Philipp Fink, Transitional Winners and Losers in:

Philipp Fink

Late Development in Hungary and Ireland, page 180 - 185

From Rags to Riches?

1. Edition 2009, ISBN print: 978-3-8329-4173-4, ISBN online: 978-3-8452-1720-8

Series: Nomos Universitätsschriften - Politik, vol. 168

Bibliographic information
180 levels (Molnár 2004: 2-3, 16). The high incidence of the informal and black market economy in Hungary indicates that illicit earnings supplemented market income. Illicit incomes are assumed to increase total income inequality due to the unequal access to the grey and black economies (Rosser et al. 2000: 168). Hence, the extent of hidden inequality may be higher than official figures suggest. Although still suffering from the same constraints, alternative measurements, such as the top to bottom ratio of the dispersion of median incomes, display a higher degree of income inequality for Hungary. Still lower than the comparative decile ratio in the US (5.5), Hungary is grouped together with those countries displaying the highest proportion of income inequality in the CEEC with a decile rate exceeding four points, a figure larger than the highest level in the EU-15 (UK: 3.5) (Rutkowski 2001b: 5). 146 Thus, the top decile of earners with an income of 214% of the median income earned 4 times more than the lowest ten percent in 1997 with an income of 51% of the median income (Rutkowski 2001b: 6). Moreover, the top ten percent of earners were able to increase their incomes from 183% of the median in 1988 to 214% in 1997. In contrast, the lowest 10% of earners experienced a loss in their earnings relative to the median income from 58% to 51% (Rutkowski 2001b: 9). 4.3.2 Transitional Winners and Losers Transitional income inequality in Hungary was, therefore, accompanied by strong wage mobility. The change in income positions is linked to the transformation of the organisational structure of the labour market. Occupational credentials replaced the internal labour market structure of the SOEs (Neumann 2002: 17). Internal labour markets reflected the central role of the SOE as the main socioeconomic unit and policy instrument under socialism (Wagener 2002: 155). The reorganisation of labour market remuneration principles resulted in a revaluation of educational attainment levels by labour demand. This is a result of structural change, whereby new technologies were introduced changing the level of skills required by the workplace. Accordingly, young and educated workers were able to greatly improve their income levels in comparison to less educated and older employees. Furthermore, investing TNCs were the driving force behind these changes. Their increased productivity in comparison to indigenous firms is linked to the higher proportions of young and skilled employees working for foreign-owned firms. Finally, the nature of Hungary’s decentralised micro-level collective bargaining system additionally amplifies skill-driven wage inequality. 146 The other CEEC members displaying high income inequality were Lithuania, Latvia, Bulgaria and Romania (Rutkowski 2001b: 6). 181 Earnings Mobility High wage volatility, i.e. the simultaneous existence of wage gains and losses, was a characteristic feature of the initial transition phase in Hungary during 1992 and 1997, a period in which average real earnings fell by almost 13%. Hence, winners and losers can only be identified as those who have gained or lost relative to the development of average incomes. 70% of the employed experienced a substantial decline in earnings. 45% of workers witnessed their incomes decrease by over 20%. However, 10% of employees were able to increase their earnings by more than 20% (Rutkowski 2001a: 71). Two employee groups suffered substantial income losses: Older workers, who had work experience prior to transition and employees with low levels of educational attainment. Those aged between 50 and 64 suffered an income loss of more than 18%, and those employees with only primary education experienced an income decline of 19.7% between 1992 and 1997. In contrast, young and educated workers reported income losses below the average decrease in real earnings. 25 to 34 yearolds lost only 8% of their income and those with university education experienced an income reduction of 6.5% throughout the same period (Rutkowski 2001a: 73).147 In terms of relative earnings mobility between 1992 and 1997, i.e. the change in income position (quintile: 20% income bracket) of a person in 1992 compared to his or her position in 1997 relative to the median income, Hungary had the highest incidences of change within the OECD. Only 43% of workers stayed in the same income groups (OECD: more than 50%), with 37% moving up or down one quintile and 20% jumping or falling by more than two or more quintiles (OECD: 11-15%) (Rutkowski 2001a: 75-76). Again the defining factors were age and the level of educational attainment. As shown by Rutkowski (2001a: 77-78), the younger and better-educated employees experienced distinct income mobility. In contrast to the older and more experienced as well as low skilled workers who faced a decline in their income positions. Skill-Biased Labour Demand Wage volatility was the result of a distinct shift in labour demand towards younger and skilled employees. Compared to the employed with primary education, university graduates were able to increase their wages by 25% between 1990 and 1999 (Kertesi/KöllQ 2001: 8). However, the wage premium applied only to younger employees, as university graduates having graduated before 1990 with 15 to 25 years of work experience witnessed their wages fall by 20% between 1992 and 1999 147 Furthermore, 35 to 49 year-olds lost almost 16% of their income, whilst the 16 to 24 year-olds suffered an income reduction of only 6.9%. In terms of educational profiles, those with vocational training (apprenticeships) earned 11% less and those with secondary education reduced their incomes by 12.6% (Rutkowski 2001a: ibid). 