Discusses the short – and long‐term labour market policies needed in Czechoslovakia to achieve successfully the economic reforms envisaged in the current economic programme. Given the similarities with other Eastern European countries in economic transition, the policy implications of this analysis can be simply extended to other cases. Emphasizes that wage indexation, deregulation of the wage structure and facilitation of labour mobility are key short‐term measures; they increase the prospects of success not only of structural reform, but also of other macroeconomic policies aimed at controlling inflation. In the long term, reforming labour market institutions, especially those responsible for setting wages and unemployment compensation plans, must take priority in order to ensure that the labour market functions in harmony with the overall market environment. Concludes that unemployment will not cause significant fiscal strain, if dismissals of retired employees are made a priority, but that nonetheless open unemployment will be higher than the Government expects. Another conclusion refers to the adequacy of the wage indexation system to drive down inflationary expectations and to stimulate employment adjustments. However, warns about the practical enforcement of the wage policy and the distortionary effect of the minimum wage policy. With respect to labour mobility, breaking the link between provision of benefits and jobs is fundamental for ensuring more rapid adjustment in employment opportunities and the supply response.
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