IB revija 1-2/2006       UMAR       37  Članki
UDK: 331.5
Milan Vodopivec*
The Evolution and Determinants of Slovenia's
Wage Structure in the 1990s**
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Summary
The paper analyzes the effects of
Slovenia's transition to a market
economy on the structure of wages.
It describes the newly established
wage-setting mechanism, discusses
the factors expected to shape the
wage structure and their predicted
effects, and - based on the
estimation of earnings functions -
empirically analyzes the determi-
nants of wages.  The paper finds
that during 1992-2001, the returns
* The World Bank and the Faculty of Management, Primorska University
** I would like to thank the Statistical Office and the Pension and Disability Fund of the Republic of Slovenia for providing
data, Slavi Pirš for useful consultations on the Slovenian wage system, and Zala Kalan and Tomaž Rejec for their excellent
work in processing the data.
Povzetek
Članek analizira učinke prehoda
v tržno gospodarstvo na strukturo
plač v Sloveniji. Za iztočnico opiše
novi sistem določanja plač. Nato
obravnava dejavnike, ki oblikujejo
strukturo plač, opiše njihove
pričakovane učinke in na podlagi
ocenjenitve plačnih funkcij te
dejavnike empirično analizira.
Rezultati kažejo, da se je v letih
1992-2001 nadaljeval trend ve-
1. Introduction
The transition to a market economy has produced
dramatic changes in how the Slovenian labour
market works. The related reforms shattered job
security, replaced the previous rigid system of wage
determination with collective bargaining, and
strengthened financial discipline that squeezed
subsidies for ailing enterprises. The disruption of
the previously stable economic system caused
major dislocations of workers. Not only the level
of employment and unemployment, but also the
transition rates among different labour market
states and wages have been seriously affected.
Employment has been drastically reduced,
disproportionately affecting both young and old
workers, as well as the less educated.
Unemployment has soared, rising from its virtual
absence in the mid-1980s into double digits in the
1990s. The probability of an employed worker
becoming unemployed has increased sharply, while
the probability of changing jobs has declined
to education and work experience
further increased, continuing their
trend from the early transition.
Controlling for skill and job
characteristics, Slovenian women
earned 9 to10 percent less than men
- the wage gap considered low by
international standards. Wage
inequality strongly increased in
1990-91, but the latter 1990s - the
period when real wages rose for all
points in the wage distribution -
arrested this trend, due to
disproportionate wage gains
workers in the lower tail of the wage
distribution, the development which
can partly be attributed to the 1995
introduction of the minimum wage.
Various firm characteristics also
mattered, with wages of state,
foreign-owned, and large firms
exceeding wages in other ownership
types, domestically-owned, and
small firms.
čanja nagrade po izobrazbi in
delovnih izkušnjah, ki se je pričel
v začetku tranzicije. V devetdesetih
letih so plače žensk zaostajale za
9 do 10 odstotkov za plačami
moških, pri čemer so upoštevane
razlike v usposobljenosti med
moškimi in ženskami in razlike v
značilnostih njihovih delovnih
mest. Po mednarodnih standardih
je to razmeroma majhen razko-
rak. Rezultati tudi kažejo, da so
se razlike v plačah močno povečale
v letih 1990-91, v naslednjih letih,
ko so se realne plače povečale v
vseh delih plačne distribucije, pa
se je ta trend zaustavil, kar je vsak
deloma mogoče pripisati uvedbi
minimalne plače v letu 1995.
Članek tudi ugotavlja, da na plače
vplivata tudi velikost in  lastniška
struktura.
  Članki38       UMAR      IB revija  1-2/2006
considerably. The chances of finding a job after
becoming unemployed have declined.
Not surprisingly, the transition also produced large
changes in the structure of wages. In their study of
changes to the wage structure in Slovenia’s early
transition (1987-91), Orazem and Vodopivec
(1995) revealed several dramatic findings:
• Relative wages and employment had risen for
the most educated and fallen for the least
educated. The apparent shift in relative labour
demand towards the most educated had
occurred in all industries.