182 (Kertesi/KöllQ 2001: 9). By 1999, a distinct wage gap appeared between the youngest and oldest age cohorts of university graduates, whereby the former earned between 20% and 25% more than their more experienced colleagues (Kertesi/KöllQ 2001: 10). In comparison to employees with only primary school education, university graduates earned 4 times as much (Feldmann 2004: 281). The age-education related wage inequalities are even greater, if remuneration practices are compared to 1987. As I.G. Tóth (2003: 23) shows, higher educated households with a principle earner aged 35 years or younger earned 7% more than the average. Households with a principle aged 60 years and with a university degree, received an income of 66% above the average. By 2001, this situation had reversed. This turnaround as well as the gap in earnings and the redundancy of pre-1990 work experience and knowledge illustrates the increasing returns to education as a result of FDI-driven technological change. In comparison to indigenous firms, foreign-owned enterprises on average employ younger and better-educated personnel (Kertesi/KöllQ 2001: 19). Their wages are higher not only compared to their counterparts in Hungarian-owned firms, but young and skilled employees in TNCs also earn more than their unskilled and skilled older colleagues in the same firm (Kertesi/KöllQ 2001: 21). Hence, highly qualified members of the workforce benefited from the appreciation of educational differentials and experience almost full employment. Those with low levels of educational attainment have experienced a distinct loss in their incomes and are subjected to high levels of unemployment (Feldmann 2004: 280). Technological transformation of the workplace has produced a pronounced reduction in unskilled employment, i.e. workplaces demanding only primary education. Although the transitional recession decreased the total number of jobs available, the number of unskilled positions fell by 48% between 1990 and 1999, whereas the number of skilled workplaces had declined by 11%. However, the net destruction rates show that only one per cent of skilled positions were lost against 40% of unskilled workplaces (Kertesi/KöllQ 2001: 14). Hence, the levels of unemployment for unskilled workers were the highest than for any other skill category. The following table compares the unemployment rates by educational level in 2001. Table 8 Unemployment and the Level of Educational Attainment, 2001 (%) Primary Secondary Tertiary Total Unemployment* H 10.0 4.6 1.2 5.7 CZ 19.2 6.2 2.0 8.1 PL 22.6 15.9 5.0 18.2 EU-15 9.3 6.2 4.0 8.4 Source: Feldmann (2004: 281) and * WIIW (2004). 183 The figures show the demand bias towards educational attainment. In all cases, the level of unskilled unemployment, i.e. those members of the workforce with only primary school education, is above the total unemployment rate. Interestingly, the figure for Hungary is far lower than either Czech or Polish figures for unskilled unemployment. This, however, cannot be taken as a sign for the superior absorption of unskilled employment by the Hungarian labour market. Instead, the comparative lower incidences of unskilled unemployment should be seen within the context of Hungarian participation rates, which have been notoriously low, underscoring both CEEC-5 and EU-15 averages (Feldmann 2004: 276-277).148 The age-education-related demand bias pushed unskilled workers into the low wage sector of the economy. Rutkowski’s (2001a: 83-84) sample of the Hungarian low wage sector showed that between 1992 and 1997, 35% of all employed in Hungary had experienced low pay, as defined by belonging to the bottom earning quintile. Only 20% of this employed group was able to improve their income positions after 5 years. 56% experienced the phenomena of perforated unemployment, i.e. alternate times of unemployment and employment, whereby the times of unemployment were prevalent. In total, 29% of the low wage group withdrew from the labour market altogether, contributing to the lower participation rate. Labour market withdrawal, therefore, effectively lowered unemployment levels in Hungary compared to its regional neighbours. Again age and level of education determined the success of being able to leave the low wage sector of the labour market. Older (50-65 year olds: 64%) and unskilled workers (73%) who belonged to the low wage sector in 1992 still remained there in 1997 (Rutkowski 2001a: 85). Hence, “in Hungary low paid jobs are more often a permanent trap than a stepping stone to higher earnings” (Rutkowski 2001a: 84). Collective Bargaining and Inequality Wage inequality is additionally amplified by Hungary’s system of collective bargaining process, which is characterised by a high degree of fragmentation and weakness (Deppe/Tatur 2002: 266-268). A tripartite system of social dialogue aimed at securing the influence of the social partners in the political sphere was institutionalised following the establishment of the ÉT in 1990. However, its political influence has been low in part as a result of the displayed wide-ranging autonomy of the state. Its political ineffectiveness is also due to organisational constraints in the form of a general lack of consent between employers and unions as well as internal rivalry and conflicts. Employers as well as unions lack a national level of organisation and 148 Between 1997 and 2001, the Hungarian participation remained at 57% of the employable population. In contrast, Polish figures stood at 72%, Czech levels were 66%, Slovakian 60% and Slovenian participation stood at 65% (WIIW 2004). 