The Evolution of Regional Wage Differentials in a Transition Economy: Evidence from Poland

ABSTRACTThis paper uses micro data from the Labor Force Surveys to examine regional wage differentials and their dynamics in Poland over 1994-2007. We find that controlling for observed worker characteristics reduces regional wage disparity by 30-50 percent, but remaining wage differentials persist and seem to intensify over time.JEL: J31, P23, R23KEYWORDS: Regions, Wage Differentials, Transition Economies(ProQuest: ... denotes formulae omitted.)INTRODUCTIONEconomic and social cohesion has been one of the major priorities of the European Union since its inception in the 1950s. The mission of the EU cohesion policy was first defined in the preamble of the Rome Treaty (1957) as the need to ensure "harmonious development by reducing the differences existing between the various regions and the backwardness of the less favoured regions." The Single European Act (1986) established a European Community policy of economic and social cohesion, and the Lisbon Treaty (2007) recognized 'territorial cohesion' as a general political objective in addition to economic and social cohesion. The EU regional policy gained in importance after 2004 with the accession of 12 new member countries which all had relatively low levels of economic development (Bulgaria, Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Romania, Slovakia and Slovenia). Financial resources for cohesion policy increased significantly and now constitute the second largest outlay in the EU budget after the Common Agricultural Policy. For instance, the Structural and Cohesion Funds amounted to euro213 billion for EU-15 and euro21.7 billion for the 10 new Member States in the 2000-2006 planning period and to euro347 billion in the 2007-2013 planning period. This constitutes over one third of the EU budget and about 0.4 percent of the total GDP of the EU. In 2007-2013 Poland was the main beneficiary country (euro67.3 billion), followed by Spain (euro35.2 billion), Italy (euro28.8 billion), Czech Republic (euro26.7 billion), Germany (euro26.3 billion), Hungary (euro25.3 billion), Portugal (euro21.5 billion), and Greece (euro20.4 billion) (EC, 2008, pp. 21, 25).Notwithstanding these huge expenditures, the impact of the EU regional policy on regional development and convergence is not clear-cut (see Busillo et al., 2010 for an overview). Interestingly enough, both converging and diverging tendencies are being reported for the EU area: while regional disparities between the EU countries have been narrowing, regional disparities within member countries - particularly the new ones - have widened (EC, 2003, p. 3; Monfort, 2008, pp. 5-6; EC, 2010a, pp. 13-14; EC, 2010b, pp. 57-58). For instance, EC (2010b) reports that the extent of regional dispersion in GDP per capita (as measured by the logarithmic deviation index) across the EU-25 declined from 8.3 in 1995 to 6.3 in 2006. At the same time, the index of regional dispersion increased from 4.9 to 5.5 across the sub-group of the 10 new members. The regional dispersion also widened within the Czech Republic (from 2.5 to 5.3), Hungary (from 4.0 to 8.5), Slovakia (from 5.9 to 8.0) and Poland (from 1.4 to 3.1).These empirical findings should be treated with caution, though. Many of these analyses employed aggregate regional data, typically GDP per capita or wage per person. However, GDP is a measure of market production and not a good measure of well-being (Stiglitz et al., 2008, p. 8). What is more important is that all aggregate approaches are flawed in their failure to account for regional heterogeneity. They implicitly assume regional homogeneity, meaning that individual differences average out in large populations, and regional macro metrics converge upon some common value. In reality, however, regions differ in their demographic, social and economic structures. For this reason, "aggregate approaches barely say anything about the "how" and even less about the "why" of regional inequalities" (Duranton and Monastiriotis, 2002, p. …