• Relative wages and employment had risen with
years of work experience. At pensionable age
relative wages were growing even faster, while
relative employment had plummeted – the effect
consistent with a labour supply shock for
pensionable-age workers.
• Women had gained relative to men in both
wages and employment primarily because
women occupied sectors less adversely affected
by the transition.
• Overall wage inequality had increased.
The purpose of the present study is to follow up
the study of Orazem and Vodopivec (1995) and
investigate the development of the wage structure
during the 1990s. It attempts to answer the
following questions: Did returns to education and
skills continue to grow during the 1990s? What
happened to the gender-wage gap? What were the
effects of the 1995 introduction of the minimum
wage? Did any particular sector wages lag behind
the economy average? How did firm characteristics
(like ownership and financial standing) affect the
formation of wages? What was the overall effect
of various forces on wage inequality? The key
findings of the study are that, during the 1990s,
the returns to education and work experience
continued to increase; that the female wage gap
stabilised at about 9 -11 percent; and that – due to
the disproportionate gains of the lower tail of wage
distribution –wage inequality stopped growing
(although those at the very top of the wage
distribution also gained in relative terms).
The paper proceeds with an institutional
background describing both the key features of
the wage-setting mechanism under self-management
and of the newly established wage determination
system that was set up after the demolition of the
previous system (Section 2). The forces expected
to shape the wage structure during the transition,
and their possible effects on wages, are discussed
in Section 3. Section 4 describes the data sources,
while Section 5 presents the results of the empirical
analysis of the evolution of wages in 1992-2001.
Section 6 provides some concluding remarks.
2. Institutional Background: Wage
Setting in the 1990s
The systemic and political changes brought by
transition reforms unleashed powerful forces which
profoundly inf luenced labour market outcomes,
including the determination of wages, in the 1990s.
In this section we review the main institutional
features that shaped the wage-setting process in the
self-managed system, and the legislative and
bargaining framework which was put in place after
it was dismantled.
Under the self management system, the absence
of explicit property rights dictated a specific wage-
setting mechanism. Both government and workers
had clearly delineated roles. The government set
the firm’s wage bill (called a ‘socially warranted’
wage bill) with the aim to even out differences in
pay among firms – the objective was achieved
through a massive inter-firm income
redistribution.1 Within government-fixed bound-
aries, the workers’ role was to set individual wages
within the firm. The wage scale was determined
by a referendum of employees. Not surprisingly,
in comparison to capitalist firms Yugoslav firms
had extremely compressed wage scales. For
example, in an enterprise with several thousand
workers the pay of the highest paid manager was
4.54 times that of the lowest paid worker (for
further details on wage determination, see
Vodopivec, 1993).
The 1988 Yugoslav Law on Enterprises transferred
decision-making rights from workers to equity
owners, thus formally ending the era of self-
management. Important changes occurred in both
employment and wage poli­cies. The main novelty
in the area of employment was the employer’s right
to lay off a worker (although this option was
extremely costly for the employer). On the wage-
setting front, the self-managed mechanism was
replaced by a system with three components: the
Labour Code, collective bargaining, and incomes
policy.
The Yugoslav Labour Code was accepted in
October 1989, while Slovenia adopted its own in
April 1990 (Official Gazette of Slovenia, No. 14/
1990) and amended it several times during the
1990s (a new Labour Code took effect in January
1 For a quantification of redistributive f lows for Slovenian firms in 1986, see Vodopivec (1993).
IB revija 1-2/2006       UMAR       39  Članki
2003). The 1990 Labour Code removed
administrative con­straints and collective decision-
making, leaving wage determination as a
managerial responsibility. Managerial discretion
to set pay was not absolute, however the law
introduced collective bargaining, a genuinely new
component of wage setting. The outcomes of
collective bargaining are binding for all employers
(regardless of their participation in the bargaining
process). The first general collective agreement for
Slovenia was ratified in August 1990 and followed
by several other general, as well as numerous
industry collective agreements. The latter ones tend
to follow the then-prevailing general collective
agreement, but could specify more detailed
conditions of pay as deemed appropriate for their
specific areas.
