Concilium Civitas Almanac 2020/2021 – Professors Paweł Bukowski and Filip Novokmet “Inequality in Poland over the Centuries” –

Concilium Civitas, Almanach 2020/2021, Przyszłość, Czas po COVID, life after COVID

Paweł Bukowski

Centre for Economic Performance, London School of Economics and Political Science

Institute of Economics, Polish Academy of Sciences

Filip Novokmet

Institute for Macroeconomics and Econometrics, University of Bonn

World Inequality Lab, Paris School of Economics

Inequality in Poland over the Centuries

This article summarizes ‘Between Communism and Capitalism: Long-Term Inequality in Poland, 1892–2015’ by Pawel Bukowski and Filip Novokmet, CEP Discussion Paper No. 1628 (http://cep.lse.ac.uk/pubs/download/dp1628.pdf).

  1. Introduction

How has inequality in Poland evolved between communism and capitalism to reach one of the highest levels in Europe today? This work charts a century of data on Polish inequality, 1892–2015, to examine the key causes. The results illustrate the central role of policies and institutions in shaping long-run inequality.

Soaring inequality has rekindled debates about the forces shaping the distribution of income, which date from as far back as the classical economists to the highly influential contemporary work of Thomas Piketty. Our understanding of inequality depends on the available empirical evidence, and as we have obtained new evidence charting inequality further back in time, the old paradigms have been challenged and new ones developed. Yet the evolution of inequality and its determinants are still not well understood.

Poland, one of the largest countries in the European Union (EU), has been surprisingly missing in this debate. The episodes of state formation, wars, socialism, transition to capitalism and integration into the EU make it a particularly compelling case for studying the determinants of income inequality. Poland’s profound transformation from communism to a market economy happened in less than one generation, and the accompanying economic growth has been the fastest in Europe (Piatkowski 2018). While the real average national income per capita has more than doubled since 1990, we lack data on which income groups have benefited from this. The growing support for redistributive policies, as an important factor in the victory of the populist parties in recent elections (Lindner et al. 2019), might suggest that this growth has not been equally shared. How do inequalities evolve in such quick-changing societies and what is the role of transition policies and emerging institutions? Similarly, the wave of globalization in recent decades has been crucial for the transformation of the Polish economy. But we know little about the distributional effects of these processes.

Our study is the first comprehensive attempt to look at the long-run evolution of inequality in Poland. We combine data from taxes, surveys and national accounts to provide consistent series on the long-term distribution of national income in Poland. First, we combine household surveys and income tax data in order to provide more reliable estimates of the full income distribution series in Poland for the 1983–2015 period. More precisely, we use tax data on high-income taxpayers to correct the top of the survey distribution. Next, we construct top income shares for the whole period from the end of the 19th century until today. We thus provide the first homogeneous series that offer a possibility to compare the level and evolution of income inequality in Poland both over time and across countries.

  •  Top income shares in Poland 1892–1989

Figure 1 summarizes our main results on long-run income inequality in Poland. Top income shares in Poland followed a U-shaped evolution from 1892 until today. Initially, during the period of the Partitions of Poland (1772–1918), top income shares experienced different trajectories in the Prussian and Austrian partitions.[i] A steady rise in the former contrasts with stagnation in the latter. We believe that an explanation for the documented rise of top income shares in the Prussian partition should be sought in the emergence of agrarian capitalism, namely the growth of commercial capital-intensive agriculture (Dumke 1991) and development of related industries (Eddie 2008). In contrast, we believe that top incomes in the Austrian partition were mainly an urban phenomenon. The predominance of employment income might suggest that employees in towns, such as in banks or in the imperial administration, fared much better than the surrounding rural population, which overwhelmingly lived at the bare subsistence level. Similarly, top incomes presumably included modest business activities in cities, carried on predominantly by Jews engaged in commerce, handicraft and smaller-scale industry (McCagg 1989).

The First World War led to soaring top income shares in the Prussian partition. The economic environment favoured the owners of capital, especially due to the wartime demand for armament and food. For instance, the shortage of raw materials, critical for the war economy, brought huge profits to the Silesian mining industry and its ‘coal barons’ residing at the top of the income distribution. Food shortages led to a surge in prices, bringing, in turn, extraordinary profits to agricultural producers, which were proportionally more concentrated in Prussian Poland (Ritschl 2005).

