The Great Recession and Labor Market Adjustment: Evidence from Latvia

How severe are costs to workers when the economy undergoes a large recession? In this paper, we try to provide an answer to this question using as an example Latvia, a new EU member state, which faced the most severe recession in Europe and globally in 2008. We employ individual-level Latvian Labor Force Survey and EU SILC data over the years 2002–2016 and 2007–2015, respectively, and analyze transitions in the labor market and their determinants as well as occupational mobility. Our results show that adjustment takes place predominantly at the extensive margin since it is driven by flows to unemployment. We also show that by 2016 the labor market has bounced back to its pre-crisis performance and that for the average worker Latvia’s macroeconomic policies that focused on internal devaluation did not impose large costs in the medium run. However, the young, ethnic minorities and the less skilled were particularly affected by the crisis. Wage regressions suggest that job mobility is not associated with an increase in wages, i.e., with increased labor productivity.