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 falls in benefits and 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 under-consumption 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.