Labor market policies and labor market flexibility during the great recession: The case of Estonia

Abstract

In Estonia, a liberal market economy, a relatively small public sector, and a relatively low tax burden result in scarce resources for policy options. Attempts to achieve an annually balanced state budget have a pro-cyclical nature, which means that it works well during economic booms, exaggerating growth through growing public expenditures. The opposite took place during the recession when the government tried to cut expenditures in order to keep the budget deficit under control. As taxes were relatively low, the government also missed sufficient automatic stabilizers. In general, one can say that government had limited fiscal tools to smooth cyclical fluctuations. The authors thank the anonymous referees as well as the editors of this volume for providing a number of suggestions that helped to improve the chapter significantly. We remain responsible for any mistakes still present. This study was supported by IZA and the CESifo institute, who offered financial support and their excellent working environment during the final stage of finishing the paper.