| Abstract: |
Ukraine, the second largest country in the former Soviet bloc, is facing the
challenge of rallying popular support for major structural reforms. As in most
developing economies, the "Orange Revolution" government’s success will depend
on its ability to keep income distribution within an acceptable range. This
paper is the first to make use of recent methodological developments in
Lemieux’s (2002) decomposition method to advance our understanding of the
determinants of wage inequality in developing and transition economies. With
an eye toward future policy, we apply this approach to the first large
longitudinal micro data set for Ukraine - the Ukrainian Longitudinal
Monitoring Survey (ULMS) - to determine the extent to which the introduction
of markets and new institutions affected men’s and women’s wage inequality
between 1986 and 2003. We find that wage inequality rises substantially for
both men and women. Applying the Lemieux method, we show that market forces
drive the increase in inequality through changes in wage premiums, but the
changes in the composition of the labor force (selection) generally contribute
to a reduction in wage inequality; the exception is that changes in women’s
labor composition contribute to an increase in inequality in the top half of
their wage distribution. Finally, changes in unobservable characteristics work
toward increasing inequality for both men and women. The institution of the
minimum wage plays an important role in lowering the growth in inequality,
more for women than for men. Going forward, if the government wants to
ameliorate the effects of market forces on wage inequality, it should
recognize the importance of maintaining the value of, and compliance with, the
minimum wage. |