A report on Czech Society

12. 5. 2010 / Jan Drahokoupil

Aiming to present available data and facts on key aspects of socio-economic life, Czech Society in the 2000s is an exercise in social reporting that draws on two decades of research on Czech transformation conducted by Večerník and his colleagues (Večerník, 1996; Večerník & Matějů, 1999). The labour market, social structure, mechanisms of stratification, patterns of redistribution, policies of social protection, and social values are analysed by using an impressive empirical base, including nine comparative European and four national datasets. Throughout much of the book, the author lets the data and regressions speak for themselves. At the same time, however, it includes three important claims about the Czech experience which deserve further scrutiny.

First, while the post-communist capitalism brought about an improvement in the standard of living for a majority of the population, only a small group of `upper class' constituted the actual winners of transition. Of a particular concern for Večerník is the weak position of the middle class, which he considers key for providing moral, political, and intellectual leadership needed for a successful and inclusive democratic polity. However, it was the middle class that bore the burden of `paying for the advancement of the upper class while protecting the lower strata' (p. 142).

Second, rather than creating an unhyphenated capitalism promised by the reformers, the Czech Republic established a generous system of social protection. The latter however suffers from two important dysfunctions: while it fails families with children, it is too forgiving to the (long-term) unemployed.

Finally, despite common believes, the so-called flat tax reforms implemented by the right from 2007 did not represent a departure from the previous trends as they in fact increased the progressive elements in the system of redistribution. These are interesting, but controversial conclusions. I will investigate in the context of the main findings on the socio-economic developments.

The introduction of the market mechanism as the means of labour allocation constituted a key systemic change. The analysis of the composition and mobility of the labour force tells us a great deal about the degree of change and continuity in Czech transformation. It is also illustrative of the specificity of the Czech way and the nature of its gradualism. The 1993-2007 period analyzed in the report (pp. 27-30) suggests only a very modest employment decline, from 69% to 66% respectively. This, however, does not take into account the significant employment reduction in the preceding years. What makes the Czech (and Slovak) case specific is not the lack of employment shedding in the nineties, but the high activity rates, comparable to that of the EU-15, that stabilized after the initial shocks (Myant & Drahokoupil, 2010, Ch. 10). While the decline in the employment of pensioners accounted for the initial adjustments (Myant, 1996), the longer time that young people spent studying and the higher activity rate among people close to retirement constituted the major structural change in the consequent period.

The structure of employment also changed. The largest reduction employment decreases took place in the manual positions in agriculture and heavy industry. The number of managers and white-collar workers grew. The service sector expanded, but, as elsewhere in Eastern Europe, it is still much smaller than in the EU-15. By the end of the 1990s, the collapse of the Czech Way of enterprise restructuring brought an end to the exceptional record of low unemployment. In this context, the report is a victim of the widespread myth that unemployment in the 1990s was held in check by maintaining soft budget constraints (p. 34). There were delays in implementing a bankruptcy law and banks did provide support to some inefficient firms, but other financial constraints on enterprises were severe and the Czech Republic experienced as rapid employment declines as other countries did (Myant & Drahokoupil, 2010, Box 10.1).

The arrival of foreign investors in manufacturing in the late 1990s led to a rebound in blue-collar manufacturing employment. In effect, job-to-job mobility was higher in 1997-2005 than in 1990-1997. Interestingly, territorial mobility of the workforce in the market system was lower than in the 1980s. Part-time and fixed-term contracts are used less often that in the EU-15, but the degree of flexibility in employment arrangements is high by international standards and various informal forms of employment are common.

Transformation of the labour market was accompanied by important changes in the patterns and mechanisms of social stratification. The pre-1989 figures on the inequality of per-capita earnings were among the lowest in the world. There were, however, large income differences between pensioners and employees. While disparities in per capita incomes were relatively narrow, household income inequality was close to Western countries. It was thus not the level of income, but the number of economically-active members in a household that accounted for the differences. The system of stratification was transformed, with the male head's earnings becoming the main source of inequality among households. Education became the main factor accounting for earning differences. At the same time, the access to education was unequal, particularly in the most attractive fields. The importance of gender in determining earnings diminished, but the wage gap decreased much less than the relative importance of gender relative to other factors.

Income inequality increased, but it still remained relatively low, with Gini coefficients reaching levels known from Germany and Austria. Only about the top five percent of earners benefited from the growing inequality. The bulk of income inequalities remained compressed as the relative share of earnings of other income categories slightly decreased or remained stable. The relative gains of the middle class were thus equivocal. To Večerník's disappointment, the middle income categories were among those who kept losing their relative earning share at the expense of the top earners throughout 1989-2006. While the subjective identification with upper-middle and upper classes increased from 3.0% to 10.9% in 1991-2007, the middle class self-identification decreased from 61.1% to 35.6% in the period. The picture looks more positive for the middle class if mobility is taken into account: while differences between subjective classes regarding changes in past income were only minor in 1989, class identification started to make a difference by 1997, with half of the middle class reporting an improvement in their financial situation. The bottom of the stratification ladder has also seen important changes: families with children moved down and replaced the pensioners at the bottom of the household income hierarchy.

Taxes, transfers and the welfare system in general played an important role in shaping the patterns of distribution and the exposure to poverty. A comprehensive package of social policies was introduced in the early nineties and the state role in social protection had a considerable support among the population. As in Hungary, the system ranked among the most effective in reducing poverty rates and inequality in the EU. (With the share of expenditures on social protection relative to GDP peaking in 2003, the Czech Republic avoided the unsustainable increases seen in Hungary after 2001.) In 1998-2002, social transfers became increasingly more targeted on low-income groups while the distribution of tax burden became more progressive. As a result, in 2002, only the lowest income decile of employee household was a net beneficiary of redistribution. The system, however, failed to meet the needs of families with children, with the 2004 at-risk poverty rate of 16.1% being among the highest in the EU.

