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the sector/size distribution of firms (endowment effect) as well as in the sector/size growth rates (coefficient effects) contribute to higher growth in the EU8 countries.

Figure III.2 shows the decomposition results for average employment growth for the same groups of countries. The main difference from the aggregate employment results presented in Figure III.1 is that the difference in the private sector growth rates is essentially nil. The reason is that the EU8 new private firms, which are growing rapidly, are small compared to the Cohesion new private firms, and therefore do not generate as much growth in aggregate. The general pattern is the same, however: the growth gap between the Cohesion and the New EU countries is more than fully explained by slow growth of privatized and state firms in the latter group of countries.

Decomposition analysis for the EU8 group and SEE countries is shown in Figures III.3- III.4. Similarly to what we have observed in the comparison of the Cohesion countries with EU8 countries, the private sector growth rate (sectoral/size effects) is higher in the follower group (SEE), regardless of whether one looks at the aggregate (16.53% versus 10.20%) or average (15.29% versus 7.74%) employment growth. The detailed decomposition results presented in the Appendix show that the growth differential between the new private sectors in the two groups of countries is not a size effect, but instead is driven mostly by the contribution of manufacturing employment growth in the SEE group. However, faster growth of private firms in these countries is completely offset (in the case of aggregate employment growth) or substantially mitigated (in the case of average growth) by downsizing of state-owned and privatized firms: the contribution of this sector, including size effects, is -11.84% in the EU8 and -24.06% in SEE (see, bar 2 of Figure III.3 and bar 2 of Figure III.4).8

8 What is driving the smaller negative contributions of the state and privatized sectors in the decomposition of average as opposed to aggregate growth is that these sectors consist of firms which are relatively large and make a bigger negative contribution to aggregates than to means. We can see this by comparing the values for “State” and “Privatized” in the “Mean” columns in the weighted and unweighted results in the Appendix. In the weighted results, these are the values of aggregate employment in the sample, i.e., in the New EU sample, SOE+Privatized = 0.360+0.255=61.5% of employment; in the SEE/CIS sample, SOE+Privatized = 0.318+0.366=68.4% of employment. In the unweighted results, SOE+Privatized = 0.078+0.092=17.0% of firms in the New EU sample, and = 0.086+0.129=21.5% of firms in the SEE/CIS sample.


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