Wage determination in historically planned economies: the case of Poland

This paper argues that in a communist economy, especially in its market socialism version, wages are set in a similar way as in a market economy. Even if the planning centre is involved in the wage setting process, it cannot set wages arbitrarily, but has to simulate market mechanisms in order to achieve minimum efficiency in the allocation of labour. Wage differences are likely to result not only from differences in human capital or working conditions but also, like in the market economies, from rent?sharing. Rent?sharing is likely to occur, since in institutional setting of market socialism there is a scope for both wage bargaining and efficiency wages considerations. However, similar mechanisms of wage determination in both economic systems do not necessarily lead to the same wage structure as socialism generates different than capitalism distribution of rents over industries as well as the rents come from different sources. The argument is supported by empirical evidence. Industrial wage structure in centrally planned economies is correlated with that prevailing in market economies, and in some cases correlation is remarkably strong. Estimation of wage equation for 23 Polish industries in 1990 indicates not only relevance of variables relating to working conditions and level of human capital but also of variables representing product market structure, like profitability, average firm''s size and concentration of production. This implies rent-sharing. Rents seem to be extracted largely from the centre (and come in the form of subsides and tax exemptions). Rent-sharing at a firm level is limited since managers ability to transfer profits to the workers is restrained.