Some Explanations for Changes in the Distribution of Household
Income in Slovakia: 1988 and 1996
Garner, Bureau of Labor Statistics, and Katherine Terrell, University of
Michigan
Objectives
The objectives of this study are: (1) to compare inequality in income in 1988, before the transition, to the level of inequality in 1996, eight years after the transition, and (2) to explore the extent to which changes in demographic composition of households may explain changes in income inequality over this time period.
Background
The Slovak economy underwent an enormous transformation during the 1988-1996 period. The private sector share of GDP rose from about 5% in 1990 to 70% in 1996. As in all the Central and East European economies, GDP fell for the first four years of transition (by an average of almost 7% a year) but rebounded in 1994 with strong growth through 1996, the end of our period of analysis. Inflation rose to 58% the year that the government liberalized all prices (1991) and returned again two years later in the year of the "Velvet Divorce" with the Czech Republic (1993). The decline in output impacted the level of employment, which in 1996 was still only 84.5% of the level of 1989. This was accompanied by large sectoral shifts in the structure of employment from 1989 to 1996: a decline of employment in agriculture of 44.2% and in the industrial sector (including mining, manufacturing and utilities), a decline of 26.8%. Although employment in the service sector did grow by 12.1%, this sector was not able to absorb all the outflows from the other two sectors. Hence unemployment rates were fairly high -- ranging from 10% to 14% -- throughout the period under analysis.
As a result of all these structural changes in the economy, individuals were faced with much uncertainty about both their job security and the purchasing power of their income during this period. This uncertainty had an impact on the family formation and household structure of the Slovakian people. The marriage rate and birth rates decline tremendously from 1989 to 1996, while the divorce rate remained constant. Not surprisingly, the rate of natural increase has fallen from 5.0 to 1.6 over this period. However, unlike the dramatic case of Russia, where life expectancy of men has actually declined during the transition, the death rate, and the infant mortality rate has fell over the period. Hence, the level of welfare has not dropped as dramatically as in Russia.
In this paper we examine how this environment has affected
the change in the distribution of income. After measuring the change in overall
inequality, we discern the relative importance of two possible explanations
for the increase in inequality: a) the changes in the sources of household income,
i.e., the relative importance of earnings versus social transfers (and how these
reflect the role of the government versus the market during transition); and
b) changes in the household composition which reflect social reactions to the
changing environment. We note that these factors affect the distribution of
total income by changing both the number of people in different groups as well
as the distribution of incomes per se.
Data/Methods
Slovak Microcensus data are used to conduct the analysis. These data are collected using from a representative sample of Slovak households. Data from 1988 and 1996 are used. Overall inequality is measured using the standard Gini coefficient, three generalized entropy measures, and decile and Lorenz curve analyses.
Results/Expected Results
After-tax households income inequality has increased substantially between 1988 and 1996 in Slovakia (Gini coefficient of 0.187 in 1988 and 0.250 in 1996). Only pension incomes became more equality over the time period. Others income sources studied include earned non-agricultural income earned agricultural income, other social benefits, other monetary incomes, and in-kind income. Demographic variables which appear to contribute the most of changes in income inequality include number of children in the household, household size, whether the head of the household is employed or not, and age of head.
Discussion
Sources of income, their distributions, and the make-up of the population are all important in explaining overall income inequality in Slovakia. As individuals and households continue to respond to transitional changes in the economy and to government policies, continuing changes in such distributions are expected.