Now, how does the evidence bear the three conclusions about the nature of socio-economic transformations? First, it is reasonable to assume that a strong middle class benefitting from the system is an important precondition for a successful and inclusive society. Indeed, the provision of public-goods such as good education system and a functioning system of social protection can be best guaranteed if the middle class has a long-term stake in it (cf. pp. 127-133). While I would be less worried about the weak relative gains for the middle class from the increase in inequality (there were only two alternatives: retaining the flat income structure without any gains for the middle class or increasing the inequality at the expense of the lower classes), I share Večerník's concerns about the nature of middle class integration into the system. Indeed, the middle class does not seem to benefit from the system enough to be easily mobilized to defend the system of redistribution and the provision of public goods. With increasing targeting of social provision, its integration into the system of public insurance and redistribution becomes more similar to the less inclusive societies such as the US and the UK (cf. Förster & d'Ercole, 2005; Večerník, 2006). The Czech Republic is thus at risk at losing its gains that put it among the more inclusive countries such as Germany and Sweden, particularly as far as income inequality and relative poverty is concerned. More specifically, the middle class as a net contributor to the system of transfer and taxation saw mainly cuts in the share of transfers it receives while its burden was increasing (p. 109). More importantly perhaps, it is being failed by the low quality of public services. Most importantly perhaps, Czech education system ranks among the EU countries with lowest public support (p. 39). This not only undermines the position of a bulk of middle class employed in this sector (p. 138), but also increases the likelihood of middle-class support for a less-inclusive private provision.

Second, Večerník is right to emphasize the serious failure of the system of social protection in relation to child poverty. However, the conclusion that the system `contributed to high unemployment' as it created a welfare-dependency trap by being too generous to the long-term unemployed is problematic (e.g. pp. 51, 164). This recurring claim has important policy implications. Surprisingly, however, the report fails to provide actual evidence. (Its support consists of a reference to a 2008 press release of the Ministry of Labour and Social Affairs claiming that its policy of making benefits less generous was accompanied by unemployment decline [p. 40] and of an observation that `the long-term unemployed often live in areas where there are available job vacancies' [p. 51].) While the dependency-trap may be a problem of the Czech system, there are also many reasons to be skeptical. In general, comparative data show that the Czech social system can be better characterized as efficient rather than generous. It has an above-the average record on lowering poverty and inequality. At the same time, total expenditures on social protection as a percentage of GDP not only lag far behind the EU-15 levels. Their level, if related to the level of development, is below the trend line also among the low-spending East European countries (Myant & Drahokoupil, 2010, Chapter 10). Moreover, replacement rates for unemployment benefits declined to only one-quarter of the average wage and the generosity of the system of benefits, including the minimum income, was decreasing significantly from mid-1990s (pp. 161-164).

Finally, one of the most interesting contributions of the analysis is the household-level simulation of the impact of the 2008 `flat tax' reforms (pp. 112-119). Departing somewhat from available model-earner calculations, it shows that the degree of progressivity of the tax system in fact increased: the lowest household-income decile received the highest income-tax reduction (by 66%, compared to 17% for the highest decile), which suggests also compensation for the VAT increase (p. 119). However, the actual effects on the distribution of household income are likely to be different, possibly leading to inequality increases. `The effect on low-income categories is negligible because they were paying very little -- if anything -- in taxes even before the reform' (p. 116). The apparently large relative gains thus do not amount to much in the absolute terms for low and middle (class) earners. In contrast, the reform led to substantial absolute, even if low relative, gains for higher earners and very substantial gains, both relative and absolute, for top the top 1.5% earners which benefited from the cap on insurance payments. What is more, the lower-income categories will also bear a disproportionate burden of spending cuts that are required to finance the reform. The public sector serving the middle class can also brace for further cuts. Seen in a wider perspective, it was again the top five percent of transition winners that gained the most from the 2008 reforms. It remains the task for the next social report to show how the burden was distributed among the lower and middle classes.

References

Förster, M., & d'Ercole, M. M. (2005). Income Distribution and Poverty in Oecd Countries in the Second Half of the 1990s. OECD Social, Employment and Migration Working Papers , 22.

Myant, M. (1996). An Incomplete Transformation? In M. Myant, F. Fleischer, K. Hornschild, Z. Souček, R. Vintrová & K. Zeman (Eds.), Successful Transformations? The Creation of Market Economies in Eastern Germany and the Czech Republic (pp. 128-162). Aldershot: Edward Elgar.

Myant, M., & Drahokoupil, J. (2010). Transition Economies: Political Economy in Russia, Eastern Europe, and Central Asia . Hoboken, NJ: Wiley-Blackwell.

Večerník, J. (1996). Markets and People: The Czech Reform Experience in a Comparative Perspective Aldershot: Avebury.

Večerník, J. (2006). Income Taxes and Social Benefits among Czech Employees: Changes since 1989 and a Cross-National Comparison. Czech Journal of Economics and Finance (Finance a úvěr) , 56(1-2), 2-17.

Večerník, J., & Matějů, P. (Eds.). (1999). Ten Years of Rebuilding Capitalism: Czech Society after 1989 . Prague: Academia.

This is an adapted version of a review prepared for Europe-Asia Studies.

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