From the perspective of market economies, central planning produced distinct distortions in the wage structures of socialist countries. This paper examines the extent to which wage structures in the state and private sectors have adjusted to remove such distortions during the economic transition, using micro data from the Czech Republic. There is strong evidence that Czech wage structures are moving toward patterns observed in market economies, and the change is being led by developments in the private sector. At the same time, the establishment of collective bargaining does not appear to be introducing countervailing distortions into Czech wage structures.

Abstract

From the perspective of market economies, central planning produced distinct distortions in the wage structures of socialist countries. This paper examines the extent to which wage structures in the state and private sectors have adjusted to remove such distortions during the economic transition, using micro data from the Czech Republic. There is strong evidence that Czech wage structures are moving toward patterns observed in market economies, and the change is being led by developments in the private sector. At the same time, the establishment of collective bargaining does not appear to be introducing countervailing distortions into Czech wage structures.

IN THE EARLY POSTWAR PERIOD, the central planning systems of eastern and central Europe pursued higher growth by raising labor force participation and increasing capital investment. Over time, however, this contribution to growth was countered by systemic failures to allocate workers to the sectors in which their potential productivity was highest and to elicit high levels of worker performance within organizations. The resulting decline in total factor productivity growth, which figured prominently in the collapse of central planning systems, was largely caused by the failure of the system to devise adequate incentives to solve the labor allocation and performance problems.

There is a strong presumption among economists that the transition from central planning to more market-oriented economies should eliminate the inefficiencies associated with central planning. Given the initial pattern of distortions, this process should produce radical changes in relative wages and an increase in overall wage inequality. Nevertheless, there is no clear understanding of how or how rapidly the required wage structures and enterprise wages policies will emerge.

Nor has the possibility that the transition process might produce countervailing distortions—common in market economies but absent under central planning—received much attention. Foremost among the potential sources of wage structure distortions accompanying the economic transitions is the reconstitution of labor unions into genuine collective bargaining organizations. However, the adjustment of wage structures in transition economies may also be thwarted by the wage rules applied through incomes policies—a clear case of short-run stabilization policies conflicting with the fundamental objectives of the transitions. The consequence of reduced relative wage flexibility from any source is an increased reliance on quantity adjustments, notably unemployment and labor force withdrawal, in transition economies.

This paper examines the extent to which wage distortions under central planning have been reversed during the transition and the extent to which countervailing distortions have been introduced, using micro data from the Czech Republic. The data are from employment and labor force surveys conducted between June 1988 and November 1994. In addition to providing information on wage, schooling, and demographic characteristics of respondents, the most recent surveys include information on union status, presence of foreign investment, and other institutional features of labor markets in the Czech Republic. Section I proceeds from a review of the labor market setting under central planning, which provided the point of departure for the transition, to an analysis of the recent evolution of the wage structure in the Czech Republic. A defining feature of a transition is the growth of a private sector, and Section II explores how this development contributes to the observed changes in wage structures. The data permit an assessment of developments in the two major components of the private sector—former state enterprises that have been privatized and new private firms.

Section III addresses differences in company wage policies between the state and private sectors and between two components of the private sector—privatized state firms and newly created private firms. The influence of foreign investment on wage policies is also examined. Section IV of the paper examines the pattern of union representation and the extent to which the development of collective bargaining has influenced wage structures. The final section discusses the policy implications of the findings.

I. Evolution of the Wage Structure

This section examines the evolution of the wage structure in the Czech Republic between 1988, a pretransition year in which virtually all official economic activity was in the state sector, and late 1994, when the rapidly emerging private sector and privatized state enterprises accounted for about half of employment. The point of departure is the distinctive wage structure achieved under central planning. In the early postwar period, central planners wished to encourage the development of goods-producing sectors of the economy (particularly heavy industry) and discourage production in services and most intellectual activities outside the hard sciences. In establishing a national wage structure—the so-called “tariff” wage scale for each job category—in the early postwar period, central planners gave some weight to education, the unpleasantness of the job, and other factors familiar to Adam Smith, but also altered relative wages to reallocate labor in accord with their objectives for industrial development. By the mid-1950s east European economies experienced large relative wage increases in industry and construction and relative wage decreases in trade and services (Adam (1984)).

