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Labour Supply in a High Unemployment Economy: Introduction

Labour Supply in a High Unemployment Economy: IntroductionFollowing the regime change in the European Transition Countries (ETCs), employment, output, wages and prices suddenly ceased being set by central planners and became determined by market forces. These developments brought profound changes in the economic behaviour of individuals residing in these countries. The labour force participation (LFP) rate in ETCs prior to 1989 was higher than their level of economic development would predict, which was thought to be due to central planners providing subsidised childcare that reduced the costs of employment for mothers, kept real wages low and enforced laws obliging all eligible adults to work.
Kosova was one of the last countries to embark on the road of transition to a market economy. Before 1990, it was the poorest region in the former Yugoslavia with a per capita social product of a quarter of the Yugoslav average in 1989. During 1990-1995, GDP contracted by 50 percent compared to its pre-transition level. Since emerging from the military conflict in 1999 and a decade of disinvestment, GDP is recovering and has now reached the level of around €1,000 in per capita. However, it remains the lowest of all SEE countries.
Labour market developments in Kosova following the regime change are different in many respects from those found in other transition economies. In the early 1990s, some 145,000 workers (about 60 percent of employment in 1989) were dismissed from their jobs. Kosova is known for its young population and large-scale emigration, both of which influence the size and the age composition of its domestic labour force. Nearly one-third of the population is under the age of 15, implying a large number of new entrants into the labour force each year. As a consequence of its recent history, young population and persistent high unemployment, approximately 20 percent of the population (that is half a million people) are emigrants, whose remittances are estimated at the level of 13 percent of GDP.
Kosova suffers from chronic labour market failure, with the young, females and the long-term unemployed bearing a disproportionate burden of the costs of this failure. The unemployment rate that is estimated at around 40 percent is predominantly long-term (88 percent of the unemployed) and the unemployed are mainly youths of age 15-24 (66 percent). The employment-to-population ratio of 30 percent is relatively low compared to that in neighbouring countries. Based on the Riinvest Household and Labour Force Survey (HLFS), the LFP rate is estimated at 58 percent with large gender, urban-rural and education related differences.
In this paper, concentrating upon the case of Kosova we investigate the determinants of labour supply. The analytical framework that we utilise takes full account of the distinctive features of the Kosovan labour market. In section 2, we introduce the theory and critically assess previous empirical approaches to estimating the labour supply function. In Section 3, we explain our estimation strategy and in Section 4 we report our findings paying particular attention to gender and urban/rural differences as these raise specific developmental concerns in Kosova. In Section 5, we assess the appropriateness of the ILO guidelines in determining an individual’s labour force status in developing/high unemployment economies. We investigate if the discouraged workers (i) can be statistically differentiated from the rest of the inactive population and (ii) their similarities with the ILO unemployed. We also examine the determinants of engaging in job search, again concentrating upon differences between the discouraged and ILO unemployed workers. In Section 6, we consider the policy implications of our findings, which also suggest the need for a different analytical framework to analyse the labour market in Kosova. The data used in the empirical investigations comes from the Riinvest HLFS, which we explain in Section 3.