Wage inequality and structural change

Transition from a centrally planned to a market economy, as experienced by Central and Eastern European (CEE) countries, constitutes an interesting case study for, at least, two reasons. First, the region comprises a relatively large set of dispersed economies, while these countries have also followed somewhat different policies, also in terms of labor market equality. Suffice it to say that, in spite of being a single country prior to 1992, Czech Republic has one of the lowest and Slovak Republic one of the highest unemployment rates in Europe. Second, the transition started nearly three decades ago, which yields a sufficiently long period to observe the wage compression processes. However, due to limitations in data availability, there was little comparative research so far into wage (de)compression in the course of a large structural shock. In most transition economies, household surveys do not permit direct identification of wages by person, while not all labor force surveys collect information on wages. Also, one needs a sufficiently long horizon.

Our findings show that the initial shock to wage distribution was essentially instantaneous, whereas countries experiencing a rapid structural change effectively do not return to the initial levels of wage compression. We show that most of the decompression stems from diverging wages, because the labor force remains substantially more homogeneous in terms of productive characteristics than in the advanced market economies. We show that more structural change is actually associated with lower extent of wage decompression.

Wage inequality and structural change
Magdalena Smyk and Joanna Tyrowicz
IZA DP | GRAPE WP | IAAEU DP | Published version

Income inequality in the context of large structural change has received a lot of attention in the literature, but most studies relied on household post-transfer inequality measures. This study utilizes a novel and fairly comprehensive collection of micro data sets from between 1980’s and 2010 for both advanced market economies and economies undergoing transition from central planning to market based system. We show that wage inequality was initially lower in transition economies and immediately upon the change of the economic system surpassed the levels observed in advanced economies. We find a very weak link between structural change and wages in both advanced and post-transition economies, despite the predictions from skill-biased technological change literature. The decomposition of changes in wage inequality into a part attributable to changes in characteristics (mainly education) and a part attributable to changes in rewards does not yield any leading factors.