The devaluation by central planners of “mental” work relative to “physical” work also influenced the schooling and training of the labor force. Vocational training was emphasized over advanced educational attainment and the limited university slots were often allocated on the basis of political affiliation and activity. From the perspective of market economies, east European economies entered their economic transitions with overinvestments in vocational-apprenticeship training and underinvestments in university education. As a result, the average returns to schooling in eastern Europe under central planning were lower than returns to schooling in most market economies (Flanagan (1994b)).

The official tariff wage structures, with the preferences that they incorporated, have been abandoned during the transition process, leaving relative wages free to adjust subject to new institutional constraints. The rest of the paper examines the nature of these adjustments using data for June 1988 (18 months before the revolution), November 1993, and November 1994 (about four and five years into the transition). The analysis for 1988 uses over 16,700 observations from the microcensus conducted by the Czech Federal Statistical Office. The data for 1993 and 1994 are from the Survey of Economic Expectations and Attitudes conducted by the Institute of Sociology at the Czech Academy of Sciences. These surveys cover adults 18 to 60 years of age and use two-step quota sampling, with the first step defining the region and size of locality, and the second defining gender, age, and education. The survey responses provide basic economic and personal data as well as the attitudes of respondents to economic and political aspects of the transition. The November 1993 survey includes questions on several aspects of human resource management, and the November 1994 survey includes questions on union membership. The November 1993 (1994) survey interviewed 1,113 (1,307) respondents from the Czech Republic, and data for the 754 (864) employed respondents are analyzed in this paper.

To examine the post-transition evolution of the wage structure, these data are analyzed with a human capital earnings function, in which the natural logarithm of the monthly full-time wage (net of social benefits) is regressed on years of schooling and potential experience (age minus school years minus six) variables. The regressions also include a dummy variable for gender. The average rate of return to another year of school (the coefficient on the school years variable) moved from 4.3 percent in mid-1988 to 6.2 percent in late 1994.1 Much of this increase occurred during 1994, as employment began to increase in the Czech Republic for the first time since the beginning of the economic transition. Aggregate estimates may obscure key aspects of the transition process, since new private firms are unlikely to adopt the wage structures and practices developed in state enterprises under central planning. Moreover, the private sector itself is not monolithic. Pay structures and policies in privatized state enterprises are likely to be subject to organizational inertia not encountered by new private firms, and the wage and human resource management policies of foreign firms may differ from those of domestic private firms. Estimated returns to schooling in November 1994 (1993) were 7.3 (6.7) percent in new private employment, 6.7 (5.4) percent in privatized state enterprises, and 6.5 (5.4) percent in ongoing state enterprises. While these figures seem to imply that wage structures in the state sector are responding sluggishly to wage structure developments in the private sector, the differences in the estimated returns to schooling between the three sectors are not statistically significant.

Given the distortions in educational choices discussed above, it is also of interest to examine changing returns to specific levels of educational attainment. The regression results in Table 1 report the wage premiums relative to primary school completion associated with completion of vocational (VOCAT), high school (HS), or university (UNIV) degrees. The regressions include the standard quadratic specification of potential experience (EXP and EXPSQ) and a dummy variable (FEMALE) taking the value 1 if the respondent is a woman and 0 otherwise. Regressions 1 and 2 report the economywide evolution of returns to different levels of school completion between 1988 and 1994. Between mid-1988 and late 1994, the wage returns to vocational, high school, and university levels of schooling increased relative to primary school education by statistically significant amounts.

Table 1.

Evolution of Returns to Schooling

(t-statistics in parentheses)

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Sources: Czechoslovak Income Survey (Microcensus) for 1988; Survey of Economic Expectations and Attitudes, November 1994, for 1994.Notes: Dependent variable is the natural logarithm of the full-time monthly wage. VOCAT = vocational degree is highest complete schooling. HS = high school degree is highest completed schooling. UNIV = university degree is highest completed schooling. EXP = potential experience (age minus school years minus 6). EXPSQ = square of potential experience. PRWORK = employee in private sector. PROWN = employer in private secor. FEMALE = female worker.

