Sweeping conclusions about the role of labor management in the newly emerging democracies in Eastern Europe often are drawn from the Yugoslav experience. In contrast to the successful years of the 1960s and, to a lesser extent, the 1970s, when Yugoslavia's economic system appealed to many as an attractive third way, its failures in the 1980s are now used to show that labor management cannot and does not work. 1 This article challenges the central premise of most studies on Yugoslavia's economic system-that any residual surplus accrues to those who currently work for the firm.'2 1 focus on the system of wage determination that was in place in the 1970s and 1980s under the system of contractual socialism and argue that workers had little say about their earnings and so only appeared to be residual claimants.3 Rather, political elites, in blatant violation of the proclaimed autonomy of workers, set workers' earnings with the clear goal of evening out differences among firms. They achieved this through a pervasive and massive redistribution of income, implemented by discretionary taxation and subsidization of enterprises. To substantiate my thesis, I will describe why and how earnings distribution was controlled under contractual socialism (Sec. I). I will then show that the control was indeed effective in imposing an egalitarian distribution of earnings (Sec. II).