On the Dynamics of Inequality in the Transition

Posted: 19 Aug 1999

See all articles by Philippe Aghion

Philippe Aghion

College de France and London School of Economics and Political Science, Fellow; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Simon John Commander

London Business School; IZA Institute of Labor Economics

Abstract

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.

JEL Classification: D31, D63, H42, P21

Suggested Citation

Aghion, Philippe and Commander, Simon John, On the Dynamics of Inequality in the Transition. Economics of Transition, Vol. 7, No. 2, July 1999. Available at SSRN: https://ssrn.com/abstract=169510

Philippe Aghion (Contact Author)

College de France and London School of Economics and Political Science, Fellow ( email )

London
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Simon John Commander

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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