1

Chapter.3

STRUCTURAL UNEMPLOYMENT IN POLAND

Mieczyslaw W. Socha1 and Urszula Sztanderska2

1Faculty of Economics, Warsaw University, Poland(email: socha@wne.uw.edu.pl)

and2 Faculty of Economics, Warsaw University, Poland

(email: sztanderska@wne.uw.edu.pl).

ABSTRACT

Following the deep collapse of the Polish economy at the beginning of the ‘ 90s and the accompanyingfast growth of open unemployment, development capabilities have been restored as of 1992, which hasbeen reflected in the high rate of economic growth, and lately by an increase in employment and adecline in unemployment. Notwithstanding fast growth, continuing has been a relatively high rate ofstructural unemployment (about 13%), a significant and stable share of long-term unemployment,considerable diversification of unemployment rates in individual labor markets. This may impede theprocesses of stabilization and restructuring of the economy. Reduction of unemployment will requiresignificant changes in labor market institutions and other supply-side determinants of this phenomenon.

Introduction

The mass-scale and fast surfacing of unemployment at the beginning of the transition process in thePolish economy was related to many factors, including the collapse of gross domestic product.Therefore, it could have been expected that upon the reversal of economic trends the unemployment ratewould start to decline. Such a situation is now prevailing in Poland. It is known, however, that part ofunemployment does not disappear alongside GDP growth, but continues in the longer run in each of thebusiness cycle phases. In this study we are interested in the latter type of unemployment, calledstructural unemployment (OECD 1994, Phelps 1994)1. In particular, we shall be seeking to answer thefollowing questions:a. What is the scale of so defined structural unemployment in the Polish economy?b. What are the sources of this unemployment: business activities (inflow to unemployment) or rather

labor force behaviors (duration of unemployment)?c. How big are the unemployment rate differences in major labor markets and what are the main labor

groups affected?d. What is the direction of changes in those differences under the conditions of rapid economic

growth?There are several reasons for taking up this problem. First, in the period of transition economies aresubject to various demand and supply shocks, which may result in a large scale of labor marketmismatches. Secondly, there are few studies concerning this aspect of the labor market in the post-communist countries. Thirdly, its scale determines the effectiveness of efforts aimed at suppressinginflation. Fourthly, the experiences of industrialized countries unequivocally indicate that it is very 1 The term structural unemployment is used here in its broad meaning, namely both asunemployment resulting from mismatches between labor supply and demand in homogeneous micro-markets (frictional unemployment), as well as a mismatch caused by the fact that vacancies and theunemployed exist in different labor markets, that is narrowly conceived structural unemployment

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difficult to quickly reduce this segment of unemployment, while its social and economic costs aregreater than in the case of cyclical unemployment.

Apart from aggregate data, in our analysis we have utilized primary data collected by the CentralStatistical Office (GUS) under the Labor Force Survey between May 1992 and August 1996, whereineach survey was conducted on a sample of about 55,000 respondents representative for the entirepopulation of Poland at the age of 15 years and more2. This basis was used for setting up rotatingquarterly panels, which allowed for the application of the methods of labor flows between three labormarket states, i.e. employment, unemployment and not in the labor force. The movement between thosestates was treated as characteristic of Markov processes, that is the probability of changing a labormarket state is determined exclusively by the state in which one is currently in.

1. The dynamics of the Polish labor market in the ‘90s

A cursory review of changes that have occurred in the labor market over the past five years providesgrounds for a positive assessment of its macroeconomic outcomes. In particular, the following favorabletendencies may be noted:After the period of collapse, in the first years of the transition the demand for labor is growing, and itssupply is relatively stable. This is illustrated by Fig. 1 presenting the labor supply, conceived here as atotal of employment and unemployment, and labor demand, represented by a total of employment andvacancies. A faster rate of growth of labor supply than demand is reflected by an increase ofunemployment, whereas a reverse tendency contributes to its reduction.

Fig. 1

Labor demand (LD) and labor suply (LS)

14000

14500

15000

15500

16000

16500

17000

17500

18000

1990 1991 1992 1993 1994 1995 1996

thousands

LS

LD

Employment grows at a slower rate than the GDP, which indicates an increase of aggregate laborproductivity. In 1996 the GDP exceeded the 1989 level by 4.5%, whereas level of employment waslower by 12.5%, which means that aggregate labor productivity increased during that period by 19.5%(Sztanderska 1997).

2 Full description of the sample as well as survey methodology may be found in: Labour Force Surveyin Poland. November 1996, Central Statistical Office, Warsaw 1997.

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The increase of aggregate employment resulted in a decline of the number of the jobless as well as theunemployment rate. This is documented by the data from the labor offices’ unemployment registers aswell as the LFS data (Fig. 2).Fig. 2

Unemployment rates according Labor Offices and LFS

6

8

10

12

14

16

18

1990 1991 1992 1993 1994 1995 1996

%

Labor OfficesLFS

Despite the shrinking unemployment rates, the inflation rate is also going down, i.e. the Okun’ s miseryindex is also declining (this index is shown as sum of inflation and registered unemployment rates),whereas the short-term Phillips curve shifts downward. Fig. 3, which shows the relationship between thescale of wage-related inflation measured by the rate of growth of average nominal wages and the rate ofregistered unemployment, seems corroborates it.

Fig. 3

Nominal money wages growth and unemployment rate 1990-1996

0

10

20

30

40

50

60

70

0 2 4 6 8 10 12 14 16 18Registered unemployment rates

Nom

inal

mon

ey w

ages

gro

wth

Shift of the Beveridge curve towards the beginning of the system of coordinates as shown in Fig. 4 forthe last period seems to indicate an improvement in structural adjustments in the labor market.

4

Fig. 4wakaty w tys.

Vacancies and unemployed (in thousands)

90

91

92 9394

95

96

0

10

20

30

40

50

60

1000 1500 2000 2500 3000

U

V

One manifestation of the intensive labor reallocation is growing labor turnover - sum of hiring rates(the relation between the number of new hires in a given year to the number of employees as at the endof the previous year) and the separation rate (the number of dismissals in a given year to the number ofemployees as at the end of the previous year) - in the recent period (figure 5).

