Institutional reforms and income distribution: Evidence from post-transition EU countries

Abstract

This paper provides an explanation of income dynamics in the posttransition EU countries from the perspective of institutional changes. As a result of seemingly-unrelated regressions analysis on panel data from 1990-2014, we find robust evidence of the relationship between income shares and institutional reforms. The impact of reforms on the top and below-average income shares is negative, whereas this effect on above above-average income share is positive. Decline of income share for the richest class during the post-transitional period can be attributed to the loss of privileges associated with the existence of an institutional vacuum in the first years of transition. Although transition increased wages for workers at the end of income distribution, the job losses had a stronger effect than wage increase, so the overall effect on income share of this group is negative. The winners of reforms appear as the workers with above-average income, whose skills are complementary to the changes instituted by transition to market economy and integration in the EU.