One more efficiency test for market economy-Return to Schooling: Does market economy reward education more than communism? By Samir Huseynov
Literature Review and Motivation
This paper aims to analyze the change in return to schooling in Hungary, via comparing communism and market economy periods. As the philosophy of each system is very different, it causes differences in treatment of factors of production as well. While getting familiar with main literature of this topic, it turns out that there is not consensus about the main driving philosophy of communism in terms of organizing production. There are some contradictory assumptions on rewarding factors of production, especially personal characteristics under planned economy. According to one them, because of egalitarian approach towards workers, wage profiles were compressed and planners set wages on the base of industry and work profile under communism (Campos and Joliffe, (2003)). So personal characteristics like education were not evaluated and that is why after transition to market economy in ex- communist countries return to education should increase. But other assumption states that planners were well informed about the importance of personal traits in productivity and they kept total wage fund for a firm fixed, while allowing managers to distribute available money within firm according to performance and personal properties (Robert Chase, (1998)). Wage grid was one of the ways, to evaluate education. So, this assumption concludes that, after transition education didn’t yield more return than it was previously. But, as Bergson (1944) argued, managers had to follow ceilings and floors, so under planned economy return to education was lower than it should be and after transition return should increase. Also, according to Schultz(1975) a more educated person is more successful in adjustment to disequilibrium, which means in new system, more educated people would achieve better job and would get more for their education, than it was in previous system. In summary of above discussion, we can conclude that, although some assumptions claim possible decrease in return to schooling in former communist countries after transition to market economy, mainstream literature support first stated approach -increase in return to education in market economy. So, this paper sheds light to theoretical discussions via quantitative analysis and aims to find some empirical evidences. Beyond this, my paper can give some insights about efficiency of planned economy and market economy and can serve as a new milestone in long lasting debate between supporters of two systems. As you know, in last century, humanity experienced rivalry of market economy and communism. Superiority of each system was claimed by their proponents throughout sharp debates, which lasted approximately more than a century. After the collapse of SSSR and its communist block, post communist countries transformed their economic systems to market economy. In today’s world there are still several countries with planned economy, like China with huge economic growth. So, the humanity still has alternative choice in terms of economic systems and “Which one is better? ” is still open question, at least for modern communist economists after the experience of recent economic crises. So, I think my paper can be “fresh” voice in this debate as well.
The experiences of ex-communist but new market economies of Eastern Europe are good natural experiment. With pure communist history these countries achieved more sophisticated market economy institutions than former SSSR countries. Among post communist block countries, Hungary is more appropriate for this study, as Hungary showed the highest score in the EBRD index of market-supporting institutions for 2001 (EBRD, 2002, p. 9). Taking these facts into the consideration in this paper, I focus on Hungary and aim to find some empirical evidences from Hungary’s experience.
The individual level data was retrieved from Hungarian Wage survey and covers the year 1986, which was communist era and the year 2004 which was the beginning of EU membership in Hungary.