On the dynamics of inequality in the transition

Inequality has increased in many of the transition economies. At the same time, spending on education has declined. In this paper we survey the factors driving these changes. We then set up a small general equilibrium model to simulate the effect of different policy choices on the path of inequality over the transition. We show that the policies selected in Central Europe engender a relatively rapid spike in inequality but with a Kuznets curve. In the simulations that broadly capture features of the policy regime dominating in Russia and the FSU, we find no Kuznets curve. We then turn to the longer run and look at the way in which both trade liberalization and technological and organizational change are likely to affect the relative demand for types of labour. We show how substantial technological and organizational change ‐ obvious features of transition ‐ can result in raising inequality. Persistence in inequality can be expected to depend critically on the pace at which the acquisition of skills takes place in the economy ‐ and, hence, on the evolution of the educational system. As such, policies aimed at raising adaptability ‐ such as quality educational systems ‐ can be expected to dampen the increase in wage inequality.