Wage formation during economic transformation: macroeconomic facts and firm survey evidence from Slovenia

This article provides macroeconomic stylised facts on wage comparisons and microeconomic evidence on how institutional changes, competitive pressures in firms' output markets, human capital and efficiency wage payment affect wage formation during the early stages of transformation. Wages in Slovenia are higher than in other transition Central and Eastern European countries and higher than labour productivity. We use a firm survey panel dataset of Slovenian enterprises to investigate labour cost adjustment and its policy relevance. The results reveal that transformation was not a uniform process as it has induced different labour cost adjustments and wage responses to transformation shocks over time. The hypothesis that labour productivity and competitive pressures in firms' output markets were important for wage formation was not supported. We confirm that rent seeking increased wages in insider, management and employee-owned enterprises in anticipation of privatisation. The effect of human capital was modest and efficiency wage payment was found not to be significant. The hypothesis of unionisation in Slovenian enterprises was not supported.