Explaining the increase in inequality during transition

Type Journal Article - Economics of transition
Title Explaining the increase in inequality during transition
Author(s)
Volume 7
Issue 2
Publication (Day/Month/Year) 1999
Page numbers 299-341
URL http://siteresources.worldbank.org/INTDECINEQ/Resources/milanovic.pdf
Abstract
This paper attempts to explain the increase in inequality that has been observed in all transition economies by constructing a simple model of change in composition of employment during the transition. The change consists of the ‘hollowing-out’ of the state-sector middle class as it moves into either the ‘rich’ private sector or the ‘poor’ unemployed sector. The predictions of the model are contrasted with the empirical evidence from annual household income surveys from six transition economies (Bulgaria, Hungary, Latvia, Poland, Russia and Slovenia) over the period 1987-95. We find that the most important factor driving overall inequality upwards was increased inequality of wage distribution. The non-wage private sector contributed strongly to inequality only in Latvia and Russia. Pensions, paradoxically, also pushed inequality up in Central Europe, while non-pension social transfers were too small everywhere and too poorly focussed to make much difference.

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