The incidence and cost of job loss in a transition economy: Displaced workers in Estonia, 1989 to 1999

We examine the effects of economic transition on the pattern and costs of worker displacement in one of the more reform-oriented transition countries, Estonia. Using labor force survey data covering the period from 1989 to 1999, we show that displacement rates in Estonia fell back to levels typically observed in several Western economies after a large initial shock. The characteristics of displaced workers are also similar to those of displaced workers in the West in that displacement is concentrated on the less skilled and those with short job tenure. About half of these workers find re-employment within two months while the others continue to be non-employed. However, unlike in some Western countries, we find less evidence of a wage penalty to job loss. This result may be due more to the nature of the transition process than to wage setting institutions in Estonia. Therefore, the main cost of displacement is the cumulative income loss measured as the difference between wages and out-of-work benefits, which is large for the minority of workers who experience long-term non-employment. © 2004 Association for Comparative Economic Studies. Published by Elsevier Inc. All rights reserved.