Wage inequality and the labor market impact of economic transformation: Croatia, 1970–2008

► We examine trends in overall wage inequality and inequality by education in Croatia from 1970 to 2008. ► Post-transformation, overall inequality increased more rapidly than inequality by educational attainment. ► These inequality trends imply rising earnings differences among individuals within educational groups in Croatia. ► Wage differences now increasingly reflect individual skills rather than institutional wage-setting based on education. ► This trend is broadly consistent with the transformation from a centrally planned to a market economy. In this paper, we examine wage inequality and wage differentials in Croatia from 1970 to 2008 using two long aggregate time series on the distribution of income. We focus especially on changing income inequality related to educational and vocational attainment, changing income inequality within those groups, and how these two components of inequality were affected by the economic transformation from socialism to capitalism. We find that income inequality between groups rose moderately post-transformation, while overall inequality increased more sharply. This finding is consistent with a growing importance of individual rather than group productivity in labor market compensation, a change broadly consistent with the economic transformation of the Croatian labor market.