Institutional Determinants of Labor Reallocation in Transition

The transition process differed in the countries of the Former Soviet Union (FSU) and those of Central and Eastern Europe (CEE) in terms of reallocation of labor real wage, employment and output adjustment. We sift through the theoretical and empirical literature to find an explanation for these diverging adjustment trajectories and conclude that they can be explained by the fact that the CEE countries adopted social policies that upheld wages at the bottom of the distribution forcing the old sector to restructure or collapse while the FSU countries allowed wages to free-fall not forcing the hand of the old sector.