Working Paper: CEPR ID: DP1662
Authors: Roger H. Gordon; David D. Li
Abstract: 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.
Keywords: economic transition; government in transition; policy during transition; redistribution; wage structure; labour productivity in transition
JEL Codes: H10; H20; H30; P50
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Government controls on wage rates (E64) | Low productivity in the state sector (O49) |
| Migration of skilled workers to nonstate sector (J61) | Decrease in productivity in the state sector (O49) |
| Migration of skilled workers to nonstate sector (J61) | Increase in productivity in the nonstate sector (O49) |
| Government redistribution policies (H23) | Financial health of state enterprises (L32) |