184 the individual organisations resemble a plethora of diverging political affiliations as well as policy motivated interests (A. Tóth 2006: 38; Neumann 2006a: 62). The political weakness of Hungary’s social dialogue is further deepened as a result of the nature of collective bargaining in the country (Ferge/Juhász 2004: 237). The remit of the ÉT covers the setting of the minimum wage levels and recommending wage rates for the business sector of the economy (Deppe/Tatur 2002: 259). However, the national wage guidelines remain pure recommendations at the most, as collective bargaining does not take place at the central level and there is no possibility to ensure compliance with the recommendations. Furthermore, intermediate or sector agreements failed to establish themselves with a few exceptions such as in utilities or the mining sector, which have been traditional union strongholds (Koltay 2002: 62). The weakness of meso-level bargaining is related to sectoral organisational and representational deficiencies of the social partners as well as the continuation of socialist legacies, as Hungary had no tradition of sector-level bargaining. As a result, the most important stage for collective bargaining in Hungary is the individual firm (Deppe/Tatur 2002: 266). In practice, therefore, similar to other CEEC economies, the Hungarian collective wage bargaining system resembles the Anglo-Saxon particularistic and decentralised model of wage negotiations (Neumann 2002: 12). The predominance of decentralised micro-level bargaining has socio-economic consequences. Micro-level negotiations resemble a trade off. On the one hand, they allow a maximum degree of flexibility for the individual firm, as they “respond to the current financial situation, technology and work organisation of the given firm” (Neumann 2006b: 122). On the other hand, the focus of the agreements is limited to the firms and they rarely include wider social and economic provisions (Koltay 2002: 63). However, the low level of unionised enterprises and the low coverage rate of the agreements in terms of employees further weaken the decentralised collective wage bargaining process in Hungary. Furthermore, the importance of wage issues featured in the collective agreements has been declining as the focus shifts primarily to workplace regulations (Neumann 2006b: 132). This weakness has implications for the development of income disparities in Hungary due to the existence of large wage gaps in the business sector, as general wage developments are uncoordinated. In general, the effectiveness of collective agreements depends on the union strength, the interest of the employer and the size of the firm (Koltay 2002: 60). On average, non-union firms pay less than union-firms. In 1998, the union wage differential for the business sector was 25%, whereby the union wage premium was higher for blue collar workers (35%) than for white collar workers (4.5%). 49% of all firms were covered by collective agreements in 1998. In those firms employing more than 300 employees, 70% of firms had collective agreements. The remaining 30% of non-unionised firms, wages were 10% lower (Neumann 2002: 16-17). The regulatory strength of the reached collective agreements is low. Wages in firms 185 covered by collective agreements were on average 78% higher than the agreed levels in the agreements (Neumann 2002: 25). In regards to sectors, the union wage premium was highest in those sectors of the competitive economy, which had high rates of unionisation and belonged to the traditional sectors of the Hungarian economy having survived transition. Furthermore, the service sectors of the economy (with the exception of financial services and public administration) showed the highest pay differences. This is related to the fact that services are notoriously low paid and union firms are scarce. Hence, the impact of the union wage premium in the service sector is larger (Neumann 2002: 16). However, wage rates in non-union firms in the dynamic branches of the manufacturing sector were higher than in union firms. These were those sectors, which were dominated by foreign-owned firms. TNCs, displaying low unionisation levels, paid higher than average wages across the board and contributed most strongest to wage increases (Neumann 2002: 16, 22). In contrast, the union wage premium and its contribution to wage increases was the smallest in indigenous firms (Neumann 2002: 22). Furthermore, intra-firm wage inequality was highest in Hungarian-owned enterprises without collective agreements. Again, the level of educational attainment, age and occupational status were the most influential factors determining intra-firm remuneration inequality. Indigenous firms employing mainly unskilled labour also had the highest share of incomes corresponding to the minimum wage (Neumann 2002: 25). The higher incidences of the absence of collective agreements as well as higher rates of unskilled low pay in indigenous firms are linked to their smaller size and the absence of trade unions (Neumann 2002: 25). Their higher cost sensitivity together with increased competitive pressure has led to a situation, whereby small and medium-sized indigenous employers have increased the amount of registered minimum wage recipients in their firms in order to lower their social and welfare contributions as well as their tax payments (Koltay 2002: 56). Employees invariably receive non-reported side payments or contributions inkind to supplement their official minimum wage or are encouraged to sell their skills to the firm via quasi-self-employment (Szanyi 2004: 198-201). As a result, figures concerning the true extent of underpayment are scarce and unreliable (Koltay 2002: 55-56). Nevertheless, these illicit practices contribute to precarious forms of employment and labour insecurity characterising indigenous employment (Ferge/Juhász: 2004: 235). 4.3.3 Social Implications The technological bias of transition has distinct social implications. The wage premium for education feeds through into the dispersion of household incomes. The educational level of the household head is the main determinant in influencing the

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