Government Distributional Concerns and Economic Policy During the Transition from Socialism
CEPR Discussion Paper No. 1662
Posted: 3 Oct 1997
Date Written: June 1997
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.
JEL Classification: H10, H20, H30, O52, P50
Suggested Citation: Suggested Citation