Regressions 3 through 5 report 1994 returns by three major sectors— traditional state enterprises (State), recently privatized state enterprises (StPriv), and new private firms created during the transition (Private). (Limited sample size prevents separate regression analyses of private sector wage structures in foreign and domestic firms.) The returns to vocational education are measured most reliably in the state sector and are not economically or statistically significant in privatized enterprises. (One year earlier none of the three major sectors reported a statistically significant effect of vocational education on wages.) While returns to a university degree appeared to increase most rapidly in the private sector in the early stages of the transition, by November 1994 there were no statistically significant differences in the returns between the three major sectors.

Under central planning. returns to (potential) experience were also lower than in market economies. During the transition, these returns became even lower—economywide earnings-experience profiles flattened further since 1988. By 1994, ten years of labor force experience produced half the wage effect it would have produced five years earlier. This is consistent with the hypothesis that recent labor market experience is more valuable than experience acquired under central planning.

How do wages paid in the private sector compare with wages paid in current and former state enterprises? The November 1994 Survey of Economic Expectations and Attitudes identifies both owners and workers in new private enterprises, as well as workers in privatized state enterprises. After controlling for schooling and potential experience, workers (owners) in new private firms earn 14 (44) percent more than respondents in current or former state enterprises (Table 1, regression 6).2 (No significant wage differential had yet emerged between workers in current and former state enterprises, however.)

To summarize, since 1988 average returns to schooling increased, and new private firms appear to have played a leading role in reversing the wage structure distortions that developed under central planning. Returns to university education increased, initially in the private sector but later more broadly. Most recently, there have been some changes in wage structures in the state sector that may reflect the effects of labor market competition with the private sector (e.g., some increase in the returns to high school and university degrees).

There is mounting evidence that both the relative wage adjustments and the leading role of the private sector reported above are not unique to the Czech Republic. Wage inequality and returns to schooling have risen in Poland, led by sharply increasing relative wages for white-collar workers with a university education (Rutkowski (1994)), Returns to schooling in Hungary have also increased (Commander and others (1993)). Unlike the Czech Republic, both of these countries had significant sectors of private activity operating well before the economic transitions. In contrast, in Romania, where there has been little development of a private sector, there was little change in returns to schooling in the early transition years, and a university degree only provided a 30 percent wage premium relative to high school completion in 1992 (Earle and Oprescu (1994)). Moreover, vocational trained workers have experienced both a falling relative wage and relatively high unemployment rates in several transition economies. Given the leading role of the private sector, a closer examination of private-sector wage policies is in order.

II. The Role of the Private Sector

The Czech Republic entered the transition process with less private sector activity than the other major east European countries—Hungary and Poland. But by early 1993, almost 30 percent of the employed respondents to the Survey of Economic Expectations and Attitudes worked in private employment. The privatization of large state enterprises followed over the next few months, and by the November 1994 survey only about 41 percent of employment remained in traditional state enterprises (Table 2). Another 28 percent of employment was in privatized state enterprises, most of which appear to have been state enterprises ten months earlier. Broadly construed, the private sector (including these enterprises) provided almost 60 percent of the nation’s employment in late 1994.

Table 2.

Means and Standard Deviations, Employed Workers, November 1994

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Note: EDYEARS = years of schooling. PRIM = primary school degree is highest completed schooling. AGE = age in years. See text and notes to Table 1 for other definitions. Standard deviations are in parentheses.

Table 2 also provides a snapshot of human resources in the three major sectors in November 1994. Average educational attainment (EDYEARS) is actually lower in new private firms than in the state or privatized state sectors. New private firms, which provide the highest returns to a university degree, have the lowest share of workers with university degrees. Employees in the private sector also have less experience than in the state sector, although the returns appear to be greater.