Fig. 5

Hiring and Separations rates during 1985-1995

0

5

10

15

20

25

30

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995

%

Separation rateHiring rate

There was a significant reallocation of employment from public to private sector. Fig. 6 illustrates thedynamics of changes in employment in the public sector, which includes both the state-owned andcooperative sectors, and in the private sector. It should be noted that a significant part of this process isof a genuine nature, meaning that it is not an effect of a formal re-classification of the privatizedsegment of the public sectors as private but the process of creating new jobs by new private companies.The so-called mass privatization is relatively poorly advanced in Poland. It should be stressed here thatcontrary to many opinions private companies recruited workers primarily from among the unemployed,

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and to a lesser extent took over employees of the public sector or absorbed newcomers to the labormarket (Socha, Sztanderska 1966).

Fig. 6

Employment in private (Epr) and public (Epub) sectors 1985-1995 in thousand

0

2000

4000

6000

8000

10000

12000

14000

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995

Epub

Epr

The fast rate of job creation by private companies and job destruction by state-owned and cooperativeones resulted in profound changes in the structure of employment by ownership sector. The share of theprivate sector in total employment increased from 33.3% in 1989 to 61.9% in 1995, and the non-agricultural private sector from about 11% to over 32%. The official statistics, which classify thecooperative sector as part of the private sector, reveal a much bigger share of the latter in employment -about 62%.

A greater inequality of wages in the economy (documented by Rutkowski, 1996) provided incentives forlabor reallocation and for the accumulation of human capital. By the same token, it provides a long-termbasis for economic growth.

However, a closer look at the changes that have been outline above reveals also a less favorable aspectof the functioning of the labor market in that period and the occurrence of threats that are ofsignificance in the medium and long term.

Despite a fast rate of growth of the GDP (over 5% annually over the last three years) the rates ofoccupational activity and employment are declining, whereas the rate of non-employment is growing.The rate of occupational activity declined between November 1992 and November 1996 from 61.7% to57.9%, the rate of employment from 53.3% to 51.2%.

Although the growth of consumer wages was slower than the growth of labor productivity (in 1992-95average real wages declined by 1.8%, while aggregate labor productivity increased by 19%), consumerprices and nominal wages were growing faster than producer prices (Fig. 7).

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Fig. 7

Nominal prices growth

0

100

200

300

400

500

600

700

1990 1991 1992 1993 1995 19961994

This means the growth of product wages, determining the demand for labor. The growing disparitybetween consumer and product wages is reflected by the increased burden of non-wage cost onemployment. One of the consequences may be increased employment in the shadow economy. Thecurrency appreciation tendency (the exchange rate of the zloty to the dollar revealed the lowest growthrate as compared with other prices) restricted export expansion while inciting import, a result of whichis a fast growing trade deficit. Apart from that, it favored a growth of employment in officially non-registered foreign trade.

The decline in registered unemployment was partly due to changes in the definition of the unemployed,stricter registering practice and narrowing down of access to unemployment benefits, especially asregards school leavers. Some of the unemployed left out of the labor market. The share of the long-termunemployed in total unemployment was not declining. Between November 1992 and November 1996 theshare of people who had been looking for a job for 13 months or longer increased from 39.9% to40.38% (according to LFS 1997, p. XXV).

In many models of the Phillips curve the long-term unemployed have no effect on the level of negotiatedwages as they are not placed on the curve of effective labor supply. The following graph, which takesinto account the relationship between the dynamics of average nominal wages and changes in the short-term unemployment rate (six months or shorter) reveals significant fluctuations of wages with a narrowrange of fluctuations of short-term unemployment rates.

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Fig. 8

Money wages and short-term unemployed rates during May 1992- November 1996

0

2

4

6

8

10

12

14

16

18

0 1 2 3 4 5 6

Short-term unemployed (6 months and less)

Mon

ey w

ages

gro

wth

The aggregate demand and the labor demand are increasing, however the supply of registered vacanciesis decreasing, and the number of the unemployed per one vacancy is clearly increasing. In the normalinterpretation of the Beveridge curve it would indicate an increase of cyclical unemployment, thoughthis phenomenon occurs in the period of growing GDP and labor demand, and therefore reflects either agrowth of the mismatch or lesser job-seeking intensity.

Fig. 9

Registered unemployed per one reported vacancy

0

50

100

150

200

250

1989 1990 1991 1992 1993 1994 1995 1996

Note: For 1989 the number of registered job-seekers instead of the unemployed.

The rate of new jobs creation in the private sector and the rate of jobs destruction in the public sectorhave recently slowed down. Between 1990 and 1992 employment in the public sector went down by14.5%, whereas between 1993 and 1995 by merely 0.3%, while in the same period employment in thenon-agricultural private sector increased by 103.6% and 19.4% respectively (Socha and Sztanderska1997, p. 44). Despite a radical change in the demand structure, the sectoral employment structure hasactually remained more or less the same. Between 1993 and 1995 the share of employment inagriculture declined from about 29% to 27%, and in industry from over 28% to 25%. The share of

May 1992

November 1996

8

agriculture of industry continue to be higher and the share of services lower than in industrializedcountries. Despite a greater need for labor movements than elsewhere the actual rate of laborreallocation has been lower than e.g. in the Czech Republic and Slovakia (Jackman and Pauna 1997),particularly since 1992 (Sztanderska 1997).

Labor re-allocation between individual sectors is impaired by rigid relativ wages. Indicating thoserigidities in 1990-94 Pujol (1996) estimates that they contribute to shrinkage of production andemployment to a larger extent than monopolistic practices. After 1992, the skill premium is diminishingand is actually retained only in the public sector (Newell, Socha 1997). Also noted is the effect ofefficiency wages (Newell Socha 1997) and the insider effect (Brauer et al 1996). In consequence theequilibrium unemployment rate is not as stable as e.g. in Hungary, but reflects the phenomenon ofhysteresis (Brauer et al 1996, Tabeau and Starzenski 1995).

