Abstract
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 datasets between 1980s and 2010 for both advanced market economies and economies undergoing transition from central planning to market based system. We show that earned income inequality was initially lower in transition economies and immediately upon the change of the economic system surpassed the levels observed in advanced economies. We decompose changes in wage inequality into parts that can be attributed to changes in characteristics (mainly education) and changes in rewards, but did not find any leading factor. Finally, in the context of skill-biased technological change literature we find a very weak link between structural changes and wages in both advanced and post-transition economies. %This holds regardless of whether an economy has underwent a large structural shock or not.
Highlights
There is a number of theoretical reasons why a structural shock may matter for the relationship between wage compression and normatively understood inequality
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 addressed all statistical offices in Central and Eastern European (CEE) region and acquired labor force surveys (LFS) and household budget surveys (HBS) data
Summary
There is a number of theoretical reasons why a structural shock may matter for the relationship between wage compression and normatively understood inequality. Shocks usually occur with adjustment frictions, which typically imply a larger role for the unexplained component Smyk adjustment in rewards to these characteristics). In the context of a Mincerian wage regression ( w = X + ) changes in will drive changes of w, given roughly stable X. Changes in wage dispersion will signify changes in inequality, until quantities fully adjust. Since eventually shocks trigger adjustment in X, the question is if immediate reaction in drives the incentives for these adjustments in a way that restores initial compression or leads to a reshuffling of the social structures
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