Book Description

Despite low open unemployment, labor market outcomes are unsatisfactory in Moldova. Employment is low and job opportunities are scarce. This paper examines labor market performance in Moldova by focusing on firm dynamics. It finds that the low level of employment in Moldova is due to the low rate of firm entry and the low rate of job creation in existing firms. Although the rate of job destruction is high, this is typical of transition economies and is a problem only because it is not coupled with a commensurate rate of job creation. Firm exit is limited and thus is not an important factor behind job losses. The only sector of the economy that creates jobs on a net basis is that of de novo private and small firms. However, in Moldova this sector is significantly smaller than in the most successful transition economies. The paper argues that the primary factor behind the small size of the employment generating sector is the high cost of doing business in Moldova. This includes numerous administrative barriers, intrusive and costly inspections and associated corruption. These costs - extremely high even be regional standards - lower the expected returns to business activity and thus discourage firm formation and growth. The paper recommends improvements in the investment climate as a primary policy to increase productive employment and lower unemployment. Priority should be given to fostering job creation by facilitating the formation of new firms and reducing constraints on the expansion of existing firms. The government should avoid measures designed to forestall the destruction of unviable jobs and firm exit, as these are not conducive to long-run productivity and employment growth. Enhancing labor market flexibility is a further priority, as the current stringent provisions of the Labor Code are not complied with and enforced. Given the unsatisfactory business environment, active labor market programs are unlikely to be effective, unless carefully targeted at the most disadvantaged worker groups. This paper - a product of the Human Development Sector Unit, Europe and Central Asia Region - is part of a larger effort in the region to examine labor market performance and its contribution to economic growth and poverty reduction.