This rather gloomy picture prompts us to put forth a thesis as to the emergence of the structural causesof unemployment, as well as to take a closer look at the dynamics of labor re-allocation in the labormarket and unemployment at a more disaggregate level.

2. Unemployment3

Equilibrium and long-term unemployment

What is the size of structural unemployment in Poland, that is such unemployment which do notdisappear alongside production growth? This question may be answered only after a longer period oftime during which the unemployment rate value would be revealed in all phases of the business cycle. Atpresent we are in the phase of economic growth and therefore we may observe only the medium-termstructural unemployment rate, whose value only in the future can become a basis for determining thenatural unemployment rate.Nonetheless, the initial studies of NAIRU value have shown its significant level. According toTabeau’ s and Starzenski’ s estimates (1995) based on 1990-94 data the long-term NAIRU wasconsiderably higher than the actual unemployment rate and amounted to 20.52%.

Utilizing our data base we have estimated the values of the unemployment rate in equilibriumunderstood as the equilibrium of inflows into and outflows from unemployment.4 Table 1 includes datadescribing values of the rates of total unemployment, unemployment in equilibrium, as well as long-termand temporary unemployment. There are two observations that may be made as regards changes in the 3 This fragment was prepared on the basis of individual data derived from LFS, covering the periodbetween May 1992 - August 1996, made available by Central Statistical Office and independentlyelaborated by the authors. All results refer to the people in the occupational activity age group (we leftout people at post-productive age), i.e. men at the age of 15-64 years and women 15-59 years. Thatis why they differ from the results for the entire population covered by LFS. This refers not only toanalyses by age groups, but also by other cross-sections in which in our study people at the post-productive age have been left out. Calculations were performed on specially set up quarterly panels.The LFS sample is of an rotating character, i.e. in each quarter 1/2 of the respondents are replaced.Those people are surveyed again in the following quarter, whereas others are withdrawn from thesurvey. In order to recognize changes in people’s situation in the labor market (in particular toevaluate probabilities of changing individual states) 1/2 of respondents should be observed over twoconsecutive quarters. We named such samples quarterly panels. Those panels are marked by themonth when they were surveyed for the first time, e.g. panel II-92 is a sample surveyed in Februaryand May 1992. The unemployment rate and other measures used in the survey are calculated for thefirst observation, with the exception of flows, which characterize the population with regard to theirplace in the labor market at the beginning and at the end of a quarter.4 The method that has been used here, as well as the formula for calculating the unemployment ratein equilibrium are described in: Darby M. R., Haltiwanger J. and Plant M. [1986]

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equilibrium unemployment rate. First, that it is systematically declining every passing year, andsecondly, its high share in the total unemployment rate (on the average it is lower by merely about 1percentage point than the actual unemployment rate). The fact that unemployment in equilibrium wasdeclining would evidence that the structural basis of unemployment was losing some of its significance.However, this result should be treated with certain caution since so understood structural unemploymentrate yields "good” results in a long-term survey, particularly if it covers a full business cycle.Meanwhile, merely four good years have been observed. Nevertheless, such a result makes it possible tohypothesize that the radical reduction of the equilibrium unemployment rate leaves "room" for furtherreducing total unemployment.

It is worth noting, however, that on the average over four years the level of equilibrium unemploymentwas lower than the level of total unemployment by merely about 1 percentage point; therefore, non-structural factors played a relatively insignificant role in shaping the level of unemployment. In trying tofind ways for a more radical reduction of unemployment one should look at those characteristics of thelabor market and its "environment" that affect the level of structural unemployment.

Table 1Unemployment in one-year periods*Types of Unemployment rates Share in total unemploymentunemployment Average for 4 quarters

V92-II93 V93-II94 V94-II95 V95-II96 V92-II93 V93-II94 V94-II95 V95-II96Total 0.137 0.149 0.146 0.139 1.000 1.000 1.000 1.000Equilibrium** 0.148 0.145 0.128 0.109 1.080 0.977 0.873 0.786Temporary** 0.032 0.037 0.035 0.031 0.243 0.258 0.249 0.232Long-Term** 0.063 0.067 0.069 0.062 0.457 0.450 0.474 0.448Notes:* All figures were calculated on the basis of LFS data compiled in the form of quarterly panels, i.e. combining informationon respondents in two consecutive surveys carried out at quarterly intervals.** The types of unemployment given were defined as follows:Equilibrium - unemployment that occurs in the situation of equal inflows and outflows, having eliminated the effect ofchanges in labor force sizeTemporary - lasting for a period of less than 2 quartersLong-term - lasting for a period of 12 months or more

The share of unemployment lasting for one year or more has not declined significantly despite the dropin unemployment rates. In 1992-96 it amounted to 45-47%. The long-term unemployment rate hasdeclined in the past three years almost identically (by about 7%) as the total unemployment rate. That iswhy the duration-based unemployment structure has remained relatively stable since 1992, and theunfavorable structural proportions shaped at the beginning of the transition (small share of short-term -less than two quarters - unemployment, large share of long-term - one year or more - unemployment)have actually been maintained to date. Economic recovery has not resulted in better matches in the labormarket, which would make it possible for the unemployed to find a job quickly.

10

Fig. 10

Unemployment rate: total, structural, long term

0.00

0.02

0.04

0.06

0.08

0.10

0.12

0.14

0.16

V92-II93 V93-II94 V94-II95 V95-II96Annual average in quarters

Total U

Structural U

Long-term U

At the same time, however, a small decline in long-term unemployment suggests that such a fast ashitherto reduction of the equilibrium unemployment rate cannot be expected. It may be hypothesizedthat in Poland there is still "room" for reduction of unemployment (as equilibrium unemployment isdeclining), though it is already very close to its limit (as equilibrium unemployment becomes close tolong-term unemployment).

Unemployment duration and inflows to unemployment

A symptom of difficulties in reducing unemployment is its long average duration. The longer it is, thegreater is the probability of the occurrence of hysteresis. In this context, its relatively long durationshould be considered one of the more disquieting characteristics of Polish unemployment. This arousesfears that further outflows from unemployment would be restricted because of lower attractiveness ofthe long-term unemployed for employers. Small outflows - despite favorable business trends - willprevent more significant reduction of unemployment.