Despite their lower level of human capital investment, full-time employees in the private sector earned considerably more than their counterparts in the state sector in the Czech Republic. (In Table 2, EARN is the monthly wage of full-time workers in Czech koruny and LEARN is the natural logarithm of the monthly wage.) Moreover, the regression analysis reported in Table 1 also confirmed the presence of higher wages in the private sector after holding human capital investments constant, raising the question of how and why such large wage differentials emerge.

One hypothesis is that the differential is necessary to attract labor resources into the emerging private sector. Research in western labor markets has found that labor mobility responds to both relative wage and job vacancy mechanisms. In labor markets with considerable unemployment, the existence of job vacancies may be enough to attract workers from unemployment. With unemployment low, as it has been during the transition in the Czech Republic, wage differentials may also be necessary to attract workers. Moreover, wage differentials are likely to be necessary when private firms hire directly from state firms rather than from the pool of unemployed, as appears to be the case in the Czech Republic and other transition economies (Flanagan (1994a)).3

A second possibility is that the private sector must also offer wages that compensate for differences in nonwage benefits and/or job security between the state and private sectors. Unfortunately, the data in the Survey of Economic Expectations and Attitudes do not include sufficient information to permit direct assessment of this hypothesis. By 1994, it was by no means clear in which direction a compensating wage differential should go, however. The job security advantage of the state sector had clearly declined. Moreover, a 1992 survey of private manufacturing firms in the Czech and Slovak Republics reported that while workers received “few fringe benefits beyond the minimum mandated by labor laws... [fjringe benefits were about three times higher in new start-ups than in privatized state enterprises.” (Webster and Swanson (1993), pp. 33-4). Further progress on this issue awaits detailed data on the composition of total compensation packages in each sector.

III. Company Wage Policies During the Transition

The foregoing discussion focused on the evolution of a relative wage structure that would raise productivity through improved allocation of labor. In a world of long job tenures and “career” employment relationships, productivity also depends on incentives established in the internal labor markets of enterprises. As yet, there is little systematic institutional information about the human resource management policies adopted during the transition, and most information must be inferred from wage structure developments in the various sectors. The Survey of Economic Expectations and Attitudes enables consideration of three potential sources of differences between the sectors: (1) the nature of career wage profiles; (2) the role of foreign investment on wage policies; and (3) the use of screening and signaling devices. As before, it will be instructive to decompose the private sector into new private firms and privatized state enterprises.

Career Wage Profiles

Several economic theories stress the desirable incentive effects associated with steep career earnings profiles. The oldest is the notion that steeper career earnings profiles are associated with longer periods of human capital investment, since with a shorter career span, earnings must increase more rapidly to provide a sufficient return to encourage the investment. In addition, the principal-agent literature has stressed the performance incentives provided by relatively steep earnings profiles when work cannot be monitored continuously. Workers who are paid less than they are worth early in their career have an incentive to work sufficiently hard to receive more than they are worth later in life. Flatter profiles produce more equity between younger and older workers, which may encourage more on-the-job cooperation, but otherwise offer weaker incentives. The regression results reported in Table 1 clearly indicate that career wage profiles are most flat in state enterprises, consistent with the greater use of wage incentives to foster career attachments in the private sector.

Wage Policies of Foreign Investors

The process by which new employers in a transition economy come to adopt wage structures and policies that differ from their prior experience with state enterprises is not well understood. In the markets for goods and services, world prices often provide an immediate benchmark for a transition economy, but channels of information on wages are less obvious. One potential source of transmission of market-oriented policies is foreign ownership and/or investment. Foreign owners and investors may encourage or import from operations in other countries market-oriented wage structures and/or apply wage policies intended to encourage greater effort. In the latter case, there have been anecdotal reports that foreign firms tend to adopt efficiency wage policies in transition economies in an effort to attract and motivate high-quality workers. If this is a general phenomenon, a high foreign presence in a firm should be statistically associated with high-wage policies.

