Emigration and the Optimal Speed of Transition

This paper presents a model of labour reallocation in a transition economy and analyzes the determinants of the optimal speed of transition. In its simplest form, the model implies that a rapid rather than slow pace of restructuring is preferable in the long run, but an initial period of gradualism may be optimal. The model is extended to consider the effect of emigration flows from the transition country. Our main conclusion is that emigration, by improving the rate of job creation in the private sector and by reducing the burden of unemployment on the government, may lead to an earlier switch to rapid adjustment of labour, and hence to a faster transition to a market economy.