 0 (5O7) l+t1 1 1 - SFx,l(LI,K1) pi) + S(1-q)apa+ - 8qh * 0 (S.8) 1 **+t 1** 1+ta From eq. (5.8) (the flrst order condltlon with respect to X,) it can be seen that a voucher introduces an additlonal term wlth posiLtve expected utility from retalning more capital in period 1.

Inserting the voucher results in dX 1 /dq having an lndeterminate sign. This comes about because although an expected galn for tho WCF will result from beLng able to sell capLtal in period 2, this will be offset by an
33 expected los from not being able to each the vouchor.0 However, dK1/da > 0, ue that if the value of the voucher Lo increased iore capital will bo rotained in the firm. l §08 Co"elUdLa **cseoats** in this sectlon we havo eplaored an prtant losu for the reforming econamyu can uncertainty or ownership an oit incentivevS for decapitalisatlon be mitlgated by applying an appropriate tan rule and/or offering a contingent claim on capital to _ a69 of the WCF ? Given the announcemnt of impending privatisation by refo governments, a two perLod setting ose quite approprLate. The model has som obvious disadvantages. There is no e ctation to price and the only unesrtainty is with respect to privatisation. Equally, we ignore any of the likely wealth effects -- and conequpent macroeonemic implications -- let alone the transactions costo and the design issues assoclated wlth a voucher schemh. Nevertheleso, lt is evident that a suitable tax rule a tax yer worker -- can d nU@n tendenciae to capital depletion. This io an important point to the extent that it adjoins to the conclusions from Section 4 whOgo the wage par worker rule can lead to lower wages and higher employment. Section ; Conclusion We have attepted in this paper to draw out the implications of the ownership structure and, subsequently9<sup>uncertainty</sup> over that structure, for wage and employment setting in refoming socialiet econoamies. We have indicated the atrong tendencies to oxceesive employment and wage drift in these system,s in part consequent upon the ownership structure and the associated legacy of earlier regimes. Our primary focus has been on the if a-l/(l+t,), the multiplier **_dK,/dq_** - 0, and the firm is indifferent over privatization or continuation as a WCW.

6 if the value of the voucher equated the value of capital in the fim, then of course decapitaLization in this setting would be rendered indepandent of the probability oif privatisation.
- 34

market-b0aed econmy, ams :xsmplifiod by Poland **_since_** 1990. **Surveying** recent developments in Poland9 although open unzploymnet has emerged to a significant degree, it is otriking to note the continuing resistance to downward pressure on wages.

In the _light_ of **theas** stylized featuroso we then **set** up a series of models which focus on the behavior of **tho** worker **controlled firm.** We **develop** a **simple** policy **gam** where govoerxuwt policy **is** conditioned on output **through** a subsidy instrumnt. **This** reflects the **characteristic** problem **faced** by reforming governments of whether to oeforce a hard budget **constraint and** hence tolerate higher **unemployment** or **vhether** to **rosort to subsidies and associated** departures from fiscal targets. We locate9 **in** both cooperative **and noncooperative** settings, the Implications for wages, employment **and subsidies.** Given the cositment to privatisation **end the consequent** uncert_inty over future claims on capital, we aloo develop in a two **period** model **the conditions** under which the WCF will deplete its **capital stock,** possibly through excessive wage growth. We indicate how an **appropriate tax** rule °- **in** thlo case a wage **per** worker rule **°** can restrain **decapitalization. We also** touch lightly on the posBible utility **of** contingent claims **on capital,** such **as vouchers,** in offsetting capital depletion promoted **by uncertainty over** property rights.

Finally, we emphasize the **way in** which **vage** tax rules **can** affect **employment** and **wages** and how critical is **their** design. A wage bill **tax, as** used in Poland through 1990, not only **lowers employment** but **will likely raise** wages. By contrast, a wage per worker tax **will** tend **to raise employment and** lower wage.. _These_ effects are likely to be reinforced in **a two-sector context** where the WCF oector and privete firm coexist **and** where relative wage
35 ceneideations alre importante - The reolvant **vage** for **private sector** _workers_ **might** be the relative wage with respect to the WCF sector. As a consequence **tho** wge set by the WCF will have direct iWlications for wages in the private sector. This geinforces the point that wage restraint In **the** WCF ts likely to be critical. We therefore conclude that because of the **inherited ownership** structure and the uncertainty asociated vith reform0<sup>**merket-based**</sup> regimes **vill** continue to **require** centralized control. over **vgegs in** the WCF or **sociaized** sector. Unemployment and an expanding private **sector** alone is **unlikely** to provide a sufficient **restraining** mechanism for **wages.**

**We** intend later to develop a two sector model lneorporating officiency wage setting in the private sctor.
36

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> **Pryd9mn** R.o, and **S.** Welliszg The Ounership-Control Structure and **the** Behavior of Polish Enterprisee During the 1990 Refonrm, World Bank, 1990, processed

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Lipton, **D., and** J. Sach., **Creating a** Market **Economy in Eastern** Europe: The Case of Poland, Dsooin Par on Economic **Activity.** 19909 2 McDonald, **I.,** and R.N. Solow, Wage Bargaining and Employment, **American** Economic Revie, 71, **5,** December 1981, pp<sup>896</sup> -<sup>908</sup> McDonald, I., and R.M. Solow, Wages and Employment in a Segmented Labor **Market, Ouarterl Journal** of **Ecnomics.** November 1985, **ppllIS-1141**