The average duration of unemployment was clearly declining until the beginning of 1995, though lateron it became stable. On the average, at the beginning of 1996 the average duration of unemploymentwas 11 months. Taking into account the fact that the share of temporary unemployment (i.e. shorterthan two quarters) amounted at that time to about 23%, it may be concluded that a large group of thelong-term unemployed were unemployed for a period much longer than one year. This points to arelatively permanent separation of a large number of the unemployed from work and a great scale ofdifficulties in finding a job. Therefore, the reduction of unemployment rates was not concurrent withaccelerated rotation of the unemployed. The situation was actually the opposite: the number of theunemployed was declining thanks to an increased ration of outflows from unemployment to inflows,though their scale was becoming smaller (cf. Table 2).

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Table 2The completed average duration of unemployment spells (in quarters)Duration of unemployment Average in quarters:

V92-II93 V93-II94 V94-II95 V95-II96With equal inflows into and outflows fromunemployment 4.647 4.050 3.828 3.913Changes in unemployment duration due to inequalityof outflows from and inflows into unemployment

0.238 0.052 -0.132 -0.121Total: Average duration of unemployment 4.885 4.102 3.697 3.791

In the period V.1992-II.1994 the duration of unemployment was going down, although inflows tounemployment were higher than outflows (unemployment was growing). On the contrary, in the periodV.95-II.96 inflows to unemployment were lower than outflows (unemployment was declining), but theaverage duration of unemployment increased. This is an evidence of certain stagnation as regards thecomposition of the unemployed population and suggests their permanent maladjustment to therequirements of the labor market. On the other hand, a smaller number of jobs reported to labor officesindicates a declining need for recruitment of new employees. Economic upswing requires somesupplementary employment, thanks to which unemployment is reduced, though at the same time thereduction of flows in unemployment shows that the competitiveness (attractiveness) of the unemployedfor employers is diminishing - as compared with the employed.

Fig. 11

Average Duration of Unemployment in Quarters

-0.5

0.5

1.5

2.5

3.5

4.5

5.5

V92-II93 V93-II94 V94-II95 V95-II96

Annual Average

At I=O

Caused by Inot=O

Aggregate

3. Flows as a source of reduction of unemployment

Net flows

The unemployment rate decline was due to the increase of net flows (outflow minus inflow) fromunemployment to employment. Such a favorable process was going on throughout the period understudy, that is it began as early as 1992, though the absorption of the unemployed into employmentassumed a broader scale as of spring 1993. At the same time, net flows to unemployment from outsidethe labor force were declining - last year they almost ceased to exist totally - which allowed for astronger impact of employment growth on the reduction of unemployment.

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Table 3Unemployment rate and its changes caused by net flows to other labor market states

Average in QuartersV92-II93 V93-II94 V94-II95 V95-II96

Unemployment rate - average as at the beginning of 4quarters

0.137 0.149 0.146 0.139

Average change of unemployment rate due to net flowsto employment

-0.003 -0.007 -0.009 -0.009

Average change in unemployment rate due to net flowsfrom outside labor force

0.004 0.003 0.003 0.000

Total: Changes in unemployment rate 0.001 -0.004 -0.006 -0.008

Both the annual average and quarterly analyses confirm that in the first two years of key importance forthe reduction of unemployment was the intensification of net flows of the unemployed to employment,whereas in the subsequent two years the weakening of flows to unemployment from outside the laborforce. Therefore, the economic upswing exerted a certain stable impact on the labor market, almostequally reducing each year (beginning with spring 1993) the unemployment rate. In fact, however,continuation of the positive trends in the recent period was more due to lower inflows to unemploymentfrom outside the labor force than to increased demand for labor.

Fig. 12

Changes in unemployment rate (u) caused by outflows for

unemployment to employment (UE) and outside the labor force (UN)

-0,040

-0,020

0,000

0,020

0,040

0,060

0,080

0,100

0,120

0,140

0,160

V-92

VIII-92

XI-92

II-93

V-93

VIII-

93XI-93

II-94

V-94

VIII-94

XI-94

II-95

V-95

VIII-95

XI-95

II-96

V-96

u

UE

UN

The quarterly analysis shows (Fig. 12) that the impact of employment on unemployment was clearlyseasonal - in early spring (quarter beginning in February) the excess of the number of people hired forjobs from unemployment over the number of people dismissed at that time who become unemployed wasthe highest, which caused that the drops in unemployment rates were concentrated at that point in time.All the more so as at that time net flows between unemployment and not in the labor force reached lowvalues. Still at the turn of 1994/95, the autumn-winter season (quarter beginning in November) wascharacterized by inflows from employment to unemployment exceeding outflows in the oppositedirection, which resulted in the increase of the unemployment rate. Later on, the unemployment rate wasno longer increased directly due to limited employment.

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Gross flows

Net outflows to employment increased, while the scale of gross inflows from employment tounemployment was systematically decreasing, which means that an ever smaller number of job losers orquitters entered unemployment. On the other hand, gross outflows from unemployment to employmentrevealed a dramatic increase in 1993, after which their scale grew only slightly, and last year evendeclined. Therefore, the economic upswing had a more favorable impact on the situation of those whowere employed (it was easier to keep a job) than the unemployed (lesser opportunities for finding a job).

Net outflows outside of the labor force declined due to two changes in flows. First, following a one-yearincrease occupational activation of people who failed to find a job started to wane. In the last year underobservation, inflows to unemployment caused by inflows from outside the labor force were even clearlysmaller than in the first year. Secondly, the increasing withdrawal of the unemployed from the labormarket had a reducing effect on unemployment. This means that there was intensified resignation fromundertaking job-seeking efforts on the part of people who - objectively - had little chances of finding ajob.

