published in: Economics of Transition, 2004, 12 (4), 683-720
For transition economies labour market flexibility is necessary for successful restructuring
and reallocation of labour force and for coping with the requirements of the European
Monetary Union. In this paper we apply a novel approach to the issue of labour market
flexibility in transition countries by studying the optimality and efficiency of labour usage
among Estonian manufacturing enterprises. A dynamic model is employed where both the
long run optimal level of employment and the speed at which actual employment is adjusted
to the optimal are modelled as functions of several variables. Firm level panel data from 1995
to 1999 were used. The results showed that in the long run employment responds greatest to
wages, followed by value-added and capital stock. Speed of adjustment and labour use
optimality and efficiency show much greater variations over firms than over time. In the
course of time there occurs both labour saving technical change and an increase in the
efficiency of labour usage. On average there is shortage of labour compared to firms’ own
optimal level, while over use of labour compared to best-practice technology. Capital seems
to be a binding constraint on the development of employment in the Estonian labour market.
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