published in: Journal of Development Economics, 2006, 80 (2), 389-427
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. 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 illustrates how even state-owned enterprises in
Poland moved towards competitive wage setting as they restructured.
A substantial part of the increase in earnings inequality was between group, due largely to
increased education premia. However, changes in inequality within education-experiencegender
groups account for about 60 percent of the increase in overall wage inequality--similar
to the patterns observed in the U.S. and U.K. in the 1980s. But, in contrast to the U.S. and
U.K. experiences, increases in within-group inequality in Poland 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 premia were somewhat
greater in the private sector.
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