Table 4Rates of gross flows to and from unemployment, and their direction (in relation to unemployment stock)Gross flows to and from unemployment Average in quarters

V92-II93 V93-II94 V94-II95 V95-II96Total inflows 0.244 0.243 0.228 0.204

Inflows from employment 0.138 0.128 0.118 0.108Inflows from outside labor force 0.106 0.114 0.110 0.096

Total outflows 0.235 0.268 0.267 0.261Outflows to employment 0.162 0.175 0.178 0.169Outflows outside labor force 0.073 0.092 0.088 0.092

Quarterly changes in gross outflows and inflows were somewhat synchronized - in the period from earlyspring to summer outflows of the unemployed intensified and inflows to unemployment lessened,whereas in the autumn-winter season the reverse was observed. Quite surprisingly at the same timewhen employment of the unemployed was intensified the outflows from unemployment to outside thelabor force were increasing. One of the explanatory hypotheses assumes that those people who hadearlier remained unemployed declared to the interviewers that they had stopped looking for work,though they did not want to reveal that it was because they found gainful employment in the gray area.Unfortunately, we have no convincing evidence to support this hypothesis.

The largest inflows from outside the labor force to unemployment took place after the date of school-leaving (quarters: May-August) and were related to - partially - with the benefits the unemploymentregistration system provided for the graduates. Those benefits were gradually reduced, which at a laterdate - not covered by the data that were available to us - could have caused a more radical decline ofinflows to unemployment and their even lesser concentration in time.

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Fig. 13

Changes in unemployment stock versus gross inflows to (+) andoutflows(-) from unemployment (in relations to unemployment size

from the beginning of each quarter)

-0,400

-0,300

-0,200

-0,100

0,000

0,100

0,200

0,300

0,400

V-92

VIII-92

XI-92

II-93

V-93

VIII-93

XI-93

II-94

V-94

VIII-94

XI-94

II-95

V-95

VIII-95

XI-95

II-96

V-96

inflows

outflows

unemploymentstock

Fig. 14

Inflows (+) and outflows (-) from unemploymentin relation to the unemployment stock

-0.25

-0.20

-0.15

-0.10

-0.05

0.00

0.05

0.10

0.15

0.20

V-92

VIII-92

XI-92

II-93

V-93

VIII-93

XI-93

II-94

V-94

VIII-94

XI-94

II-95

V-95

VIII-95

XI-95

II-96

V-96

E->U

U->E

N->U

U->N

Gross outflows from unemployment to employment changed at a clearly seasonal pattern and since1994 (and more pronouncedly since 1995) inflows from employment to unemployment have assumed asimilar nature. In spring-summer employment of the unemployed intensified and the scale of dismissalsresulting in unemployment was shrinking. Such a regularity of inflows did not occur earlier, whichwould mean that at that time dismissals were more independent of seasonality and had other causes(mostly the shock of transition).

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Fig. 15Quarterly average probabilities of changing a labor market state

In the period under study only the probabilities of outflow from unemployment increased, while theprobabilities of outflows from other states declined. This explains the mechanism of the drop inunemployment. Unemployment and employment were to a lesser degree affected by changes inparticipation rate, while unemployment and economic inactivity to a lesser degree grew due todismissals from work. Those were the main reasons for the decline in unemployment.

At the same time, the probability of outflow from unemployment to employment - taking into accountthe averages for the quarters from May 1995-February 1996 to May 1992-February 1993 - increasedby merely 4.5%, whereas probabilities of outflow from unemployment to outside the labor force grewby 25.4% (cf. Table 4). Therefore, although the ending of unemployment more frequently (on theaverage over 4 years) consisted in finding a job than resigning from efforts to find it, this excess wasgrowing smaller and smaller. Such changes in the proportions of outflows from unemployment provethat the significance of various barriers restricting employment of the jobless was growing.Summing up:• In 1992-1996 the rate of unemployment was declining (especially since 1993), which, however, in

the last two years was not due primarily to intensification of net outflows to employment, but toreduced net inflows from outside the labor force.

• The continuing stable level of unemployment being reduced by employment was rather aconsequence of a lesser number of people who lost their jobs than intensified outflows fromunemployment to employment.

• The decline of net inflows to unemployment from outside the labor force was in a large extent due todeactivation of a part of the unemployed accompanied by a simultaneous, stable inflow of newunemployed coming from the group of new entrants to the labor market.

Those tendencies point to merely moderately successful efforts aimed at reducing unemployment. Theunemployment figure was declining thanks to lower rate of participations and reduced inflows fromemployment, which indicates certain "freezing" of the composition of the employed and the unemployed,and prolongs the period of remaining in each of those conditions. This reflects poor competitiveness ofthe unemployed as compared with the employed (both due to their behaviors, as well as the qualities ofhuman capital) and/or the barriers to their hiring (mechanisms of insiders-outsiders, efficiency wages,excess of specific over general human capital, structural mismatches in the strict meaning of this term,etc.). Therefore, they may be considered to be symptomatic of structural unemployment in the broadmeaning of the term.

Not in laborforce Employment

employment

Unemployment

0,020

0,172 0,088

0,034

0,024

0,043

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3. Persistence of differences in unemployment rates

Unemployment in Poland is characterized by permanent group differences. To study the structuralaspects of unemployment it would be most desirable to analyze differences reflecting non-homogeneousqualities of human capital in individual groups or other features preventing employment despite theexisting demand for labor, and in particular pointing to those groups which cannot take up a jobalthough they could have performed it according to the requirements of the existing vacancies. Thediversification of unemployment rates by occupations and geographical distribution of labor force areusually studied for that purpose.

However, the persistence of differences in unemployment for groups distinguished on the basis of othercriteria suggests that no effective balancing mechanism is operating in the labor market. And both withrespect to labor supply and demand characteristics, as well as in view of the absence of effective wageadjustment it is impossible to absorb entire labor supply even if the economic conditions are favorable.