The November 1993 Survey of Economic Expectations and Attitudes includes questions about the importance of foreign capital in the respondent’s firm but does not explicitly ask whether the firm is foreign-owned. Twelve percent of the respondents indicated that a major part of the financial capital of their organization came from abroad (HIFORKAP); another 2 percent indicated that foreign capital played a small role (Table 3). Relatively few employees of state enterprises (6 percent) report a major foreign financial influence. There are notable differences in foreign financial presence within the private sector, however. Of employees in privatized state enterprises, 25 percent report such influence, in comparison with 10 percent of employees in other private firms. In part, this reflects the tendency of foreign capital to flow to the larger enterprises. Foreign capital also tends to be found in relatively high-wage industries.

Table 3.

Foreign Investment and Wages by Sectors, November 1993

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Source: Survey of Economic Expectations and Attitudes, November 1993.

The sample of employees working for firms with HIFORKAP is too small to analyze the effect of foreign investment on the overall wage structure. Nevertheless, it is possible to test for a relationship between foreign investment and efficiency wage policies. To examine whether Czech firms with substantial foreign investment pay relatively high wages for given human capital attributes, human capital earnings functions with a dummy variable for HIFORKAP were estimated for the total sample and each of the three sectors. Only the results for the HIFORKAP variable are reported in Table 3. We see that, economy wide, workers in firms with substantial foreign investment appear to earn a wage premium of about 11 percent relative to similarly qualified workers in other firms. This result reflects the tendency of foreign investment to flow toward high-wage industries in the Czech Republic, however, and the finding disappears with the addition of industry dummy variables (Table 3). No significant relationship between wages and HIFORKAP is found for any of the individual sectors with or without controls for industry. It appears that there is no general tendency for firms with substantial foreign investment to follow efficiency wage policies. Consistent with these wage patterns, firms with HIFORKAP do not appear to attract employees with particularly high investments in human capital. HIFORKAP is most likely to be found in relatively large firms employing comparatively few workers with university education and offering comparatively little training.

Use of Screening and Signaling Devices

In virtually all hiring decisions, employers are unable to observe all aspects of an applicant’s productive potential, and the applicant is incompletely informed about the prospects of the firm as a place of work. Both parties have an interest in relying on observable characteristics to reduce uncertainty. For example, profit-maximizing employers who view prior unemployment experience as signaling unobservable quality deficiencies will offer workers with such experience lower wages or lower-wage positions. There is already evidence from transition economies that private-sector employers prefer to hire new workers directly from state enterprises rather than from the pool of unemployed (Flanagan (1994a)). Additional evidence may be obtained by testing for wage differences associated with prior unemployment experience. The Survey of Economic Expectations and Attitudes elicits information on unemployment experience in the past two years. When a dummy variable for such experience is added to the basic human capital wage specification, prior unemployment experience does tend to depress wages by about 10 percent in the private sector. In other sectors, prior joblessness has no significant influence on wages.

IV. Union Wage Effects During the Transition

In Czechoslovakia, as in other former Soviet bloc countries, union membership was compulsory but labor unions had a distinctly circumscribed role under central planning. As workplace organs of the Communist Party, the unions’ major role was to assist in the production process, and representational functions were limited to a kind of grievance handling in rare dismissal cases. (Under central planning, labor unions also distributed “workplace public goods,” including recreation and cultural benefits.) Collective bargaining over the terms and conditions of work, as it is understood in the west, did not exist. As in the rest of the region, Czech unions rapidly transformed to conduct normal wage bargaining following the velvet revolution. There was a further change in the institutional arrangements after the division of the country into the Czech and Slovak Republics in early 1993.

This institutional development holds the potential for introducing distortions into transition wage structures that were not present under central planning. In market economies, unions have had two types of relative wage effects. First, they tend to raise the wages of union workers relative to nonunion workers. In economies in which both a union and nonunion sector can be observed statistically, union wage levels exceed nonunion wage levels for a given quality of worker. The union wage premium averaged 15 percent in the United States between the mid-1950s and late 1970s, but declined somewhat in the 1980s (Lewis (1986)). The union-nonunion wage differential is somewhat lower in the United Kingdom (Metcalf (1993)). Second, unions tend to narrow pay distributions in ways that reduce returns to schooling. Looking across countries, this effect appears strongest in economies with centralized bargaining, where unions can coordinate nationwide “solidaristic” wage policies. But even in countries with decentralized collective bargaining (e.g., the United States), returns to schooling tend to be relatively low among unionized workers. In principle, then, collective bargaining might inhibit the transformation of wage structures inherited from central planning. This section examines the extent to which unions have had such an effect.