Nevertheless, the end of the First World War and the immediate post-war development led to a sharp reduction in top income shares, owing to such shocks to capital income as wartime destruction, the Polish–Soviet War of 1919–1920, hyperinflation of the early 1920s and introduction of anti-rich policies, including steeply progressive income and wealth taxation. The following six years, however, saw a continuous rise in the top percentile share and reached almost 11% in 1930. While the economic growth saw an improvement of conditions for all income groups, the rich benefited proportionally more (Wiśniewski 1934; Landau and Tomaszewski 1985). However, the Great Depression resulted in further concentration at the top, since top incomes were less adversely affected than the majority of the population, which consisted of smallholding farmers. The proportionally lower decrease in incomes of the top groups during the depression was largely procured by rapid cartelization and intensified industrial concentration. When the tax data become available in 1935, the series on top income shares re-emerged at 15%, which corresponds to its secular peak in the time of peace.

Right after the Second World War, in 1946–7, we find top income shares at the level of 9% – a significant fall from the level of 14.6% in 1936. In order to understand the fall in top shares one needs again to ascertain a development at the ‘bottom’ of the distribution. The post-war years thus saw a relative improvement in the living conditions of the rural population in comparison to the devastating experience of the Great Depression. This came about in the first place through rising prices of agricultural products, extensive land redistribution, debt release and new social legislation, such as the increased availability of education in the countryside (Landau and Tomaszewski 1985). The tax data for the post-war years, however, do not point to the dramatic deconcentration within the top groups.

But it is indisputable that a fall in concentration of unearned income occurred eventually as communism strengthened its rule in the country, which led to the state almost completely expropriating capital income. In addition, it implied a strong reduction in the top labour incomes, as the setting of wages was largely centralized, with a limited role played by incentive schemes. The wage structure across occupations and positions was used as a policy tool, for instance to provide incentives for people to invest in particular skills, to stimulate the economy by widening earnings differentials or to calm down social dissatisfaction by narrowing them (Flakierski 1986; Atkinson and Micklewright 1992). Consequently, during the four decades of communist rule, top income shares displayed notable stability at these – to some extent artificially – lower levels. The inequalities slightly trended downward from 4.9% in 1956 to 3.4% in 1988, and the average level in this period is roughly half of the total top income shares in 1946 or 1992.

We must consider the meaning of monetary inequality during communism, as summarized by our measures. Given the potential distributional implications of well-known non-monetary features of the socialist economy – such as shortages and queueing, widespread consumer price subsidies and price controls, extensive social benefits in kind, or various non-wage benefits of the communist elite, among others (Bergson 1984; Atkinson and Micklewright 1992, chapter 6) – it may be asked to what extent monetary inequality reflected the true inequality of living standards. Most importantly, the varying importance of the non-monetary aspects of inequality could bias inequality comparisons over time and across countries.

Notwithstanding the importance of the mentioned distortions, the consensus reached by authorities has been that money incomes were the single most important welfare dimension in socialist economies (notably, Bergson 1984; Atkinson and Micklewright 1992; Rutkowski 1996; Milanović 1998) and that monetary indicators may be taken as indicative of the broad development in living standards. Moreover, biases tended to balance on average, leaving the overall inequality largely unchanged. Milanović has aptly summarized the main offsetting forces by pointing out that direct subsidies favouring the poor ‘pulled’ inequality down, while non-wage privileges favouring the rich ‘pulled’ inequality up (Milanović 1998: 15). Specifically, when it comes to (questioning) the reality of the increase of inequality in Poland during the transition, Rutkowski concludes that ‘biases seem to be of the second order and do not alter the main results’ (Rutkowski 1996, 91).

