Wage inequality, labour market flexibility and duality in Eastern and Western Europe

Abstract

In the last two decades a broad process of labour market reforms towards more flexible and liberal models has been taking place in Europe. For Central and Eastern European countries this evolution was an important dimension of the wider process of institutional change which accompanied their transition to market economies. This article presents the complex picture of EU countries at the outset of the recent crisis (2007) in terms of the components of earnings differentials, with particular emphasis on the dimensions of labour market flexibility identifiable with contractual arrangements (temporary versus permanent employment) and self-employment. Our main focus is on Central and Eastern European countries but we keep old EU members as benchmarks. Results highlight that different factors lie behind permanent/temporary and permanent/self-employed earnings gaps in the two regions. The dualism between regular and flexible jobs in the CEE labour market is mainly based on workers' attributes; in the Western EU the dualism is instead mainly driven by discrimination associated with labour positions.

Acknowledgements

We are grateful to Vittorio Valli, Will Bartlett, Saul Estrin, Karsten Staehr and Milica Uvalic for their helpful comments on preliminary versions of this article presented at the EACES 2010 conference in Tartu and at the 2011 Managing Transition Network Workshop held in Brighton. Usual disclaimers apply.

Notes

 1. Owing to intrinsic characteristics of macro sectors in terms of internal differentiation and institutional settings (e.g. the presence of unions and the coverage of collective bargaining) a decline in industry is expected to foster inequality (Gustafsson and Johanson 1999); a similar effect is produced by a growing service sector (Ferreira 1999). A decline in agriculture should instead produce a reduction of inequality via the between-sector component.

 2. Another stream of the literature focuses on the perceived impact of transition (see Hölscher 2009), which is related to income and wealth distribution. A survey carried out by the EBRD and the World Bank in 2006 (EBRD 2007) shows that in all transition countries a majority of respondents considered that their relative position compared with 1989 had deteriorated, in spite of the growth rates experienced in most of the countries. Levels of unhappiness in Eastern Europe are in general greater than in Western Europe and North America, and particularly high in South-Eastern Europe and parts of the Commonwealth of Independent States (CIS).

 3. A review of the extensive literature on these aspects is clearly beyond the scope of this article. Useful references can be found in Paci (2002) for gender wage inequality, Orlowski and Riphahn (2009) for age wage structure, Munich et al. (2005) for education wage premia and Du Caju et al. (2010) for sector and firm characteristics.

 4. Examples of country-specific studies on wage inequality in transition are Keane and Prasad (2006) for Poland; Večernik (2001) for the Czech Republic; Giddings (2002) for Bulgaria; Smith (2001) for Estonia; Kohn and Antonczyk (2011) for East Germany; and Krstić and Reilly (2007) for Serbia.

 5. A related third crucial dimension of flexibility is of course the expansion of the informal sector, which typically attracts low-skilled and low-experienced workers. In CEE countries the rise in informal activity is associated with high taxes and strict regulations in product and labour markets. In low-income transition countries the informal economy has also been widely associated with an extensive rural sector. For a focus on these aspects see Bernabè (2002, 2008) and the literature cited therein.

 6. Rutkowski et al. (2005) report that CEE employment protection legislation is stricter than the OECD average, especially due to stronger effective enforcement; in former Soviet Union and Balkan countries the EPL is formally more rigid but poorly enforced owing to the relatively weaker role of unions and to the incentive and ability of firms to circumvent overly strict de jure regulations.

 7. Country-specific studies on self-employment have been published in the 2010 European Employment Observatory Review 2010 and can be accessed at: http://www.eu-employment-observatory.net/en/documents/EEOReviews.aspx.

 8. The distinction between self-employed and employees is provided in variable PL040 (Status in employment); variable PL140 (Type of contract) specifies whether the employed worker has a permanent or a temporary position.

 9. A more detailed description of this variable is in European Commission, 2010, EU-SILC Guidelines 2008 (Version January 2010). Monetary values are reported by respondents and it is therefore not possible to know whether they included ‘envelope wages’, which can be important in Eastern countries (Williams 2008). As a gross measure, income includes the social contributions and income taxes payable by employees. The use of gross wages is common in the literature considering wage and earnings inequality within countries (e.g. Salvereda and Mayhew 2009, Antonczyk et al. 2010). In our case its use is also motivated by the fact that data on net incomes are not available for Hungary and the Slovak Republic nor for Germany, the Netherlands and Finland. Brandolini et al. (2011) explain fully why the use of gross wages is, in fact, the only alternative when EU-SILC data are concerned.

10. This variable does not include any forms of capital income. The difficulties in defining self-employment are well known. The guidelines accompanying the EU-SILC dataset provide all necessary details of the data used here.

11. The BO decomposition does not provide identical results (Jann 2008, Elder et al. 2010) if we choose temporary workers as the benchmark and reverse Equation (6). In our case, the differences are not remarkable and outcomes (available upon request) confirm the evidence presented here.