LICOS Centre for Transition Economics

In the transition to a market economy we examine the relationship between inherited human capital structures and the evolution of unemployment within a two-sector model of endogenous restructuring. We find evidence across Polish regions for the predictions of our theory. The inherited dominance of ineffective human capital in eastern regions of Poland has delayed restructuring, reduced unemployment turnover and lowered the number of workers with out-dated human capital in the unemployment stock. On the other hand, the dominance of effective human capital in western regions has induced restructuring, boosted unemployment turnover and increased the number of workers with out-dated human capital among the unemployed. We argue that the role of government to prevent such outcomes is limited. Yet, intervention conceived as social rather than economic policies can lessen the social cost created from the inheritance of out-dated human capital, which is a legacy of central planning.