MEXICO CITY — In perhaps the clearest sign yet that economic change is gathering pace in Cuba , the government plans to lay off more than half a million people from the public sector in the expectation that they will move into private businesses, Cuba’s labor federation said Monday. 
 
 Over the past several months, President Raúl Castro has given stern warnings that Cuba’s economy needs a radical overhaul, beginning with its workers. With as many as one million excess employees on the state payroll, Mr. Castro has said, the government is supporting a bloated bureaucracy that has sapped motivation and long sheltered a huge swath of the nation’s workers. 
 
 “We have to erase forever the notion that Cuba is the only country in the world where one can live without working,” he told the National Assembly last month. 
 
 Since permanently taking over from his brother Fidel two years ago, Mr. Castro has often pledged to make Cuba’s centralized, Soviet-style economy more efficient and open up opportunities for people. The government has handed tens of thousands of acres of state-held farmland to private farmers and begun freeing up a market for agricultural supplies. It has loosened restrictions on cellphones and other electronics, and created a few areas for private business, allowing barbers’ shops to become cooperatives and giving more licenses to private taxi drivers. 
 
 But these initial reforms have been comparatively limited, many analysts contend, and Cuba’s economy — grappling with the fallout from the global financial crisis and the aftermath of devastating hurricanes in 2008 — appears to be in dire shape. 
 
 Tourism revenues have flagged, the country has faced rice shortages and its sugar crop has been disastrous. Last year, as the government tried to hold onto desperately needed hard currency, imports fell by 37 percent. 
 
 In its statement Monday, the Cuban Workers’ Central, the country’s only recognized labor federation, openly acknowledged the nation’s troubled economy, saying that changes were “necessary and could not be delayed.” 
 
 “Cuba faces the urgency to advance economically,” the statement said. “Our state cannot and should not continue supporting companies” and other state entities, “with inflated payrolls, losses that damage the economy, which are counterproductive, generate bad habits and deform the workers’ conduct,” the labor federation added. 
 
 To that end, the government has previously said that it would grant new licenses to entrepreneurs, vastly expanding the kinds of businesses that can be run privately. But the announcement on Monday — saying that the layoffs would be completed by next March — suggested that Mr. Castro now intended to move ahead vigorously. 
 
 “What’s stunning today is that they put a date and they put a number on it — 500,000,” said Philip Peters, who follows Cuba for the Lexington Institute. “It’s a very substantial decision,” he added. “It’s a major shift towards a larger private sector in a socialist economy.” 
 
 New openings in the private sector would be welcomed by many Cubans, who are weary of the island’s stagnation and desperate for new opportunities. 
 
 Even so, the disappearance of hundreds of thousands of jobs — and with them the security of a salary, workplace meals and the chance to make extra money through tips in some cases — would come as a shock. 
 
 While Cubans have access to free health care, education and subsidized food and housing, the government has already cut some of the subsidies that many Cubans rely on to supplement their average monthly wage of about $20. And given the government’s record of introducing new areas for enterprise only haltingly, it is unclear that new jobs can be created as quickly as the public sector positions will be cut. 
 
 “They are in the process of massively reducing the size and participation of the state in Cuban life,” said Julia E. Sweig, a Cuba expert at the Council on Foreign Relations who was in Havana a couple of weeks ago. “There is a belief that there is so much pent-up demand on the one hand and so much skill on the other that the private sector will absorb them pretty rapidly.” 
 
 Ms. Sweig said that it appeared the government was preparing to open up a vast range of activities, including light manufacturing like furniture making and garment production. Cuba’s underground economy already provides a broad array of products, she said, but under the new arrangement the government would begin to tax those new businesses. 
 
 To absorb all those workers who will be laid off, the federation said that hundreds of thousands were expected to move into some form of private enterprise over the next few years. 
 
 Just how strongly the government plans to hold onto its traditional economic philosophies are a matter of debate. 
 
 In an interview published online by the Atlantic last week, Fidel Castro said that the Cuban model no longer worked. But in a speech at the University of Havana shortly after his remarks were published, he said that he had been misinterpreted and that what he meant was that capitalism did not work. 
 
 Ms. Sweig, who was present for the first interview, said that Mr. Castro’s speech correcting himself was not backtracking. Instead, she said his words were most likely intended to reassure Cubans that he did not intend to import American-style capitalism. “It is a hybrid that is evolving,” she said. 
 
