Following the collapse of socialism, the countries of Central and Eastern Europe (CEE) have undergone substantial changes (Elster et al, 1998; Kornai, 2006). They have adopted the institutions of capitalist democracies, while simultaneously developing the socio-political infrastructure to render capitalism and democracy functional. Additionally, they have had to come to terms with massive economic and demographic crises. Improving individual welfare has always been a central concern in this process for individuals as well as politicians, not least to mitigate the political costs of the transition crisis in the newly founded democracies. Nevertheless, initial hopes of rapid convergence to Western standards have been largely disappointed. The early 1990s were marked by a decline in aggregate output, employment levels and real incomes. Unemployment, poverty and income inequality rose, while fertility levels and individual health deteriorated, and suicide and crime rates climbed. With economic growth returning and living standards rising, some of the initial symptoms of the transition crisis have passed. However, inherent risks of capitalism like unemployment and other forms of social exclusion have become persistent threats to individual welfare and social cohesion.

This chapter assumes that, with the move towards a market economy, individual labour market position becomes a central determinant of individual life chances. Smooth labour market integration and protection against labour market risks are therefore central for individual welfare, particularly in times of rapid change. The chapter therefore focuses on the emerging labour market risks and inequalities after the breakdown of socialism, most notably the risks of unemployment and poverty as well as income inequality. Furthermore, it provides a more general overview of the development of social protection and the welfare state, with a particular focus on active and passive labour market policies. Compared to Western and Southern European Union (EU) member states, the chapter seeks to draw attention to salient problem constellations in the CEE countries as well as the policy responses that have emerged.

The rest of the chapter is structured as follows. It begins with a brief overview of the system of social protection inherited from socialism in view of the main challenges facing social policy makers with the transition to a market economy. The subsequent sections provide an overview of where the CEE countries stand today relative to old EU member states in terms of levels and distribution of material welfare and labour market risks.