Labour market flexibility in Estonia: what more can be done?

In  mid-2008,  high  employment  and  low  unemployment  rates  characterised  the  Estonian  labour  market  in
comparison  with  the  average  of  the  EU15 countries. While  aggregate  outcomes  improved  during 2000-07,  large
inequalities  persisted  across  regions,  ethnic  groups,  and  workers  with  different  skill  levels.  As  Estonia  entered
recession in 2008, the unemployment rate almost doubled between the 2nd and the 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 in the medium
term  if  Estonia  is  to  become  a  knowledge-based  economy.  Given  the  currency  board  arrangement  and  low
synchronisation  with  the  euro  area,  flexibility  is  also  needed  to  cushion  asymmetric  shocks.  In  December 2008,
parliament adopted the new Employment Contract Act, deregulating employment protection while increasing income
security of  the  unemployed. This paper discusses options  for  removing  the  remaining  barriers  that  impede worker
reallocation across jobs, sectors, and regions into more productive activities.

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