Until recently, assessments of union strength in eastern Europe came mainly from the membership claims of trade unions. Evidence from surveys of privatized firms in the region indicated that union representation was largely limited to the state sector. The November 1994 Survey of Economic Expectations and Attitudes asked respondents whether they were union members, thus permitting a more precise assessment of the pattern of unionization and of the relationship between union representation and wages in the Czech Republic about five years into the transition.

Patterns of Union Representation

By these measures, about 55 percent of workers in the Czech Republic were union members in November 1994 (Table 4), in contrast with virtually 100 percent unionization under central planning. The membership estimate is in the upper end of union density rates in west European countries but exceeds membership rates in North America (OECD (1994), Chapter 5).4 At first glance, the extent of union representation indicates a potential for substantial union influence on wage structures during the transition. We now examine the data for clues as to whether the potential is likely to be realized.

Table 4.

Union Membership Rates, November 1994

(Standard errors in parentheses)

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Source: Survey of Economic Expectations and Attitudes, November 1994.

The estimate of average union membership masks a huge difference in union presence in the state and private sectors. While unions have retained most of their members in ongoing and recently privatized state enterprises, they barely have a toehold in the new private enterprises that have emerged during the transition (Table 4). At 8 percent, the membership rate in the private sector falls below the lowest density figures for the private sector in market economies.5 Efforts to determine a more extensive set of determinants of union membership (including education, experience, and other individual characteristics) using probit analysis were unsuccessful. Broad sector of employment (state versus private) remained the dominant influence. Thus, the future of union representation in the Czech Republic may depend on the ultimate balance between newly created private firms and privatized state enterprises.

Union Wage Effects

If the assumption of normal collective bargaining activities by unions during the economic transitions has retarded the emergence of competitive wage structures, there should be measurable union wage effects. Table 5 reports on efforts to measure such effects among employed workers in the Czech Republic in November 1994. The union membership dummy variable (MEM) has been added to’standard human capital earnings functions to test for union wage impacts. Table 5 reports only the coefficients and t-statistics for the union membership (MEM) variable.

Table 5.

Union Wage Effects, November 1994

(t-statistics in parentheses)

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Source: Survey of Economic Expectations and Attitudes, November 1994.Note: All regressions also include following control variables: HS, VOCAT, UNTV, EXP, EXPSQ.

In western market economies union wage effects tend to be on the order of 10-15 percent, with considerable variation by sector, reflecting variations in bargaining power. From this perspective, the remarkable finding in the economywide estimate in Table 5 is that for a given level of education and experience, union members appear to earn 18 percent less than nonmembers in the Czech Republic. Negative union-nonunion wage differentials are essentially unheard of in research on western market economies!

Averages can be deceptive, however. In particular, we have already reviewed evidence indicating that private sector workers earn more than state-sector workers, and that union membership rates are much higher in state enterprises. The regressions clearly rule out the possibility that relatively high wages in the private sector can be attributed to the presence of unions, but they do not rule out the possibility that the negative union wage differential is an artifact of the sectoral distribution of union members and thus must be explained by whatever factors explain the difference in state-private wages. In fact, this appears to be the case. With the addition of dummy variables for private sector employment (PRIVATE in row 2 and PREMP and PROWN in row 3 of Table 5), the sign on the union representation variables becomes statistically insignificant. Sector-specific regressions also find no significant union wage effect in either the state or private sectors (see the last three estimates in first row).6

In the early years of the transition, there is no indication of a positive union wage effect. One explanation is that unions in this transition economy have little power since neither subjective measures of worker support nor objective measures of impact provide evidence of union power. A second interpretation is that incomes policies have prevented the exercise of union economic power. Since incomes policies were, prior to the summer of 1993, applied only to the state sector of the Czech Republic, this might also contribute to an explanation of the wage differences between the state and private sectors. Unfortunately, there are insufficient degrees of freedom to disentangle these interpretations, although the absence of a union wage impact in the private sector, where incomes policies were not applied until 1993, provides some support for the low-union-power hypothesis.