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PRE Working Paper Series I

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|WPS718|Impact of Investment Policies on<br>German Direct Investment in Deyelo<br>Countries: An Empirical Investigatio|Andrea Gubitz<br>ping<br>n|July 1991|S. King-Watson<br>31047|
|WPS719|How Trade and Economic Policies<br>Affect Agriculture: A Framework for<br>Analysis Applied to Tanzania and<br>Malawi|Ramon Lopez<br>Ridwan Ali<br>Bjorn Larsen|July 1991|M. Gunasekara<br>32261|
|WPS720|Ths Outlook for Commercial Bank<br>Lending to Sub-Saharan Africa|Ellen Johnson Sirleaf<br>Francis Nyirjesy|July 1991|S. King-Watson<br>31047|
|WPS721|The Demand for Money in Developin<br>Countries: Assessing the Role<br>of Financial Innovation|g Patricio Arrau<br>Jose De Gregorio<br>Carmen Reinhart<br>Peter Wickham|July 1991|S. King-Watson<br>31047|
|WPS722|Is Rice Becoming an Inferior Good?<br>Food Demand in the Philippines|Merlinda D. Ingco|July 1991|P. Kokila<br>33716|
|WPS723|Improving Women's and Children's<br>Nutrition in Sub-Saharan Africa:<br>An Issues Paper|Olayinka Abosede<br>Judith S. McGuire|July 1991|0. Nadora<br>31091|
|WPS724|Fiscal Issues in Adjustment:<br>An Introduction|Riccardo Faini<br>Jaime de Melo|July 1991|D. Ballantyne<br>37947|
|WPS725|How Structure of Production<br>Determines the Demand for Human<br>Capital|Indermit S. Gill<br>Shahidur R. Khandker|July 1991|A. Sloan<br>35108|
|WPS726|Perspectives on the Design of<br>Intergovernmental Fiscal Relations|AnwarShah|JL;y1991|A. Bhalla<br>37699|
|WPS727|The Effects of Debt Subsidies on<br>Corporate Investment Behavior|Mansoor Dailami<br>E. Han Kim|July 1991|A. Bruce-Konuah<br>80356|
|WPS728|Does Better Access to Contracep-<br>tives Increase their Use? Key Policy<br>and Methodological Issues|Susan Cochrane<br>Laura Gibney|July 1991|0. Nadora<br>31091|
|WPS729|Is Export Diversification the Best<br>Way to Achieve Export Growth and<br>Stability? A Look at Three African<br>Countries|Ridwan Ali<br>Jeffrey Alwang<br>Paul B. Siegel|July 1991|M. Gunasekara<br>32260|
PRE WorkinaPager Series

||\|~~~~~~~~~ALhor|12Lforpae|Contact|
|---|---|---|---|---|
|WPS730|Wage and Employment Policies in<br>Czechoslovakia|Luis A. Riveros|July 1991|V. Charles<br>33651|
|WPS731|Efficiency Wage Theory, Labor<br>Markets, and Adjustment|Luis A. Riveros<br>Lawrence Bouton|July 1991|V. Charles<br>33651|
|WPS732|Stabilization Programs in Eastern<br>Europe: A Comparative Analysis of<br>the Polish and Yugoslav Programs<br>of 1990|Fabrizio Coricelli<br>Roberlo de Rezende Roch|July 1991<br>a|R. Martin<br>39065|
|WPS733|The Consulting Profession in<br>Developing Countries:AStrategy for<br>Development|Syed S. Kirmani<br>Warren C. Baum|July 1991|INUDR<br>33758|
|WPS734|Curricular Content. Educational<br>Expansion, and Economic Growth|Aaron Benavot|July 1991|C. Cristobal<br>33640|
|WPS735|Traditional Medicine in Sub-Saharan<br>Africa: Its Importance and Potential<br>Policy Options|Jocelyn DeJong<br>|July 1991|0. Nadora<br>31091|
|WPS736|Wages and Employment in the<br>Transition to a Market Economy|Simon Commander<br>Fabrizio Coricelli<br>Karsten Staehr|August 1991|0. Del Cid<br>39050|
|WPS737|External Shocks, Adjustment<br>Policies, and Investment in a<br>Developing Economy: Illustrations<br>from a Forward-looking<br>CGE Model<br>of the Philippines|Delfin S. Go|August 1991||
|WPS738|Tax Competition and Tax<br>Coordination: When Countries<br>Differ in Size|Ravi Kanbur<br>Michael Keen|August 1991||
|WPS739|Managing Financial Risks in Papua<br>New Guinea: An Optimal External<br>Debt Portfolio|Jonathan R. Coleman<br>Ying Qian|August 1991|J. Carroll<br>33715|
|WPS740|The Onchocerciasis Control Program<br>in West Africa: A Long-term<br>Commitmen**t**o Success|Bernhard H. Liese<br>John Wilson<br>Bruce Benton<br>Douglas Marr|August 1991||
|WPS741|When Does Rent-Seeking Augment<br>the Benefits of rDrice and Trade Refor<br>on Rationed Commodities? Estimate<br>for Automobiles and Color Television<br>in Poland|David Tarr<br>m<br>s<br>s|August 1991|D. Ballantyne<br>37947|