The new member states: Building a modern welfare system

Due to the ongoing reforms, it is still not clear whether the New EU Member States are a different group or whether they are better understood as part of the previous regimes. In fact, the countries belonging to this group are heterogeneous, although sharing a common heritage. Consequently, also the outcomes in terms of youth unemployment are similar.

The labour market position of young people in the new member states is on average worse than the EU average and close to that in Southern European countries (Figures 9.1 and 9.2). The ratio of the adult to youth unemployment rate fluctuates between 2 and 3 from one country to the other. Beleva et. al. (2001) find a ration of 2.1 for Bulgaria, whereas Domadenik and Pastore (2006) and Pastore (2012b) find a ratio of 2.8 for Slovenia and 3 for Poland. However, almost everywhere the youth unemployment rate is high and the anecdotal evidence suggests that while few particularly skilled young people have been the real winners of transition, most low-skilled young people have been the losers.

During the socialist system, in Central and Eastern European Countries (CEECs), workers were used to a pervasive welfare state. Unemployment was virtually non-existent due to the commitment of socialist regimes to full employment as a way to exploit all the available labour surplus (Kornai, 1992), but this implied also the commitment of state firms to provide jobs for all, though at very low wages. Moreover, the state used to provide also several other benefits to the most in need as well as free social services for all, including childcare facilities, health care, hospices and other services for the elderly. This was possible thanks to very soft budget constraints for state firms, the hidden state budget deficit and strong trade unions.

Only in the late 1990s, when transition seemed to have become irreversible and state budget were suffering dramatic imbalances, the debate has shifted from the gradualism/shock therapy debate to a debate on the optimal design of labour market institutions. Two streams of literature have emerged that this research aims to discuss theoretically and test empirically. Some scholars (Boeri, 2000) started to point to passive income support schemes as the origin not only of threat for the financial and monetary stability of the countries involved, but also as a source of social distress for the actual way of working of the labour market and, consequently, for the speeding up of a transition process which seemed to experience a dramatic slowdown. Boeri (2000) claimed that the right sequence for the implementation of non-employment benefits would have been the opposite of that actually followed: the governments should have started from low passive income support schemes to facilitate the flow from the state sector to non-employment and back to employment in the private sector. Only at a later stage, when unemployment was really involuntary, the governments should have started to provide income support to the losers of transition, namely those who were actually not employable in the private sector.

Other scholars (Micklewright and Nagy, 1999; 2002) advocated that the sequence of reforms was the right one and that income support schemes in the early stages of transition were indeed necessary to help people bear the consequences of dramatic structural and cultural change. Moreover, in the early stages of transition, un When transition began (youth) unemployment started to emerge as a new reality and with it a debate started on the need to introduce some kind of employment protection legislation, state subsidies to the unemployed, early retirement schemes and support to inactive people. This type of new welfare state started under the auspices of the early Optimal Speed of Transition models (Aghion and Blanchard, 1994), which suggested that passive income support schemes might be useful to buy out workers from state owned enterprises and win their resistance to the reform process. At that time, the emphasis on rapid restructuring versus gradualism was dramatically affected by the fear of a return to the past and the need to make the transition process irreversible. This way of thinking found an encouraging consensus in the population as well as in all political parties worried to make the increasing unemployment, inequality and poverty socially acceptable. Also a widespread feeling was that the state, not the households should bear the social cost of reforms. The almost immediate consequence was the explosion of the social public expenditure, the pressure on the pension system, the dramatic increase of the dependency ratio, all factors that led the CEECs state budget to the edge of a dramatic collapse.

employment was essentially involuntary, whereas later, when long-term unemployment started to emerge, unemployment benefits should have been reduced to increase incentives to work for non-employed people. Finally, unemployment benefits have been very low in CEECs also compared to the low average wages and their bite would be minor.

Also in new EU member states, youth unemployment is worrisome, among other reasons, because it contributes to make harder a dilemma that the young people in CEE have to face between continuing to invest in their own education, therefore reducing the household’s budget, on the one hand; and accessing immediately the labour market, therefore contributing to the household income, but reducing their own chance to find gainful employment in the future, on the other hand.

Pastore (2012b) focuses on Poland as a typical example of the changes new member states are facing. Poland is the transition economy experiencing the highest degree of structural change and the highest unemployment rate in the area. It adopted a Big Bang approach to the reform process, by introducing simultaneously price and trade liberalisation, together with privatisation and macroeconomic stabilization already in the early 1990s. A massive flow of foreign direct investment has triggered the process of technological change, on the one hand, and generated the need for skill upgrading of the workforce, especially of the youngest segments, on the other hand.

Over the years, similar to other transition countries, the share of individuals with high education attainment has dramatically increased in Poland and other new member states, together with the progressive abatement of the share of people with vocational secondary degrees (Boeri, 2000). Domadenik and Pastore (2006, Tab. 5 and A5) find that from 1997 to 2002 the percentage of young teenagers (15-19) in education increased from about 84 to 88, while that of young adults (20-24) increased from 20 to 31. The corresponding figures for the early 1990s were 45 and 13 per cent respectively. In both cases, Poland seems to be close to the educational targets fixed within the Lisbon strategy for the year 2010.

However, these figures raise an important issue, namely what is the reason of the striking contrast between the excellent (at least quantitative) achievement in educational attainment and the delay in reducing youth unemployment rates, which remain well below the Lisbon objectives.

In recent years, almost all new member states have implemented the 3+2 educational reform. Several former Yugoslavian countries - Bosnia and Herzegovina, Croatia, Macedonia, Montenegro, Serbia, Slovenia - have adopted the dual educational system. Moreover, their ratio of expenditure in pro-active versus passive schemes has dramatically increased.

The educational attainment level is further increasing in all former socialist countries, which is raising concern that over education and over skilling might become more and more important issues (Farcnik and Domadenik, 2012).

The positive sides of the welfare systems in new member states include:

• 1 the old tradition of high investment in human capital formation;
• 2 the existence of several forms of protection for young people by the State and also by international organisations, including the EU;
• 3 deep reforms aimed to modernize the educational and training system.

The disadvantages include:

• 1 a mismatch between the composition of supply of and demand for skills, which the educational system partly contributes to maintain;
• 2 an excessive trust in the virtues of market forces;
• 3 the low average income of household and high state deficit;
• 4 the need to cope with increasing external constraints due also to EU accession;
• 5 a massive process of brain drain.