ESTONIAN LABOUR MARKET AND EMU MEMBERSHIP - CHALLENGES AND POLICY OPTIONS Andreas Freytag Tallinn December 2002 Working Papers of Eesti Pank No 11, 2002

With the planned membership in EMU, Estonia will give up every option to pursue a discretionary monetary policy. This demands a very flexible labour market, returning to equilibrium by itself after a negative external shock. In general, the Estonian labour market regime allows for flexibility and labour force mobility. Nevertheless, there is a serious problem on the Estonian labour market, namely, a mismatch with respect to qualification. The paper discusses three potential remedies for this problem: 1) further development of the relatively underdeveloped social dialogue in Estonia, 2) an increase of the low extent of public labour market spending, and 3) a significant improvement of the education and training system. It turns out that concentration on education policy promises the highest yields. We conclude by referring to earmarked education vouchers. Such a system allows to fully employ the capacities of competition to generate the structure of qualifications necessary to increase the level of employment in Estonia.

Author's e-mail address: andreas.freytag@uni-koeln.de

The views expressed are those of the author and do not necessarily represent the official views of Eesti Pank.

CONTENTS

1. Introduction

2. Estonian Labour Market Regime and Performance

2.1. Labour Market Flexibility

2.2. The Regime

2.3. The Performance of the Estonian Labour Market

2.4. Three Types of Remedy

3. Further Development of the Social Dialogue

4. Focus on Active Labour Market Policy

4.1. Theoretical Aspects of Active Labour Market Policy

4.2. Mixed Empirical Evidence for Successful ALMP

4.3. How to Improve the Effectiveness of ALMP in Estonia

5. Reform of Education and Continuous Training

5.1. Current Problems of Education and Training in Estonia

5.2. The Alternative: A Voucher Scheme

5.3. The Rationale for Vouchers

5.4. Potential Problems of a Voucher System in Estonia

5.5. Details of the Voucher Scheme for Estonia

5.6. Dealing with the Costs

5.7. Some Thoughts about the Feasibility

6. Conclusions

References

Estonian Labour Market and EMU Membership - Challenges and Policy Options, Working Papers of Eesti Pank, No 11, 2002 (PDF*)

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