 Still, John Kavulich, a senior adviser for the U.S.-Cuba Trade and Economic Council, warned that it would be difficult for Cuba to follow through on the full scale of its announcement. On a practical level, he asked, would the government be able to import all the tools the new entrepreneurs or small manufacturing cooperatives will need? 
 
 There is also a larger question that goes to the heart of Cuba’s ideology, Mr. Kavulich said. “The Cuban government is going to allow and by definition encourage people to go into private sector opportunities,” he said. “What happens when some people get rich?” 
 
 “The government is going to have to determine whether it will allow and embrace success, not just opportunity,” he said. ||||| Cuba will lay off more than half a million state workers and try to create hundreds of thousands of private-sector jobs, a dramatic attempt by the hemisphere's only Communist country to shift its nearly bankrupt economy toward a more market-oriented system. 
 
 Enlarge Image Close European Pressphoto Agency A Cuban State worker (center) sweeps the streets in Havana. 
 
 The mass layoffs will take place between now and the end of March, according to a statement issued Monday by the Cuban Workers Federation, the island nation's only official labor union. Workers will be encouraged to find jobs in Cuba's tiny private sector instead. 
 
 "Our state can't keep maintaining...bloated payrolls," the union's statement said. More than 85% of Cuba's 5.5 million workers are employed by the state. 
 
 Cuba's effort to reorient its labor force represents the country's biggest step toward a freer economy since the early 1990s, when Havana embarked on a brief attempt to make changes in a bid to survive without subsidies after the collapse of the Soviet Union, its main benefactor. 
 
 The revamp is also the most drastic effort to revive the country's flagging economy since President Raul Castro, the brother of retired dictator Fidel Castro, took the helm of the Communist country more than four years ago after his brother fell gravely ill. 
 
 Many hoped that the younger Mr. Castro would push through Chinese-style measures to open the economy when he took power in 2006. But, with the president's ailing, revolutionary brother lingering in the background, changes never came. 
 
 Enlarge Image Close eruopean pressphoto agency A barber cuts hair in a state-run shop in Havana on a day when the Communist country outlined plans to trim massive government payrolls. 
 
 But pressures have mounted in the wake of the global financial crisis, as the island's economic conditions have deteriorated, analysts say. Earlier this year, the Catholic Church warned that the island was on the verge of economic and social disaster if the government didn't quickly make the changes required. 
 
 Raul Castro has moved cautiously on reforms, but has consistently said the Cuban economy needs an overhaul. He has leased state lands and loosened restrictions on farmers buying supplies and selling produce. Last month, he foreshadowed Monday's announcement, complaining that the state payroll was burdened with 1 million excess workers. 
 
 "This is survival economics," says Jaime Suchlicki, director of the Institute for Cuban Studies at the University of Miami. "They don't have liquidity, and have a lousy economy." 
 
 Laying off government workers, however, is unlikely to do much to solve the country's problems, Mr. Suchlicki and others warned, since let-go workers have no where else to turn to earn a living. "They won't be absorbed by the private sector because there is no private sector to absorb them," he said. 
 
 The changes were announced shortly after the elder Mr. Castro, who heads Cuba's Communist Party, and wields enormous influence on the island, gave a controversial interview to The Atlantic magazine, in which he said the Cuban model no longer worked for any country, much less Cuba. Mr. Castro later said he had been misunderstood, and it was capitalism that didn't work. 
 
 The move raised speculation about whether the elder Mr. Castro, long seen as an obstacle to his younger brother's attempts to reform the economy, had given his consent. 
 
 Enlarge Image Close Associated Press Cuban workers repair shoes at a state workshop in Havana on Monday. 
 
 On Monday, Julia Sweig, a Cuba policy specialist at the Council on Foreign Relations who was present at the Atlantic interview, said the two Castro brothers may remain on different sides of the issue. But, she added, "When global capitalism takes over the world, Fidel's going to be the last man standing, but he's also not going to get in his brother's way." 
 
 To help workers who are laid off, the union said Cuba will issue thousands more licenses allowing citizens to find work on their own. 
 
 Cuba said it hoped to move some state workers into sectors that had not attracted much interest in the past, such as policing, teaching and industrial work, the statement said. The statement also said Cuba is investing heavily in areas such as oil, tourism and biotechnology where it hoped that future job growth would take place. 
 
 "Job options will be increased and broadened with new forms of nonstate employment, among them leasing land, cooperatives and self-employment, absorbing hundreds of thousands of workers in the coming years," the union statement said. 
 
