Wage Structure in the Transition of the Czech Economy

Wage Structure in the Transition of the Czech Economy
by Robert J. Flanagan

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.