Why Labour Hoarding may be Rational: A model of firm behaviour during transition

In the Former Soviet Union, the early 1990s were characterized by large falls in GDP and small changes to already low unemployment. The slow adjustment to unemployment was a result of employers using various means to maintain employment levels, including; extended periods of unpaid leave, reduced hours of work and non-payment of wages. A theoretical model presented here explains why it was rational for firms to adjust labour in this way. The nature of inherited features of the Soviet labour market and lack of institutions necessary for a competitive market economy meant it was in the firm's interest initially to maintain employment levels. Quantitative analysis using Kyrgyz data for 1993 and 1996 provides evidence of changing economic behaviour in agents over this period.