Fig. 16

Unemployment rate by education

0.02

0.04

0.06

0.08

0.10

0.12

0.14

0.16

0.18

0.20

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17Quarters

LO

P

SZ

W

ZSZ

Notes: LO - general secondary school; P - elementary school; SZ - secondary vocational school; W - university;ZSZ - basic vocational school

Deep inter-group diversification that is characteristic of Poland and which has been continuingthroughout the transition period suggests that there are barriers to effective clearing of the labor marketand that there is structural unemployment in the broad meaning of this term. The most profoundunemployment differences are characteristic of people with specific occupations performed for at least 6months, as well as people who have no such job practice. Mismatch indexes5 for occupations, includinga group with no occupational experience as a separate category, assume highest values. As many as65% of the labor force would have to change so understood occupational groups in order to equalizeunemployment rates in the four year period under study. When only people having job experience longerthan six months are taken into account, the mismatch index declines to 19% (which is the second highestresult). Out of the remaining cross-sections the mismatch is highest in the case of age groups - 13%. In 5 Mismatch measures have bee calculated according to the formula 1/2varui/u (Layard, Nickell,Jackmann 1991, chapt. 6)

17

the light of the above data it seems that it is not age as such that causes such a high diversification ofunemployment rate, but the associated entering into the labor market and absence of occupationalexperience.

One variable describing another characteristic of labor force - education was associated with themismatch amounting to almost 4%. All the above-mentioned methods of grouping labor force in relationto their occupational characteristics reveal significant mismatches prevailing in the labor market.6 Whatis more, in the period under study mismatch indexes were growing, with the exception of certainimprovement at the turn of 1993 and 1994 for the group with no occupational experience (later on,however, difficulties with finding a job have again intensified as compared with other groups).

Fig. 17

Unemployment rate by age

0.01

0.06

0.11

0.16

0.21

0.26

0.31

0.36

0.41

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17Quarters

15-17

18-24

25-44

45-59/64

older

A somewhat different picture can be seen while analyzing unemployment rate dispersion, that is whenthe size of the population characterized by diversified unemployment rates has no effect on theevaluation of those dispersion. The highest unemployment rate differences - measured by variabilitycoefficients - were related to age and education, slightly smaller for occupational groups, among whicha group without occupational experience was distinguished as a separate category. The diversificationof unemployment rates by occupations was clearly smaller, which indicates that permanent differencesin the labor market are more related with education (general human capital) and occupational experience(company-specific human capital) than profession. The high "position" of occupation with respect tomismatch was a result of numerically equal occupational groups. In order to equalize unemploymentrates much greater shifts of the labor force would be necessary despite the fact that the unemploymentrate differences between them were lower than for groups differing with respect to education.Nevertheless, the educational and occupational groups are characterized by the greatest differencesbetween the average unemployment rate to the lowest unemployment rate in a given classification are 4to 6-fold).

6 Mismatch indicators usually grow faster the more the groups have been disaggregated and thegreater sub-populations belong to groups situated at the extremes of the scale of the observedcharacteristic, in this case unemployment.

18

Fig. 18

Unemployment rate by regions

0.08

0.10

0.12

0.14

0.16

0.18

0.20

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17Quarters

A

B

C

D

E

Geographical differences in unemployment rates were similar to occupational differences if measured byvariability coefficients. Although they are significant, geographical differences in unemployment - ifanalyzed in cross-sections bigger than voivodships - do not suggest that the shifts between types ofvoivodships with a given dominant type of economy had to be of a large scale in order to makeunemployment rates equal (mismatch amounted to about 1% for voivodship types and categories oflocalities). During the period under study, locality category was losing significance as a factor causingdifficulties in matches, and regional inequalities were growing.7 This would indicate that economicrecovery in certain regions draws into employment ever more evenly people living in various categoriesof localities and/or that the scale of shuttle migration (commuting to work) has increased. At the sametime, regional labor movements had to remain small, and economic upswing unequally occurred in thedistinguished groups of voivodships.

Fig. 19

7 Regions were classified as follows:

A. balanced employment structure with a high share of services (9 voivodships)B. balanced employment structure with a low share of services (5 voivodships)C. predominant employment in industry (6 voivodships)D. predominant employment in private farms (14 voivodships)E. predominant employment in public sector and cooperative farms (15 voivodships)

19

Unemployment rates by categories of localities

0.00

0.05

0.10

0.15

0.20

0.25

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

Quarters

town>100,000

town 50-99, 000

town 20-49,000

town <20,000

village

The smallest differences - with regard to each measure used in this survey - occurred in the labor marketwith respect to gender. Only the scale of the variability coefficient reminded the values obtained foroccupational cross-sections. Though the diversification of unemployment rate characteristic ofoccupational cross-sections was growing, whereas for sex cross-sections was declining.

Fig. 20

Unemployment rates by sex

0.05

0.07

0.09

0.11

0.13

0.15

0.17

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17Quarters

M

F

Interesting results are also obtained while comparing mismatch indices for long -term and totalunemployment. Differences occurring in almost every cross-section become ever more profound, whichproves that the analyzed characteristics not only induce inter-groups inequalities in the labor market, butalso very strongly determine permanent unemployment, and thus also structural mismatches. Evengender, which did not constitute a significant determinant of diversification of equilibrium in the labor

20

market, turned out to be a relatively important factor of differences in long-term unemployment. Onlyage determined to a lesser degree diversification of long-term than total unemployment. On this basis itmay be inferred that most difficult is to take up the first job which provides one with some jobexperience. However, young people "extricate" themselves from unemployment more easily than anyother age group. This fact may be attributed to their relatively high mobility (Sztanderska,1995), as wellas labor market policy concerning graduates, which virtually encouraged them to remain unemployedduring the first year after leaving school (Herk, Socha, Sztanderska 1995). Making this policygradually more restrictive should reduce the willingness to remain unemployed and such a tendency maybe in fact perceived when we observe mismatch indicators for long-term and total unemployment.

Fig. 3.6

Average mismatch for unemployed (U) and long-termunemplyed (LTU)

0,000

0,020

0,040

0,060

0,080

0,100

0,120

0,140

gender age education region categoryof locality

U

LTU

Summing up:1. Of key significance for maintaining group imbalances in the labor market was the factor of

professional skills. Within this factor, absence of occupationall experience turned out to be the mostdiscriminating feature, then short employment period (age may be treated in this respect as asubstitute characteristic), education and occupation. The latter two characteristics assumed adifferent dimension in the context of labor transfers necessary to equalize unemployment rates (alarge scale of transfers was required by occupations), and quite different when they were comparedwith respect to the threat of unemployment (differences were markedly greater for various levels ofeducation).

