# **2. HAS INCOME INEQUALITY CONTINUED TO RISE IN EU8 COUNTRIES?**

12. During the early years of transition, income inequality rose sharply in virtually all transition countries (including in EU8 countries, albeit to a lesser extent), and has been attributed in varying degrees on a diverse set of contributory factors, such as greater wage decompression, higher unemployment rates, building-up of wage arrears, reduced public spending on transfers, rapid inflation, etc.<sup>6</sup> Following the severe contraction in output and employment in the early years of transition, has the steady improvement in economic performance since the mid-1990s been accompanied by continued increases in income inequality in EU8 countries?

13. Table 1 compares income inequality estimates for EU8 countries derived from the 2006 EUSILC data with those reported in World Bank (2000).<sup>7</sup> While all Gini coefficients reported here are based on the distribution of equivalized disposable incomes which were standardized to the extent possible to aid comparability,<sup>8</sup> differences nonetheless remain as it is impossible to completely eliminate these. These estimates should therefore be seen as broadly indicative (i.e. rather than definitive evidence _per se_ ) of long-term trends in inequality.<sup>9</sup>

**Table 1: Long-term Trends in Income Inequality**

||**G**<br>|**ini coefficient fo**<br>|**r incomeper capita**<br>|<br>|
|---|---|---|---|---|
|**Country**|**1987-90**|**1993-94**|**1996-99**|**2006**|
|Slovakia|-|-|-|0.30|
|Slovenia|0.22|0.29|0.25|0.26|
|Poland|0.28|0.28|0.33|0.33|
|Czech Republic|0.19|0.23|0.25|0.27|
|Estonia|0.24|0.35|0.37|0.35|
|Lithuania|0.23|0.33|0.34|0.37|
|Hungary|0.21|0.23|0.25|0.34|
|Latvia|0.24|0.31|0.32|0.40|

_Source:_ 2006: World Bank staff calculations based on data from the 2006 EU-SILC (based on per capita income, hence slightly different from Table 2). Earlier years: _Making Transition Work for Everyone_ , World Bank, Washington DC, 2000.

14. These estimates show that between 1996-99 and 2006, there was considerable diversity across EU8 countries in pattern of change in income inequality. In particular, the Gini coefficient of income inequality fell in Estonia, remained unchanged in Poland, rose slightly in Slovenia and Lithuania, but rose sharply in Latvia and Hungary.<sup>10</sup> At the same time, the table confirms that present levels of income inequality in all EU8 countries continue to be considerably higher than prevailing levels in the mid-1980s before the onset of transition. The overall rise in income inequality has been lowest in Slovenia and the Czech Republic, and highest in the Baltic countries.

> 6 See for e.g., Milanovic (1999) Flemming & Micklewright (1999) Aghion & Commander (1999) Mitra & Yemtsov (2006).

> 7 _Making Transition Work for Everyone: Poverty and Inequality in Europe and Central Asia_ , Washington D.C.

> 8 See World Bank (2000), appendix B for a more detailed description of the data sources used in the study.

> 9 Disposable income in the EU-SILC does not, in general, include in-kind incomes. Hence, to the extent that in-kind income constitutes a larger share of incomes of the poor, income inequality measures based on disposable incomes will tend to overstate inequality compared to those based on wider income measures (i.e. including in-kind incomes).

> 10 According to analysis published by the Ministry of Finance, the Gini coefficient for Slovakia in 1988 was 0.19 (http://www.finance.gov.sk/Documents/Ifp/Publikacie/Makro/EA11_ZIVOTNA_UROVEN.pdf, considerably lower than the 2006 Gini in the above table, indicating that income inequality in Slovakia also rose over this period.