Changes in the structure of earnings during the Polish transition

• Published in: Journal of development economics 2006-08, Vol.80 (2), p.389-427
• Main Authors: Keane, Michael P., Prasad, Eswar S.
• Format: Article
• Language: English
• Subjects: Between and within-group inequality; Economic theory; Education and experience premiums; Income inequality; Inequality; Labor market; Labor reallocation; Studies; Transition; Transition economies; Wage inequality
• ISSN: 0304-3878; 1872-6089
• DOI: 10.1016/j.jdeveco.2005.04.001

We document changes in the structure of earnings during the economic transition in Poland. We find that inequality in labor earnings increased substantially from 1988 to 1996. A common view is that the reallocation of workers from a public sector with a compressed wage distribution, to a private sector with much higher wage inequality, accounts for the bulk of increased earnings inequality during transition (see, e.g., the models of Aghion and Commander (1999) [Aghion, Philippe, Commander, Simon, 1999. On the dynamics of inequality in the transition. Economics of Transition 7, 275–2898.] and Commander and Tolstopiatenko (1998) [Commander, Simon, Tolstopiatenko, Andrei, 1998. The role of unemployment and restructuring in the transition. In: Commander, Simon (Ed.), Enterprise Restructuring and Unemployment in Models of Transition. The World Bank, Washington, pp. 169–192.]). However, our decomposition of the sources of the increase in inequality suggests that this compositional effect accounts for only 39% of the increase. Fully 52% of the increase is due to the increase in the variance of wages within sectors. That is, earnings inequality within both the private and public sectors grew substantially, and by similar amounts. This is consistent with prior work suggesting that even state-owned enterprises in Poland moved towards competitive wage setting as they restructured (see, e.g., Pinto et al. (1993) [Pinto, Brian, Belka, Marek, Krajewski, Stefan, 1993. Transforming state enterprises in Poland: evidence on adjustment by manufacturing firms. Brookings papers on Economic Activity, 213-70.] Commander and Dhar (1998) [Commander, Simon, Dhar, Sumana, 1998. Enterprises in the Polish transition. In Simon Commander (Ed.), Enterprise Restructuring and Unemployment in Models of Transition. The World Bank, Washington, pp. 109-142.]). A substantial part of the increase in earnings inequality was between group, due largely to increased education premiums. However, changes in inequality within education–experience–gender groups account for about 60 percent of the increase in overall earnings inequality. The increases in within-group inequality were very different across skill groups, with much larger increases for highly educated workers. These patterns hold in both the private and public sectors, although increases in education premiums were somewhat greater in the private sector.