2. Geographical difference almost in every respect played a lesser role in maintaining partialimbalances in the labor market compared with skills difference; sex was an insignificant factor.

3. During the period under study imbalances related to qualifications and regional geographical cross-section were markedly growing, whereas those dependent on the type of locality and sex werediminishing, which indicates a growth of typically structural imbalances in the labor market.

4. Young age was losing significance as a determinant of long-term unemployment compared with otherage groups and other characteristics, which would indicate that the structural basis of unemploymentwas more related to the level of education and occupation than job seniority, as pointed to bydifferences in total unemployment.

4. Conclusions

21

Despite favorable changes in the Polish labor market in the recent period negative tendencies havecontinued, which in the future may become manifest in the stabilization of the unemployment rate andthe inflation rate at a relatively high level. The scale of unemployment in equilibrium (that is broadlyunderstood structural employment) in relation to actual unemployment is very large, which endangersthe processes of economic stabilization, and makes it difficult to permanently reduce unemployment.Stabilization of long-term unemployment may generate the effect of hysteresis, with its unfavorableconsequences. Halting the dynamics of labor market flows may reflect the weakening of labor re-allocation processes, thus undermining the restructuring of the Polish economy. Finally, the continuationof significant differences, primarily with respect to human capital, that is most persistent and difficult toovercome, does not allows for making fast progress in reducing structural unemployment, and at thesame time favors segmentation of the labor market. It may threaten with a growth of social tensions andlessening of public support for programs of increasing competitiveness and adjusting the Polisheconomy to the standards of the European Union.

22

References

• Brauer H., Falk M., Raiser M. [1996], Labour Markets in Poland and Hungary Five Years from the Start ofTransition: Evidence from Monthly Data, Kieler Arbeitspapier Nr 742, Institut fur Weltwirtschaft Kiel.

• Boeri T. [1977], Labour Supply, w: Boeri T., Kollo J. and Burda M., Labour Market in Central Europe andthe EU Enlargement, Papers for A CEPR/IEWS Conference Economic Policy Initiative Forum, Portoro¿,June 13-15, CEPR and IEWS

• CEPR [1995], Unemployment: Choices for Europe, CEPR, London• CSO [1997], Labour Force Survey in Poland. November 1966, Central Statistical Office, Warsaw• Darby M. R., Haltiwanger J. and Plant M. [1986], Unemployment Rate Dynamics and Persistent

Unemployment under Rational Expectations, American Economic Review, Vo. 75 No. 4• Gora M. And Lehmann H. [1995], How Divergent is Polish Labour Market, IFO Discussion Paper No 156• Herk L., Socha M. and Sztanderska U. [1995] , The Influence of Unemployment Insurance on the

Functioning of the Polish Labor Market, Polish Policy Research Group Discussion Papers No 36, Facultyof Economic Sciences, University of Warsaw, Warsaw

• Jackman R. [1995] Economic Policies, Employment and Labour Markets in Transition in Central AndEastern Europe, Centre for Economic Performance DP No. 265, LSE London

• Jackman R. And Pauna C. [1997], Labour Market Policy and the Reallocation of Labour Across Sectors,Centre for Economic Performance DP No. 338, LSE London

• Layard R., Nickell S., Jackman, R. [1991], Unemployment. Macroeconomic Performance and the LabourMarket, Oxford University Press, Oxford, New York

• OECD [1994], OECD Job Study, Paris• Phelps E. S. [1994], Structural Slumps. The Modern Equilibrium Theory of Unemployment, Interest, and

Assets, Harvard University Press, Cambridge and London• Pujol T. [1996], The Role of Labour Market Rigidities During the Transition: Lessons from Poland, IMF

Working Paper No. WP/96/77, Washington• Rutkowski J. [1996], High skills pay off; the changing wage structure during economic transition in

Poland, Economics of Transition, Volume 4(1)• Newell A. And Socha M. W. [1997], The role of privatisation and internationalisation in wage distribution

in Poland 1992-95, Paper prepared for ACE Conference „ EU Enlargement and the World TradingSystem. The Case of Poland” , Warsaw 1996 June 27

• Snower D. J. and de la Dehesa G. Eds. [1997], Unemployment Policy. Government Options for the LabourMarket, Cambridge University Press, Cambridge

• Socha M. W. and Sztanderska U. [1996], The Development of Non-agricultural Private Sector and LabourMarket Transitions, Economic Discussion Papers No 27, Faculty of Economic Sciences, University ofWarsaw

• Socha M. W. and Sztanderska U. [1997], Dynamika i struktura przeplywow sily roboczej na rynku pracy wlatach 1992-1996((Dynamic and Structure of the labour force flows in the labour market during 1992-1996),in: Polski rynek pracy w latach 1990-1996 (Polish Labour Market during 1990-96), Instytut SprawPublicznych, Warsaw

• Sztanderska, U. Ed.[1995], Rynek pracy w Polsce 1993-94(Labour market in Poland 1993-94), IPiSS,Warszawa

• Sztanderska, U. [1997] Changes in the Labor Market. From Rapid Collapse to Step-by-Step Reconstructionof the Demand for Labor, in: Social Report, UNDP

• Tabeau A. And Starzenski O. [1995], Wage Formation in Poland in Transition Period, in; 7th AnnualEALE Conference Proceedings Volume 4, September 7 - 10, Lyon

