Before the transition governments had strong distributional objectives, which they pursued mainly by direct controls over state enterprise wage rates and hiring decisions, yielding a highly compressed wage distribution. During the reform they maintained similar controls over state enterprises, but had to take into account competition from the new non-state sector that was mostly free from these controls. Based on these distributional considerations alone, we forecast: 1) an immediate and continuing decline in the skills of workers in the state sector as the most able workers leave; 2) higher productivity in the non-state sector, which consists of the most able workers; 3) accounting losses in the state sector, reflecting the transfer of tax revenue to finance payments to the unskilled previously financed within the firm; and 4) restructuring within the state sector to reduce the distortions to relative wage rates. These phenomena are broadly observed across all transition economies.
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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
1662.
Find related papers by JEL classification: H10 - Public Economics - - Structure and Scope of Government - - - General H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General O52 - Economic Development, Technological Change, and Growth - - Economywide Country Studies - - - Europe P50 - Economic Systems - - Comparative Economic Systems - - - General
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