HETEROGENEOUS WORKERS, ECONOMIC TRANSFORMATION AND THE STAGNANCY OF TRANSITIONAL UNEMPLOYMENT

In an environment of intense structural change being unemployed convey s a bad signal. A simple model is developed which accounts for the sta gnancy of the unemployment pool in transitional economies in spite of major worker reallocation occurring in these countries. The model pred icts that the tightening of unemployment benefits can hardly boost out flows to jobs once mass unemployment has built-up as there are at this stage too many low-productivity workers in the pool. The implications of the model are consistent with evidence on gross job flows, wage di fferentials, and the effects of the tightening of unemployment benefit systems in Eastern Europe. (C) 1997 Elsevier Science B.V.