Employment and Wages
      Initial Condition:
Sources of Labor to Force Growth
• Major source of extensive growth
• Many forms of surplus, broadly
  – open unemployment
    • mainly in the cities at time of
– hidden unemployment
  • zero marginal product workers on
    family farms
  • casual workers or traders
    – not contributing much but not registered
      as unemployed
    – exists mainly in rural locations but also
– family undertakings
  • fully employed but a source of labor
    from perspective of the state
    – family-owners become employees of the
      state to be allocated to farms or industries
      as needs of forced growth dictate
– the “declassed”
  • dispossessed former capitalists and
    – lose property and capital and are either
      imprisoned, allowed to emigrate, or enter
      workforce as employees of the state
– women working in the home
  • a major source of labor
    – female labor-market participation rate
      reaches nearly 100 percent
        » not possible for household to maintain
          standard of living otherwise
        » women risk prosecution as parasite if
          not employed
Particpation Rate of Women Age 40-44      Kornai, p. 207

               1950      1960     1970         1980        1985

Bulgaria        78.6     83.4      88.5        92.5        93.3
Czech.          52.3     67.3      79.9        91.3        92.4
GDR             61.9     72.7      79.1        83.6        86.1
Hungary         29.0     51.8      69.4        83.2        84.7
Poland          66.4     69.1      79.5        83.2        84.7
Romania         75.8     76.4      79.5        83.1        85.1
USSR            66.8     77.9      93.2        96.9        96.8
N. Europe       30.9     39.9      53.8        69.9        71.1
W. Europe       34.5     39.5      46.4        55.1        55.6
S. Europe       22.4     25.3      29.7        35.7        37.1
– population growth
  • most countries undergo rapid
    population growth in part as a result of
    explicit bureaucratic inducement
    – ban on abortion
    – prohibition on contraceptives
    – financial rewards for having children
  • opposite bureaucratic responses occur
    in countries already overpopulated
    – China
    – Cuba
     Inducements to Work
• Opportunity
  – factory opens in rural area
    • zero marg prod farm workers suddenly made
      much better off with opportunity to earn a
• Financial
  – as anywhere
• Bureaucratic compulsion
  – law specifies duty to work
           Winners and Losers
• Winners
  – unemployed
  – underemployed
  – generations of new workers
• Losers
  – family concerns
     • property taken often with considerable violence
  – wealthy former capitalists and landowners
• Ambiguous
  – women
 Development of Chronic
    Labor Shortage
• As surplus gets used up,
  shortages appear
  –skilled labor
    • as more capital used there is
      increased need for specialized,
      skilled labor
      –most is unskilled agricultural labor
–urban shortages
  • housing and other infrastructure
    shortages prevents surplus rural
    labor from migrating to cities
    –low priority of housing due to desire
     to use resources for investment to
     achieve forced growth
    –resulting shortage of labor in cities
     conflicts with goal of forced growth
       »internal contradiction
  – regional shortages
     • some areas develop faster than others
       relative to supply of labor
        – often due to attempts to develop regions no one
          wants to be
            » far east and artic regions of Soviet Union
• As time passes, more and more
  shortages develop until one can
  reasonably describe the situation as
  one of chronic labor shortage
  – though frictional unemployment still
  – by 1988, Poland had 100 vacancies for
    every job seeker
    Bureaucratic Control
• Allocation of labor and
  determination of wages have both
  bureaucratic and market influences
  – bureaucratic predominates
• Begins with schooling
  – considerable channeling
    • more engineers needed, more
      engineering seats opened up
• Channeling continues after graduation
  – compulsory work assignments in
    exchange for specialized training
  – channeling through employment offices
  – availability of housing
  – residency permits
• System of differential wages
• Wages determined by several factors
  – occupation
     • e.g., engineer’s wages are double that of retail
       clerks, on average
  – skill
     • top grade in occupation earns double lowest
  – compensating differential for difficult
  – priority of industry
     • workers in steel industry earn more than
       workers in retail trade
• Managers compete for workers by
  manipulating scales
• Enterprise plan specifies employment
  and wages
  – enterprises must not exceed employment
    and wage fund specified in plan
    • total expenditure constraint is soft but the wage
      constraint is hard, once set