23

AnnexTable A1Basic labor market characteristics 1992-1996

Average Median Max Min Standarddeviation

Variabilitycoefficient

Unemployment rate

total 0.142 0.141 0.159 0.125 0.009 0.066

in equilibrium 0.131 0.123 0.209 0.071 0.035 0.268

long term 0.065 0.064 0.077 0.055 0.006 0.092

duration of unemployment 4.199 4.105 5.788 3.218 0.794 0.189

Probability of outflow

from unemployment to employment 0.172 0.177 0.237 0.104 0.041 0.239

from unemployment to outsidelabor force

0.088 0.085 0.125 0.050 0.022 0.255

from employment to unemployment 0.020 0.020 0.026 0.013 0.004 0.177

from employment to outside laborforce

0.024 0.022 0.050 0.013 0.010 0.408

from outside labor force toemployment 0.043 0.041 0.096 0.017 0.020 0.459

from outside labor force tounemployment

0.034 0.030 0.058 0.019 0.012 0.344

Mismatch

sex 0.0061 0.0048 0.0130 0.0009 0.0033 0.5393

age 0.1337 0.1272 0.2004 0.1046 0.0237 0.1774

education 0.0376 0.0366 0.0534 0.0222 0.0094 0.2487

regions 0.0105 0.0097 0.0177 0.0043 0.0038 0.3634

category of locality 0.0121 0.0117 0.0284 0.0041 0.0061 0.5003

occupation - incl. groups withoutwork performed for at least sixmonths*

0.6514 0.6432 0.8274 0.5242 0.0935 0.1436

occupation - only people who haveworked for at least six months* 0.1903 0.1727 0.5530 0.1326 0.0969 0.5092

Notes:* In observations V.92-II.93 and V.93-II.94 different classification criteria for occupations were used than inlater periods, therefore the appropriate indices for those two periods are not directly comparable with oneanother.

24

Table A2Unemployment rates by selected characteristics, annual averages for the period: May 1992-May 1996

Unemployment rates in periods:*

Characteristics V92-V93 V93-V94 V94-V95 V95-V96 V92-V96

by sex

Men 0.121 0.130 0.128 0.124 0.124

Women 0.145 0.157 0.156 0.145 0.150

by age

15-17 years 0.082 0.090 0.089 0.135 0.103

18-24 years 0.322 0.346 0.357 0.352 0.342

25-44 years 0.130 0.144 0.138 0.129 0.134

45-59/64 years 0.081 0.085 0.085 0.079 0.082

older 0.030 0.029 0.028 0.022 0.027

by education

Higher (W) 0.051 0.045 0.037 0.029 0.039

Secondary vocational (SZ) 0.135 0.125 0.122 0.117 0.123

Secondary general (LO) 0.130 0.153 0.159 0.158 0.149

Basic vocational (ZSZ) 0.166 0.180 0.178 0.166 0.171

elementary and lower (P) 0.117 0.141 0.141 0.139 0.134

by regions

Balanced with services (A) 0.127 0.135 0.129 0.122 0.126

Balanced without services (B) 0.146 0.151 0.137 0.133 0.140

Industrial (C) 0.136 0.135 0.133 0.125 0.131

Agricultural, private (D) 0.100 0.122 0.126 0.120 0.116

Agricultural, public (E) 0.158 0.175 0.178 0.167 0.169

by category of locality

Town 100,000 inhabitants and more

0.141 0.143 0.134 0.121 0.134

Town 50-99,000 inhabitants 0.158 0.174 0.166 0.151 0.161

Town 20-49,000 inhabitants 0.164 0.177 0.169 0.158 0.166

Town less than 20,000 inhabitants

0.172 0.195 0.185 0.172 0.180

Village 0.114 0.128 0.133 0.132 0.125

Total 0.132 0.143 0.141 0.134 0.136

Notes:*on the basis of LFS data, period averageSource: U. Sztanderska, Changes in the Labor Market. From Rapid Collapse to Step-by-Step Reconstruction ofthe Demand for Labor, UNDP Social Report, Poland1997

25

Table 3AAnnual average measures of group diversification of unemployment ratesValues Quarterly averages

V92-II93 V93-II94 V94-II95 V95-II96

Mismatches for unemployment

Sex 0.0058 0.0066 0.0066 0.0045

Age 0.1216 0.1200 0.1369 0.1577

Education 0.0272 0.0352 0.0408 0.0441

Region 0.0101 0.0087 0.0111 0.0105

Category of locality 0.0137 0.0152 0.0103 0.0099

Occupation - incl. groups without work performedfor at least six months* 0.7832 0.6127 0.5710 0.6405

Occupation - only people who have worked for atleast six months* 0.1402 0.1524 0.1793 0.2814

Variability coefficients

Sex 0.1068 0.1117 0.1104 0.0886

Age 0.4926 0.4896 0.5227 0.5589

Education 0.2321 0.2644 0.2851 0.2962

Region 0.1413 0.1306 0.1472 0.1409

Category of locality 0.1635 0.1671 0.1394 0.1382

Occupation - incl. groups without work performedfor at least six months* 0.1716 0.1643 0.1562 0.1566

Occupation - only people who have worked for atleast six months* 0.0342 0.0422 0.0810 0.1045

Relation of average unemployment rate to lowest valueunemployment rate

Sex 1.1081 1.1149 1.1145 1.0902

Age 1.6923 1.7474 1.7264 1.7625

Education 2.7986 3.4749 4.2773 5.0697

Region 1.0605 1.0817 1.1199 1.1208

Category of locality 0.9748 1.0423 1.0923 1.1472

Occupation - incl. groups without work performedfor at least six months* 5.8020 5.6457 7.4169 6.6480

Occupation - only people who have worked for atleast six months* 4.6182 4.9291 6.1027 6.0191

Notes:* as for Table 1A** in observations V.92-II.93 and V.93-II.94 occupational group 5 was the group of reference (6 groups weredistinguished), whereas in observations V.94-II.95 and V.95-II.96 group 7 (9 were distinguished).

26

Table 4ARelation of mismatch for long-term unemployed to unemployedCharacteristics Quarterly averages

V92-II93 V93-II94 V94-II95 V95-II96Sex 2.185 2.834 3.220 4.481Age 0.389 0.405 0.401 0.331Education 0.694 1.041 1.070 1.261Region 0.922 1.362 0.905 1.236Category of locality 1.404 1.487 1.538 1.374