GINI Country Report: Growing Inequalities and their Impacts in Hungary

Income inequality began to increase back in the 1980s, with the Gini index reaching 0.24 in 1987. There was a marked increase in inequality during the early years of transition, and the Gini index reached 0.30 in 1995. Changes in inequality were smaller in the period 1995–2005, the overall pattern being stagnation until the economic crisis broke. The changes in inequality can be separated into various periods. The first, the early 1990s, was characterized by rapid and profound changes in the structure of the economy. Hungary’s trade with her eastern neighbours collapsed, and socialist mega-enterprises went bankrupt and were dismantled. This period was characterized by a massive decline in employment and a fall in the country’s GDP between 1990 and 1993. Between 1995 and 2006, GDP grew at around 4 per cent annually. Foreign direct investment played a major role in kick-starting and accelerating this growth, which brought about a significant technological modernization of production processes. Technological change increased demand for young educated labour, while employment prospects worsened for the poorly educated and older cohorts with obsolete human capital. Wage inequality – and most importantly, returns to education – continued to increase during this phase. The employment rate of the poorly educated remained at the lowest level in the EU, partly because of the underdeveloped small and medium-sized enterprise (SME) sector. In 2004–08, income inequality decreased. Redistribution policies played a significant role, by first increasing transfers to the lower middle class and then increasing the tax burden on the upper middle class.