Czech Incomes

Household incomes in the Czech and Slovak market economies

Under the Soviet-based system, countries in Central and Eastern Europe were among those with the most equal distributions of income in the world. A greater income inequality was therefore an expected outcome of a transition to a market economy. After 5-7 years of observations on the transition, two models of the process have emerged within the former Soviet bloc: one in Russia and other newly independent states, and another in the Central and East European countries. Russia and the newly independent states have suffered profound and continuous declines in gross domestic product as the centrally planned system disintegrated, government tax revenues plummeted, and weak social safety nets were instituted. In contrast, the Central and East European economies experienced only a brief period of economic decline, followed by growth within a newly introduced market system. Moreover, some governments, including the Czech and Slovak Republics, established relatively strong social safety nets.1

Data from the Family Budget Surveys2 of the Czech and Slovak Republics show that inequality, based on adult equivalent household income,3 did not change appreciably in the Slovak Republic from 1989, when the two republics operated as one country (before the "Velvet Revolution") to 1993, the first year the country separated into two Republics (the year of the "Velvet Divorce"), 4 years into the transition to a market economy. Also, income inequality in the Czech Republic did not rise to any great extent after the transition. Income inequality in the Czech and Slovak Republics continues to be among the lowest in the world. These countries have created market economies with relatively little increase in income inequality, primarily due to institutional changes in the countries. Jiri Vecernik, using 1988 and 1992 Microcensus survey data, reports a similar trend in income inequality for the two republics.4

This report briefly reviews the income policies which may have influenced the distribution of income in the Czech and Slovak Republics during the early years of the transition, and presents some results from a recent study. The focus here is on wage policies, social insurance, the social assistance system, and income taxes. Other factors likely to have affected income distributions include changes in macroeconomic conditions (briefly discussed here), and asset redistribution (not considered here, but discussed in the full article).5

In both republics, wage controls were first put into effect in 1991, and then were used intermittently in the ensuing years, with several changes in design. In 1993, the coverage and scope changed: wage controls limited an enterprise’s wage bill growth to equal that of the product of the firm’s total number of employees at the beginning of the year and the economywide average wage. The effects of wage controls were not clear because fines were not imposed until the enterprise exceeded the wage bill growth norm by 5 percent. Because policy changed often and enforcement was weak, it is unlikely that wage controls had a significant effect on wage growth or wage dispersion.

In 1991,