ENTERPRISE RESTRUCTURING AND SOCIAL BENEFITS

Soviet era firms provided generous social benefits, including health a nd child care. Despite recent cuts, firm survey data show that benefit s have remained a major component of total compensation. With benefits largely firm-specific and firms dominated by insiders, continuing att achment of workers as well as widespread informal sector participation has resulted. This has impeded restructuring, in part by generating s ignificant set-up costs for new private firms. We simulate the effects of a cut in subsidies to benefits provision. We show that while this leads to falls in benefits and employment and an increase in wages, th e outcome critically depends on the availability of alternative provid ers. The key to cushioning these adverse consequences is the stimulati on of a market in benefits provision. Given initial conditions, rapid removal of benefits supports will require transitional income support to avoid under-consumption of these goods. We provide the design of a simple scheme of transitional support and show that it can be financed from the savings from removal of current subsidies to benefits.