We analyse the transition from communism to the market economy by constructing the full income distribution (1983–2015) from combined tax and survey data. Figure 2 shows that after the fall of communism, people experienced a substantial and steady rise in inequality that was driven by a sharp increase in the income shares of the top groups. Within one generation, Poland has moved from being one of the most egalitarian to one of the most unequal countries in Europe. The largest increase in income inequality occurred in the early 1990s, particularly between 1993 and 1995. The top 10% income share increased from levels around 22%–23% in the 1980s to 25% in 1992–3, and then jumped to 30% by 1995. This rise was accompanied by a fall in income shares of the middle 40% and of the bottom 50%. These groups experienced a roughly commensurate fall in income shares of around 5 percentage points between 1989 and 1995. Subsequently, we observe a steady rise in inequality, especially between 2003 and 2008, which has been induced also by the rising share of the top decile.

It is important to note that this rise has been altogether overlooked by the official survey-based measures. Between 1989 and 2015, the top 10% income share rose from levels slightly above 20% in the 1980s up to 35% in 2015, as opposed to around 26% suggested by surveys. In the same period, the top 1% income share more than tripled, rising from around 4% to 13%, as opposed to 6% suggested by surveys. Similar conclusions can be drawn from a comparison of Gini coefficients. Overall, these results show the importance of correcting the upper end of the distribution in the survey data.

Today, Polish top income shares are at the level of the more unequal European countries, most notably Germany and the UK, but still substantially below those documented in Russia. However, income concentration in Poland is higher than in other former socialist countries in the EU, owing to a relatively higher number of affluent entrepreneurs, plausibly benefiting from the larger domestic market.

We next consider distributional effects of the transition in Poland by looking at the growth experience of different income groups. Table 1 shows that over the whole period 1989–2015, average real national income per adult has increased by 73%, or about 2.1% per year. Overall, there has been a notable increase in the living standards of the Polish population since the fall of communism. However, this growth has not been equally shared. Real incomes of the top 10% increased by 190% (or 4.2% per year) and of the top percentile by 458% (or 6.8% per year). On the other hand, the income growth of the bottom 90% has been much more modest: the bottom 50% have experienced a 31% increase (1% per year) and the middle 40% a 47% increase (1.5% per year) in their real income. The top 1% has captured almost twice as large a portion of total income growth as the bottom 50% (24% versus 13%). This contrasts with France, where the top 1% captured the same share of growth as the poorest half.

The rise of inequality after the return to capitalism in the early 1990s was induced both by the rise of top labour and capital incomes. We attribute this to labour market liberalization and privatization. The rising educational premium, triggered by the decentralization of wage setting, has usually been singled out as the main cause of rising wage inequality in Poland (e.g. Rutkowski 2001; Keane and Prasad 2006; Letki et al. 2014). On the other hand, more extensive and better targeted social transfers towards low-income groups and Poland’s generous minimum wage have often been seen as the most important mechanisms in preventing a sharp rise of inequality during the transition (Keane and Prasad 2002; Mitra and Yemtsov 2006). This is visible in the more robust relative standing of the Polish bottom 50% in the 1990s. This contrasts with the Russian transition, as shown in Table 1, where the share of the bottom 50% collapsed. Social transfer payments in Russia were small and declining, and pensions were not indexed to inflation, which led to a plunge in living standards of the bottom 50% when hyperinflation struck in the early 1990s. This suggests that mitigating a more substantial rise in inequality may be conducive to economic growth.

But the strong rise in inequality in the 2000s was driven solely by the increase in top capital incomes, which are dominant sources of income for the top percentile group. We relate the rise in top capital incomes to current globalization forces and capital-biased technological change, which have potentially rebalanced the division of national income in favour of capital. The rise in capital share has often been attributed to the new globalization phase and increasing participation in international trade. We point to three broad channels through which globalization might have potentially induced the rising capital share in Poland. The first channel is capital-augmenting technological change, which entered Poland through strong foreign direct investment (FDI) after EU accession (Olszewski 2009). The attractiveness of the technology argument lies in the fact that it can also account for the increasing relative wages of skilled workers, as recorded in rising wage inequality (e.g. Krusell et al. 2000). The second channel is a trade-induced shift towards capital-intensive sectors. Traditional labour-intensive industries, such as mining or textile manufacturing, have been in decline due to the increasing trade competition, especially after China joined the World Trade Organization in 2001 (Growiec 2012). Finally, being part of global value chains, foreign investors or Polish multinational companies do not build supply chains in Poland, which can break the connection between the productivity of companies and the domestic demand for labour (Baldwin 2016). Trade-involved companies are thus facing relatively weak upward pressure on their own wages even though their profit margins are higher. Relatedly, the rising market power of foreign companies over labour could have also contributed to the falling labour share, as a monopsonistic firm might pay its employees wages below competitive levels (Azar et al. 2017).