       – ability to bargain for a larger fund is a form of
  – employment and wages subject to intense
    • vertical shortage
       – lower level argues for more workers and larger
         wage fund
       – higher levels trying best to deal with labor shortage
  Relations in the Factory
• Because of labor shortage, workers
  have some bargaining strengths
  – sellers’ market, in a way
  – workers can leave job without fear of
    being unable to find employment
    • makes them bolder about criticizing
      bosses and bucking orders
    • workers feel they can get away with
       – absenteeism and drunkenness on the job
         were huge problems in the Soviet Union
• Official ideology reinforces these
  – dictatorship of the workers, etc.
  – even if a worker doesn’t buy in, it’s
    still a great excuse to be demanding
    and uncooperative
• In other respects, workers are in a
  relatively weak position
  – no independent trade unions
    • socialist unions are a part of the party-
      state apparatus
    • transmission belt conveying
      information to the masses and
      providing surveillance
    • represent interests of the hierarchy
– enterprises have various tools to
  influence worker behavior
  • management has responsibility to assign
    tasks and set wages and bonuses
    accordingly, within specifications of the plan
  • while workers can initiate leaving a job, the
    enterprise has to give its permission
  • may even need enterprise’s permission to
    leave his or her place of residence
  • workplace is the focus of much propaganda
    and moral incentives
• workplace serves as launch pad for a bright
  career in the party-state apparatus
• workplace can also be ruin of a bright career
  in the party-state apparatus
   – nationwide blacklist
• employers can easily arrange for a worker to
  be arrested for criminal or counter-
  revolutionary behavior
• workers need permission to conduct certain
  personal business
   – acquisition of passport or exit visa
   – to get a loan at the bank
   – to apply for a telephone
• employees have to get permission
  from enterprise to earn outside
• enterprises in many countries and
  periods intervene in family life
  –prevent a worker from getting a
  –persuade a worker to have more or
   fewer children
  –help or hinder a worker’s child
   applying for a place in a university
• enterprise as a provider of state
   – housing provided through enterprises
       » a very powerful tool of control
   – health care
   – schooling
   – vacation facilities
   – rationed goods
   – supplementary payments in kind
   – access to goods not normally available
• “A firm becomes a cell of totalitarian
  power, not merely a scene of work”
   – Kornai, p. 222
     The Manager’s
    Ambivalent Position
• The ideology tells the manager
  that he is the representative of
  the workers
  –he should work in solidarity with
   his workers
• He depends on his workers to a
  large extent
  – he wants a calm, smooth-sailing
  – the more severe the labor shortage,
    the more dependent
  – thus motivated to represent his
    workers’ interests and satisfy their
    demands as much as possible
• The bureaucratic interests of the
  firm generally prevail in the end
   Internal Labor Surplus
    Unemployment on the Job

• Labor shortage causes enterprises
  to hoard labor
  – a worker might be dispensable now
    but he may not be later
  – more is always better as long as
    manager can get the additional funds
• Extra labor is always needed to
  make up for the shirking and
• Internal surplus may be more than
  enough to eliminate the shortage
  but it cannot because it is a
  consequence of the nature of the
• Both bureaucratic and market
• Macro level of wages determined
  – but market forces have an influence
  – planners set the overall wage fund so that
    consumers have enough but not more
    than enough to consume what is planned
    for them
    • i.e., not rob from investment, defense, etc.
• Over time, more and more
  consumption becomes collective
  – provided to all for free or close to it
    • housing
    • education
    • health care
    • vacations
    • rations
  – wages restricted to cover only
    remaining, individualistic
• At the micro level there is
  considerable market coordination
  – workers respond to wage rates
    workers respond to perks
    • perks tend to be much better in priority
      – schools
      – health care
      – vacation facilities
      – access to scarce goods
      – private plots
– enterprises compete for scarce labor
  by manipulating wages
  • categorizing workers at higher level
     – higher skill level
     – higher experience level
     – higher occupational level
– in setting wage scales, planners
  respond to relative scarcities by
  occupation, region
– also respond with other bureaucratic
  tools to channel workers

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