Essays on Income Inequality in Central-Eastern European Countries

Abstract

This dissertation investigates the causes behind the divergent income inequality trends in Central and Eastern European (CEE) countries, focusing specifically on six countries: Hungary, Poland, Czechia, Slovakia, Bulgaria, and Romania. The dissertation is structured into three interconnected studies: a systematic literature review and two empirical studies. The systematic literature review provides a comprehensive perspective on the literature on income inequality in CEE countries. The study employs a systematic literature review and network analysis to explore the topic, organized around four thematic frameworks: concepts and assessments, evidence, causes, and the role of policy. These thematic strands collectively offer a detailed overview of income inequality in CEE countries and highlight key research gaps for future exploration. The review underscores several critical areas for improvement within CEE studies. These include addressing gaps in geographical and temporal coverage, using alternative indicators of income inequality, and examining the causes behind the diverging trends of income inequality in the region. Additionally, we need to deepen our understanding of the factors influencing income inequality in these countries, which presents a substantial opportunity for future research. The first empirical study explores the determinants of wage inequality and its fluctuations using micro data from the European Union Statistics on Income and Living Conditions (EU-SILC) for the period 2009-2018. Beyond offering a detailed account of wage inequality trends in these countries, the study investigates demographic and micro-level factors, including the effects of changes in the minimum wage. The study employs RIF regression and RIF decompositions across various inequality measures. The findings reveal that changes in wage inequality across these countries are primarily driven by wage structure effects, irrespective of whether wage inequality increased or decreased. Notably, changes in the returns to education and returns to permanent employment contracts are crucial in explaining decreased wage inequality. The increases in wage inequality in Hungary and Bulgaria are defined mainly by the changes in the estimated constants instead of micro-level determinants. The changes in the minimum wage explain most of the unknown factors in Bulgaria, and the spillover effects of the minimum wage may explain most of the unknown factors in Hungary. The second empirical study investigates the redistributive effects of taxes and social transfers on income inequality using EU-SILC microdata from 2010 to 2019. It provides an overview of redistribution trends and examines the relative contributions of various income sources, focusing on taxes and social transfers, to the levels and changes in income inequality. The study employs decomposition analyses. The study reveals diverse patterns in the evolution of redistributive effects of taxes and transfers across countries. From 2009 to 2018, the average reduction in market income inequality ranged from 24.5% in Bulgaria to 43.6% in Czechia. The findings underscore that while labor market conditions predominantly influence income inequality, the effectiveness of redistribution policies emerges as a crucial factor. Market income, mainly from labor, is the primary determinant of income inequality across countries. The study highlights the substantial impact of taxes and non-elderly benefits in effectively reducing inequality, with taxes exerting a more pronounced influence than non-elderly benefits in most countries. Together, these studies underscore the complexity of income inequality dynamics in six CEE countries, offering valuable insights and laying a foundation for future research to understand better and address the underlying causes of these disparities.