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Explaining the increase in inequality during transition

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  • Branko Milanovic

Abstract

This paper attempts to explain the increase in inequality that has been observed in all transition economies by constructing a simple model of change in composition of employment during the transition. The change consists of the ‘hollowing‐out’ of the state‐sector middle class as it moves into either the ‘rich’ private sector or the ‘poor’ unemployed sector. The predictions of the model are contrasted with the empirical evidence from annual household income surveys from six transition economies (Bulgaria, Hungary, Latvia, Poland, Russia and Slovenia) over the period 1987‐95. We find that the most important factor driving overall inequality upwards was increased inequality of wage distribution. The non‐wage private sector contributed strongly to inequality only in Latvia and Russia. Pensions, paradoxically, also pushed inequality up in Central Europe, while non‐pension social transfers were too small everywhere and too poorly focussed to make much difference.

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  • Branko Milanovic, 1999. "Explaining the increase in inequality during transition," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 7(2), pages 299-341, July.
  • Handle: RePEc:bla:etrans:v:7:y:1999:i:2:p:299-341
    DOI: 10.1111/1468-0351.00016
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    1. Giovanni Andrea Cornia, 1994. "Income distribution, poverty and welfare in transitional economies: A comparison between Eastern Europe and China," Journal of International Development, John Wiley & Sons, Ltd., vol. 6(5), pages 569-607, September.
    2. Atkinson,Anthony Barnes & Micklewright,John, 1992. "Economic Transformation in Eastern Europe and the Distribution of Income," Cambridge Books, Cambridge University Press, number 9780521433297, June.
    3. Simon Commander & Andrei Tolstopiatenko & Ruslan Yemtsov, 1999. "Channels of redistribution: Inequality and poverty in the Russian transition," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 7(2), pages 411-447, July.
    4. Orazem, Peter F & Vodopivec, Milan, 1995. "Winners and Losers in Transition: Returns to Education, Experience, and Gender in Slovenia," World Bank Economic Review, World Bank Group, vol. 9(2), pages 201-230, May.
    5. Sheila Marnie & Hohn Micklewright, 1994. "Poverty In Pre‐Reform Uzbekistan: What Do Official Data Really Reveal?," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 40(4), pages 395-414, December.
    6. Jan Rutkowski, 1996. "High skills pay off: the changing wage structure during economic transition in Poland," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 4(1), pages 89-112, May.
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