In: Labor Market Flexibility, Flexicurity and Employment ISBN 1-60021-416-9 Editor: Tiiu Paas and Raul Eamets, pp.1- © 2006 Nova Science Publishers, Inc. Chapter 1 LABOUR MARKET DEVELOPMENTS IN THE BALTIC STATES Raul Eamets, Tiiu Paas, Jaan Masso INTRODUCTION The Baltic states as the only former Soviet Union republics among the new member states of the EU since May 2004 have undergone the transformation from Soviet planned economy to market economy very abruptly. These countries quickly restructured and modernized their economies, attracting foreign direct investments and redirecting foreign trade from east to west. Nowadays Estonia, Latvia and Lithuania report high economic growth rates which are above the respective indicators of the old EU member states. The average real GDP growth has been about 6−8% per year during the period 2000−2004 (Figure 1.1). The economic policies, institutions and problems of the Baltic states now more closely resemble those of the other developed countries than those of transition countries. The EU accession required policies promoting macroeconomic stability and development of private sector. At the same it also required public sector reforms in order to adopt the European law and regulations known as the acquis communautaire. A functioning market economy not only requires private sector development but also effective state structures that can partner with the private sector and correct market failures instead of causing them. Thus, the challenges of transition are giving way to the challenges of convergence within the euro area, which also outlines the importance of flexible labour markets in order to bring economic policies in line with the overall goals of the EMU. The chapter gives a brief overview of the main trends in the Baltic states’ labour markets mainly during the EU pre-accession periods. The main task of the chapter is to provide a broader context for the more detailed analysis of the flexibility, flexicurity and employment issues concerning the Baltic states’ labour markets presented in the subsequent chapters of the book. Emphasis is given to examining the main changes in labour force, employment composition and unemployment in the Baltic states compared to the EU-15, new member