 The move to slim down the public sector will create unemployment in the short term, which could create some political turbulence for the government. But the result will likely be higher wages for those in the private sector, said Philip Peters, a Cuba expert with the Lexington Institute, a think-tank in Arlington, Va. 
 
 Citing surveys he has conducted in recent years, Mr. Peters said private-sector employees make salaries three times as high as those in comparable public-sector jobs. "If they carry this thing out fully, it will vastly improve the welfare of thousands of families," he said. 
 
 It remains to be seen, however, just how many private-sector jobs Cuba can create. Cuba now has only 591,000 people working in the private sector, most of them family farmers, as well as another 143,000 workers classified as self-employed, according to government figures. 
 
 Since Cuba first allowed self-employment in the early 1990s, thousands of Cubans have gone into business, often catering to tourists. Privately owned restaurants, known as paladares, emerged to serve visitors, usually in the crumbling but grand old homes of Havana. But restrictions on the paladares were so strict in recent years that many have since closed their doors. 
 
 Cubans who decide to go into business for themselves will find a series of obstacles, including very high taxes, lack of access to credit and foreign exchange, bans on advertising, limits on the number of people they can hire, and a litany of small-print government regulations, experts say. 
 
 Cuba's government has a list of 124 "authorized" activities for people who want to employ themselves. Among them: Toy repairman, music teacher, piñata salesman and carpenter. Carpenters are allowed only to "repair existing furniture or make new furniture upon the direct request of a customer." They cannot make "furniture to sell to the general public." 
 
 Carmelo Mesa-Lago, an expert on the Cuban economy who is emeritus professor of economics at the University of Pittsburgh says: "The question is how many obstacles [the government] will place in front of these people?" 
 
 A government attempt this year to get Cuban farmers to produce more by allowing them to lease land, has been hampered by an acute lack of fertilizer, farm machinery and herbicides. That has made it difficult to cultivate land overrun by a thick, thorny scrub brush called Marabu. And earlier this year, Cuba announced big drops in agricultural production despite the land reforms. 
 
 Economic growth could pick up if Cuba continues to open itself to privatization in coming years, but the process will be a slow one, said Arch Ritter, an economist who studies Cuba at Carleton University in Canada. Growth would "require a major change in the way the private sector is treated," he says. Critical steps would be lowering taxes and loosening regulations for small businesses. 
 
 Cuba is one of the last true Communist economic systems in the world, a place where the state dominates nearly all spheres of life. Foreign investment is restricted to joint ventures with the government and limited to some sectors like tourism and oil. 
 
 After running up a huge current-account deficit in 2009, Cuba has had to cut back sharply on its imports, including critical inputs for agriculture and manufacturing. That has driven down agricultural and industrial production. To save money, Cuba stopped foreign joint ventures from repatriating profits. 
 
 In recent years, Cuba has largely depended on nickel exports, tourism and an estimated $5 billion a year in subsidies from Venezuela's ideologically sympathetic government to get by. But tourism has been flat, nickel prices fell sharply last year, and many question how long Mr. Castro's ally, President Hugo Chavez of Venezuela, can afford to ship close to 100,000 barrels a day of oil products to the island. The oil is partly a payment for the services of Cuban doctors and other professions working in Venezuela. 
 
 Cuba's previous attempt at reform, in the 1990s, didn't last long. On the verge of collapse following the end of Soviet subsidies, Cuba allowed the U.S. dollar to circulate, opened itself to foreign investment and issued licenses allowing Cubans to find work outside the state sector. But as Cuba regained its economic footing, foreign investment was limited, and self-employment was rolled back as the state heavily taxed would be entrepreneurs, making many of them give up their licenses because they were too expensive to maintain. 
 
 Write to Jose de Cordoba at jose.decordoba@wsj.com and Nicholas Casey at nicholas.casey@wsj.com
– Cuba's announcement that it's looking to whack a half-million workers off the state payroll by March is a significant move toward capitalism, reports the Wall Street Journal. Bearing some 85% of the nation's 5.5 million workers on the government payroll, as well as a ravaged economy, the island nation has little choice but to offload a significant number into the private sector. "Our state can't keep maintaining bloated payrolls," said Cuba's national union yesterday. Now Cuba watchers are split on whether that private sector can absorb Castro's move: "There is so much pent-up demand on the one hand and so much skill on the other," one tells the New York Times, so the transition will happen "pretty rapidly.” Baloney, says another: "There is no private sector to absorb them." Regardless, Castro said last month: “We have to erase forever the notion that Cuba is the only country in the world where one can live without working." For Raul Castro's earlier flirtations with free markets, click here.