By Marc Frank

HAVANA (Reuters) - Cuba will let more than 500,000state employees go by next March and try to move most tonon-state jobs in the biggest shift to the private sector sincethe 1960s, the official Cuban labor federation said Monday.

The statement said eventually more than a million jobswould be cut and, due to efforts to increase efficiency in thestate sector, there would be few new state sector openings.

More than 85 percent of the Cuban labor force, or over 5million people, worked for the state at the close of 2009,according to the government.

"Our state cannot and should not continue maintainingcompanies, productive entities, services and budgeted sectorswith bloated payrolls (and) losses that hurt the economy," thestatement said.

"Job options will be increased and broadened with new formsof non-state employment, among them leasing land, cooperativesand self-employment, absorbing hundreds of thousands of workersin the coming years," it said.

According to Communist party sources who have seen thedetailed plan to "reorganize the labor force," Cuba expects toissue 250,000 new licenses for self-employment by the close of2011, almost twice the current number, and create 200,000 othernon-state jobs.

The government's definition of self-employment includesmany entities that are essentially small businesses, includingsuch things as family-run restaurants and cafeterias, autorepair shops and jobs in the building trades.

The non-state jobs will include, among other things,workers hired by the small businesses, taxi drivers who willnow lease their cabs from the state and employees of smallstate businesses to be converted to cooperatives.

SEISMIC SHIFT

The plan amounts to the most important reform undertaken byPresident Raul Castro since he succeeded older brother FidelCastro in early 2008 and the biggest shift to privateenterprise since all small businesses -- 58,000 in total, withan average of five to eight employees, according to Cubaneconomist Juan Triana -- were nationalized in 1968.

"We have to erase forever the notion that Cuba is the onlycountry in the world in which people can live without working,"Castro said, upon announcing in general terms his plans to cutstate payrolls and increase self employment in an August speechto the National Assembly.

Cuba currently has only 591,000 people working in theprivate sector, a number that includes mostly family farmers aswell as 143,000 self-employed, according to the NationalStatistics Office.

All state businesses and agencies were ordered in Januaryto review payrolls with an eye to trimming unneeded positions.

Laid-off state workers will be offered alternative jobs,and if they do not accept one, will have unemployment benefitsequal to 70 percent of their wages for no more than threemonths, depending on their seniority, sources said.

They will not be totally out in the cold because all Cubansreceive free health care and education, subsidized utilities, asubsidized food ration and automatic adjustment of mortgages to10 percent of the top breadwinner's income.

Many Cubans also receive remittances from family abroadworth far more than the average monthly wage, equivalent to around twenty U.S. dollars.

Castro has fostered discussion in the media and grass-rootsmeetings on what ails the socialist economy, and made mostlyminor changes aimed at boosting productivity by putting moreincentives in the system.

The most important reforms up to now were in agriculture,where state lands have been leased to 100,000 new farmers andthe state's monopoly on the sale of farm supplies includingfuel and fertilizer and produce have been loosened. (Editing by Jeff Franks and Todd Eastham)