The distributional effects of globalization and technological change can also explain a decline in the income share of the middle 40%, which can be attributed to the relative standing of the Polish middle class. It has been documented that the middle-skilled jobs in developed economies are more likely to be automatized, leading to so-called ‘job polarization’ (Autor et al. 2006). At the same time, employment in manufacturing – a traditional sector for the middle class – has been in decline owing to offshoring and trade competition with developing countries (Autor et al. 2016). The relative decline in the importance of the middle class, which is the ‘backbone’ of democracy, might be related to the recent rise of populism across both Central and Eastern Europe and Western Europe.

  • Conclusions

Overall, the unique history of Polish inequality illustrates the central role of policies and institutions in shaping inequality in the long run. Most obviously, the critical role of institutions and policies is manifestly encapsulated by the unparalleled changes in the labour market and capital ownership arrangements that followed the rise and fall of communism in Poland. The communist system eliminated private capital income and compressed earnings, which led to the sharp fall and decades-long stagnation of the top income shares. By the same token, the labour market liberalization and privatization during the post-communist transition instantly increased inequalities and brought them to the level of countries with long histories of capitalism. To a certain extent, the Polish experience may be seen as an extreme version of the development of inequality seen in Western countries.

Finally, recent developments suggest that the future of inequality in Poland is likely to be linked with the prominent role of capital income among top incomes. Moreover, one should not expect a weakening of this trend, as processes connected with globalization and technological change seem to contribute to the growing dominance of capital in the economy. Rising inequality might have adverse social and political implications, as is evident in the recent populist anti-globalization backlash in Poland and internationally. The issue of distribution of gains from economic growth has become crucial for sustaining long-run development.

Further reading

Atkinson, A. B., and J. Micklewright (1992) Economic Transformation in Eastern Europe and the Distribution of Income. Cambridge: Cambridge University Press.

Autor, D., L.F. Katz and M.S. Kearney (2006) ‘The Polarization of the US Labor Market’. American Economic Review, 96 (2), 189–94.

Autor, D., D. Dorn and G. Hanson (2016) ‘The China Shock: Learning from Labor-Market Adjustment to Large Changes in Trade’. Annual Review of Economics, 8, 205–40.

Azar, J., I. Marinescu and M. Steinbaum (2017) ‘Labor Market Concentration’. NBER Working Paper Series, No w24147.

Baldwin, R.E. (2016) The Great Convergence: Information Technology and the New Globalization. Cambridge, MA: The Belknap Press of Harvard University Press.

Bergson, A. (1984) ‘Income Inequality under Soviet Socialism’. Journal of Economic Literature, 22, 1052–99.

Dumke, R. (1991) ‘Income Inequality and Industrialization: The Kuznets Hypothesis Re-examined’. In Brenner, Y., H. Kaelbe and M. Thomas (eds), Income Distribution in Historical Perspective. Cambridge: Cambridge University Press.

Eddie, S.A. (2008) Landownership in Eastern Germany before the Great War: A Quantitative Analysis. Oxford: Oxford University Press.

Flakierski, H. (1986) Economic Reform & Income Distribution: A Case Study of Hungary and Poland. Armonk, NY/London: M.E. Sharpe.

Garbinti, B., J. Goupille-Lebret and T. Piketty (2017) ‘Income Inequality in France: Evidence from Distributional National Accounts (DNA)’. WID.world Working Paper Series No. 2017/4.

Growiec, J. (2012). ‘Determinants of the Labor Share: Evidence from a Panel of Firms’. Eastern European Economics, 50 (5), 23–65.

Keane, M. P., and E.S. Prasad (2002) ‘Inequality, Transfers, and Growth: New Evidence from the Economic Transition in Poland’. The Review of Economics and Statistics, 84, 324–41.

Keane, M. P. and E.S. Prasad (2006) ‘Changes in the Structure of Earnings during the Polish Transition’. Journal of Development Economics, vol. 80 (2), 389–427.

