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Enterprise restructuring and social benefits
Soviet era firms provided generous social benefits, including health and child
care. Despite recent cuts, firm survey data show that benefits have remained a
major component of total compensation. With benefits largely firm-specific and
firms dominated by insiders, continuing attachment of workers as well as
widespread informal sector participation has resulted. This has impeded
restructuring, in part by generating significant set-up costs for new private
firms. We simulate the effects of a cut in subsidies to benefits provision. We
show that while this leads to a fall in benefits, employment and an increase
in wages, the outcome critically depends on the availability of alternative
providers. The key to cushioning these adverse consequences is the stimulation
of a market in benefits provision. Given initial conditions, rapid removal of
benefits supports will require transitional income support to avoid
underconsumption of these goods. We provide the design of a simple scheme of
transitional support and show that it can be financed from the savings from
removal of current subsidies to benefits.
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