Labour market policy and the reallocation of labour across sectors

This paper investigates the extent of labour market allocation across broad industrial sectors in the transition of economies of Eastern Europe since 1989. It offers various measures of the magnitude of labour misallocation and of the speed and efficiency of reallocation during the first half of the 1980s. It compares the performance of the economies of Eastern Europe with one another and with two Southern European economies, Greece and Portugal, which have also been experiencing substantial economic change. Contrary to much a pirori theorising, the paper finds no correlation between unemployment and the speed or effectiveness of labour market reallocation. The authors argue that the analysis in the paper strengthens the case for an active as against a passive approach to labour market policy.