Landau, Z., and J. Tomaszewski (1985) The Polish Economy in the Twentieth Century. London: Croom Helm.

Letki N., M. Brzezinski and B. Jancewicz (2014) ‘The Rise of Inequalities in Poland and their Impacts: When Politicians Don’t Care but Citizens Do’. In B. Nolan, W. Salverda, D. Checchi, I. Marx, A. McKnight, I. G. Tóth and H. G. van de Werfhorst (eds), Changing Inequalities and Societal Impacts in Rich Countries: Thirty Countries’ Experiences. Oxford, Oxford University Press, 488–513.

Lindner, A., F. Novokmet, T. Piketty and T. Zawisza (2019) ‘Political Conflict and Electoral Cleavages in Central–Eastern Europe, 1992–2018’. Mimeo.

McCagg, W.O. (1989) A History of Habsburg Jews, 16701918. Bloomington: Indiana University Press.

Milanović, B. (1998). Income, Inequality, and Poverty During the Transition from Planned to Market Economy. Washington, DC: World Bank.

Mitra, P., and R. Yemtsov (2006) ‘Increasing Inequality in Transition Economies: Is there More to Come?’ The World Bank. Policy Research Working Paper Series 4007.

Novokmet, F., T. Piketty, L. Yang and G. Zucman (2018) ‘From Communism to Capitalism: Private versus Public Property and Inequality in China and Russia’. American Economic Review: Papers and Proceedings 108, 109–13.

Olszewski, K. (2009) Essays on the Effect of Foreign Direct Investment on Central and Eastern European Transition Economies. Venice:Università Ca’Foscari.

Piatkowski, M. (2018) Europe’s Growth Champion: Insights from the Economic Rise of Poland. Oxford: Oxford University Press.

Ritschl, A. (2005) ‘The Pity of Peace: Germany’s Economy at War, 1914–1918 and Beyond’. In S. Broadberry and M. Harrison (eds), The Economics of World War I. Cambridge: Cambridge University Press.

Rutkowski, J. (1996) ‘High Skills Pay-Off: The Changing Wage Structure during Economic Transition in Poland’. Economics of Transition, 4, 89–112.

Rutkowski, J. (2001) ‘Earnings Inequality in Transition Economies of Central Europe: Trends and Patterns during the 1990s.’ World Bank Social Protection Discussion Paper No. 0117.

Wiśniewski, J. (1934) Rozkład dochodów według wysokości w r. 1929. T. III, Badania nad dochodem społecznym w Polsce. Warsaw: Instytut Badań Koniunktur Gospodarczych i Cen.

Figure 1:

Income share of the top 1% in Poland 1892–2015

Source: Authors’ computation based on income tax statistics. Distribution of fiscal income among tax units. Note: Prussian Poland is the Province of Posen and West Prussia; Galicia is the Austrian partition.

Figure 2:

Income shares in Poland, 1983–2015

Source: Authors’ computation. Distribution of pre-tax national income (before taxes and transfers, except pensions and unemployment insurance) among equal-split adults.

Table 2: Income growth and inequality in Poland, France and Russia

Income group (distribution of per adult pre-tax national income)PolandFranceRussia
Total cumulated real growth 1989–2015Share in total macro growth 1989–2015Total cumulated real growth 1983–2014Share in total macro growth 1983–2014Total cumulated real growth 1989–2016Share in total macro growth 1989–2016
       
Full Population73%100%35%100%41%100%
Bottom 50%31%13%31%21%-20%-15%
Middle 40%47%30%27%37%15%16%
Top 10% 190%57%49%42%171%99%
Top 1%458%24%33%21%429%56%
Top 0.1%1019%9%98%21%1054%34%
Top 0.01%2273%3%133%8%2134%17%
       

Source: Poland: Authors’ computation (see section 2). Distribution of pre-tax national income (before taxes and transfers, except pensions and unemployment insurance) among equal-split adults. France: see Garbinti et al. (2017) (Table 2b). Russia: see Novokmet et al. (2018a) (Table 2).


[i] Unfortunately, we omit the Russian partition as there are no comprehensive tax sources available. 

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