After World War II, Hungary suffered from chronic, widespread underemployment. Until the late 1980s, the leadership stubbornly clung to the principle of full employment, and employment rolls swelled because, as a consequence of low wages, it was more cost effective to employ human labor than install labor-saving equipment or implement other efficiency measures. In addition, an enterprise tax based on average wages encouraged managers to pad their payrolls with low-paid, redundant employees who worked at or near full capacity only during the closing weeks of a plan period when pressure to meet targets was most intense. Underemployment combined with other factors to make the country's labor productivity only 40 to 50 percent of that in Western countries. In the late 1980s, the government shelved the principle of full employment and enacted measures, including new bankruptcy and tax laws, to induce enterprises to use labor and other resources more efficiently (see Economic Regulators , this ch.). Vigorous implementation of these measures will entail layoffs, retraining, and early retirement for many workers.

Hungary was the first member of the Council for Mutual Economic Assistance (Comecon--see Glossary) to acknowledge the existence of unemployment. Marxist-Leninist ideology has always considered socialism and unemployment incompatible, and until 1987 even the word unemployment was taboo in Hungary. The ideological implications of this policy shift outweighed the scale of the potential layoffs. The government reported that 30,000 to 40,000 people were unemployed in late 1987, and government officials have estimated that another 100,000 to 150,000 workers might be laid off while Hungary implemented its economic reform. Compared with Western countries, however, Hungary's unemployment problem was relatively small: a 4 percent unemployment rate is generally considered full employment in a free-market economy in Hungary this percentage would amount to about 240,000 people.

In 1987 Hungary became the first communist state to establish public works programs to provide jobs for the unemployed. In 1988 it created an unemployment relief fund with the capacity to benefit 25,000 people. Nevertheless, critics argued that the government did not allot sufficient funds to these programs to deal with projected layoffs.

Data as of September 1989