period. The percentage contribution to total inequality explained by differences between education groups was estimated at about 10 in the late 1990s.

There are other factors, which may be viewed as consequences of the numerous economic downturns recorded in most of the transitional period, including the collapse of formal wages, accumulation of arrears and reduction of income generating opportunities. The successive economic downturns are believed to have led to a rapid increase of selfemployment and large scale movement toward subsistence agriculture in most transition economies (World Bank [2000b]). In the Latvian case, it is estimated that self-employment contributed to about 22% to overall income inequality in the late 1990s, despite its relatively small size. Indeed, compared to other transition economies, self-employment is less common in Latvia, and has been declining steadily, representing less than 10% in 2002, the lowest among Central European countries (Republic of Latvia [2003]). In fact, the data on the labor market and demographic structure suggests continued increase of pensioner households, which in the late 1990s represented about 32% of the total. To the extent that pensioner households have a relatively stable flow of resources over their income stream, this could further fuel income disparities and widening income gaps between poor and non poor, especially in a context of increasing returns to education, rewards for risk-taking behaviors and rising wages at the higher end of the distribution.

In order to prevent further deterioration of living standards, and reduce income disparities between non poor and poor, Latvian authorities have designed a transfers scheme to provide direct assistance to the latter group. These include social security transfers, local transfers and unemployment benefits and compensation. The magnitude of social transfers increased significantly during the transitional period, reflecting the government focus on poverty alleviation. The increase in social transfers is illustrated by continued rising trends in social expenditure. For instance, expressed as a percentage of GDP, social expenditures increased from 12.5 to over 19% between 1992 and 1999 (OCDE [2003]).

Though the targeting of these transfers has not always been effective and efficient given the scope of leakages, they are believed to be inequality-reducing (Milanovic [1999], World Bank [2000a]).<sup>13</sup> Hypothetically, in the absence of state social transfers in the form of social security, the household per capita income-based Gini coefficient would be higher (about 39, instead of 34) in 2000. Similarly, in the absence of unemployment compensation and benefits, the Gini coefficient would be over 36.2.<sup>14</sup> Local transfers are also inequalityreducing, in spite of their relatively small size. In the absence of such transfers to households (particularly local and municipal transfers), the Gini coefficient in 2000 would be about 36. While the transfers have been inequality-reducing, they have not been particularly effective in helping those at the bottom of the income distribution move out of poverty, probably reflecting the bias in income distribution and leakages. In the 2000 household survey, social transfers to households represented about 28 percent of aggregate household income, and most of it was directed to urban households.

> 13 This is consistent with the “transfer axiom”, and to the extent that inequality-reducing transfers among the poor should be poverty-reducing, one should expect the impact of social transfers to extend beyond the scope of income inequality and contribute to the improvement of welfare and living standards.

> 14 Indeed, at about 24% of  household disposable income, public transfers in the form of pensions is relatively high in Latvia, higher than the EU average of 17%. By contrast, transfers in the form of unemployment benefits is low, less than 0.7% of household disposable income, significantly below the EU average of 2.4% (Heady, Mitrakos and Tsakloglou [2001]).

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