V. Conclusions

Four years into the economic transition, there is strong evidence that wage structures in the Czech Republic are moving away from the patterns produced by central planners’ preferences and toward patterns observed in market economies. The change was led by developments in new private firms but somewhat retarded by the initially sluggish response in state enterprises. There are also signs that new private firms pioneer with more advanced incentive policies, although firm-level data would permit a much richer analysis of the extent of such changes.

A key question for future labor market adjustment during the transition is why wage structures in state enterprises, which account for about half of employment in the Czech Republic, were slow to adjust. In the face of competition from new private firms for highly educated personnel, both current and former (recently privatized) state enterprises have only recently adjusted wage structures sufficiently to match outside private offers. To what extent may market forces be muted by institutional developments?

A possibility suggested by experience in market economies is that collective bargaining, which occurs mainly in state enterprises, retards the adjustment of wage structures in the state sector. As of late 1993, however, there was no indication of countervailing wage distortions from the establishment of genuine collective representation at the workplace. Indeed, unions appear to have no impact on wages in either the state or private sectors. (Unions may, of course, negotiate direct quantitative restrictions on labor reallocation via dismissal regulations, etc., but the surveys provide no information on this issue.)

A second possibility is that incomes policies, which also usually apply only to the state sector, have retarded the adjustment of wage structures. The application of incomes policies in transition economies is somewhat paradoxical. The case for the policies rests on the argument that state managers facing soft budget constraints and an uncertain future have little incentive to resist union wage demands. Yet, the tax-based incomes policies that are typically applied in the region are designed to encourage managers facing hard budget constraints to bargain harder!7 In any event, we have seen that the case for incomes policies seems particularly weak in the Czech Republic, where there is no evidence of union wage effects in either the state sector, where such policies apply, or the private sector, where they did not until mid-1993. This does not quite prove that incomes policies did not restrain union wages in the state sector, but layoffs and diminishing job security were an important counterweight to weak management.

To the extent that incomes policies are successful, their potential for retarding labor market adjustment is great. Contrary to transition objectives, the particular wage rules adopted tend to encourage wage freezes or further compression of internal wage structures in enterprises. Ultimately this has perverse macroeconomic consequences, as it forces more of the burden of market adjustment into quantity responses, such as unemployment and labor force withdrawal, rather than wage adjustment.

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*

Robert J. Flanagan is the Konosuke Matsushita Professor of International Labor Economics at the Graduate School of Business, Stanford University. Parts of this paper were written while he was a visiting scholar at the Research Department of the IMF in October 1994. The author is grateful to Jiri Vecernik for generously providing the files of the Survey of Economic Expectations and Attitudes, to David Coe and Vladislav Flek for comments on an earlier draft, and to the Stanford Graduate School of Business for research support.

1

The regressions producing these estimates are not reported here, but are available from the author. The standard errors on the estimated returns to schooling for 1988 and 1994 are .095 and .62, respectively.

2

The slope coefficients do not vary with worker status in the private sector. Interacting PROWN with the schooling and experience variables produced no significant interactions.

3

Because of housing restrictions, effective labor market competition is likely to be local, rather than national, so that large differentials are not necessary to attract workers over long distances.

4

The coverage of collective bargaining agreements often exceeds union membership, although the difference varies from a few percentage points in North America to over 50 percentage points in Austria, France, Germany, and Spain (OECD (1994), Chapter 5). The Survey of Economic Expectations and Attitudes does not inquire into collective bargaining coverage in the Czech Republic.

5

Similar patterns occur in a late 1993 survey of 200 manufacturing firms in Poland. The survey reports no union representation in the 40 new private firms in the sample, although significant union membership rates exist in current and former state enterprises (Belka and others (1994), Table 15).

6

Again, there is a parallel to the case of Poland, where managers in all sectors report that unions are not a significant factor in wage determination (Belka and others (1994), Table 14).

7

These points are developed further in Flanagan (1994a).