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, a single minimum wage was established for the two republics. In October 1993, the Slovak government raised its minimum wage to 47 percent of the average economywide net wage, a level higher than that in the Czech Republic. (See table 1.) The minimum wage increase in the Slovak Republic may have mitigated the increase of wage inequality brought about by market forces there, relative to the Czech Republic where the minimum wage was not increased.

Social insurance is primarily composed of unemployment compensation and pensions. Both factors were likely to have mitigated the widening of income distribution in the two republics. Unemployment compensation did not exist in 1989 when there officially was no unemployment,6 but it played a role in 1993 by replacing part of lost income for 6 months. The eligibility criteria, entitlement, and replacement rates were the same for the two countries in 1993. However, the level of benefits rose for some unemployed persons in the Slovak Republic when the minimum wage was raised. In addition, in both countries, unemployment benefits were not taxed. However, because the benefits were also not indexed for inflation, their value eroded over a spell of unemployment. Unemployment compensation is likely to have played a bigger role in income inequality in the Slovak Republic than in the Czech Republic.

Unlike unemployment compensation, government-designed pensions did exist in 1989. In both 1989 and 1993, men could retire with full pensions at age 60. For women, the retirement age was between 53 and 57, depending on the number of children they raised. In 1989, individuals could draw a pension and work for pay simultaneously and could easily retire early with a full pension. These options were no longer available for Czechs beginning in 1993, when a comprehensive law on pensions was passed. The law introduced a "work or retire" system and limited early retirement to a maximum of 3 years before the legal retirement age. The Slovak Republic did not have such a law in 1993. Because pensions were indexed for inflation in both republics, the average pension maintained its value over the 1989-93 period. Disability pensions were somewhat lower than old-age pensions in each republic, and widows' pensions were only about one-quarter of the average net wage. The changes in the pension system were likely to be countervailing: indexation would likely reduce inequality, but an increase in the number of persons becoming pensioners would likely increase inequality.

ike unemployment compensation, a social assistance system did exist in 1989. Several legal changes were made in the system during the 1991-93 period, resulting in a complex web of legal norms and a variety of benefits. One important thrust of the changes was an increase in the number of means-tested benefits in 1993. Generally, transfers in 1993 were considered means-tested social assistance and nonmeans-tested social aid available primarily to families with children (family benefits).

In 1991, the right was established for everyone to receive "assistance essential for ensuring the basic living conditions." Minimum living standards were set for various types of households and served as a basis for means testing. The minimum living standard for each household was the sum of a personal minimum (based on whether one was an adult or a child) and a household minimum (a function of the number of individuals living in a household). Households could receive a cash benefit equal to the difference in