Journal Issue
IMF Working Paper Summaries (WP/95/1 - WP/95/61)

Summary of WP/95/36: “Wage Structure in the Transition of the Czech Economy”

International Monetary Fund
Published Date:
August 1995
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Central planning produced distinct distortions in the wage structures of socialist economies, compared with market economies. These wage structures reflected the emphases on vocational training over advanced educational attainment, and on goods-producing industries over service industries. Under central planning, average returns to schooling were lower than in most market economies.

This paper examines the extent to which wage structures have adjusted during the economic transitions to remove such distortions, using microeconomic data from the Czech Republic. Since 1988, returns to schooling have increased, driven by weakening returns to vocational education and sharply increased returns to university education. These changes are led by developments in the private sector and retarded by the sluggish response of state enterprises. This general pattern of changing returns emerges in other transition economies as well. The paper also explores differences between wage policies in the private and state sectors during the transition. The private sector appears to establish steeper career wage profiles and is more likely than the state sector to use past unemployment experience as an indication of a productivity deficit.

Wage structures in market economies are not free of distortions. The reconstitution of eastern European labor unions into genuine collective bargaining organizations has the potential for introducing one source of such distortions into the wage structures of economies in transition. The paper examines the presence and impact of unions, finding that union representation is largely confined to the state sector, and that unions in the Czech Republic have had no impact on relative wages in either the state or private sectors.

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