LABOUR MARKET FLEXIBILITY IN ESTONIA: WHAT MORE CAN BE DONE?

In mid-2008, high employment and low unemployment rates characterised the Estonian labour marketin comparison with the average of the EU15 countries. While aggregate outcomes improvedduring 2000-07, large inequalities persisted across regions, ethnic groups, and workers with different skilllevels. As Estonia entered recession in 2008, the unemployment rate almost doubled between the 2nd andthe 4th quarter, and is expected to rise further in 2009 and 2010.More flexible labour markets will be a key adjustment mechanism during the recession as well as inthe medium term if Estonia is to become a knowledge-based economy. Given the currency boardarrangement and low synchronisation with the euro area, flexibility is also needed to cushion asymmetricshocks. In December 2008, parliament adopted the new Employment Contract Act, deregulatingemployment protection while increasing income security of the unemployed. This paper discusses optionsfor removing the remaining barriers that impede worker reallocation across jobs, sectors, and regions intomore productive activities....