General collective agreements, among others,
prescribe the components of the wage and determine
fringe benefits (such as the duration of vacations,
reimbursement of transport costs for travelling to
work, meals etc). According to these agreements,
the components of wages are: (a) the basic wage,
whose f loor level is determined by collective and
industry agreements; (b) wage supplements, for
example, for difficult working conditions and for
seniority; (c) supplements for an individual’s
successfulness; and (d) an ‘income-sharing’
component paid on the basis of a firm’s business
success.
The largest component of a worker’s pay is the basic
wage (usually determined as a multiple, say 1.35, of
the minimum basic wage as determined by collective
agreements). To determine the basic wage, collective
agreements classify workers in nine categories,
prescribing for each category its own minimum, basic
wage (precise inflation-escalation clauses determine
the basic wage for each category for each month).
The classification of workers is based on the levels
of education and – formal and on-the-job – training,
or ‘professional qualification.’ The basic wage for
the highest category has been repeatedly set at three
times that of the lowest category (some industry
agreements set slightly higher ratios). Up until 1997,
firms in poor financial standing (a term that was
not precisely defined) had the right to reduce the
basic wage levels (by up to 20 percent till 1995, and
by 10 percent during 1995-97). As an illustration,
below we present the basic wage scale mandated by
the supplement to the 1997 general collective
agreement (Official Gazette of the Republic of
Slovenia, No. 40, June 1997):
Class Coefficient
Basic monthly gross
wage for full-time work
(in SIT)
1 Simple work (no training, unfinished primary school education) 1 47,978
2
Less demanding work (short training, completed primary school
education)
1.1 52,776
3
Medium demanding work (up to two years'
professional/vocational education)
1.23 59,013
4
Demanding work (up to two-and-a-half years'
professional/vocational education)
1.37 65,730
5
More demanding work (3 years of professional/vocational
education, with a foreman's exam, or 4-5 years of such
education)
1.55 74,366
6 Very demanding work (2 years of college-level education) 1.85 88,759
7
Extremely demanding work (4-5 years of college-level
education)
2.10 100,745
8 Most demanding work (master's degree) 2.50 119,945
9 Exceptionally important and most demanding work (doctorate) 3.00 143,934
Bargaining agreements also specify many other
conditions of pay. One of the most important ones
is a seniority supplement that determines the
minimum rate of returns to seniority (work
experience). For example, Article 47 of the 1997
general collective agreement (Official Gazette of the
Republic of Slovenia, No. 40) prescribes that a
worker’s pay is to be increased by at least 0.5 percent
of their basic wage for each year of work experience
(the same stipulation was in effect throughout the
1990s).
Parallel to the structure of basic wages imposed
by collective agreements, a 1995 social agreement
also introduced an inf lation-adjusted minimum
wage (Official Gazette of Slovenia No. 22/95).
The minimum wage exceeds the basic wage of the
lowest paid workers as stipulated by collective
agreements valid for the same period because the
minimum wage provision relates to the total
payment received by the worker (including various
supplements), and the basic wage is only one –
  Članki40       UMAR      IB revija  1-2/2006
albeit the main – component of pay. For example,
the minimum monthly wage in April 1997 (at the
time the 1997 collective agreement was introduced)
was SIT 56,781, compared to the basic wage of
SIT 47,978 stipulated by the general collective
agreement (see the Table above).2
Until 1997, incomes policies (which were a staple
of the self-management system) continued to be
an important component of the wage-setting
system. The government repeatedly accepted laws
which together limited the growth of the overall
wage bill of enterprises. Since 1997, there has been
no incomes policy general limit on the overall wage
bill, and the only limitation on wage growth has
been the requirement that the annual growth of
managerial pay (the pay of highly-paid workers
under so-called individual contracts) should be
matched by growth of the payroll of those workers
covered by collective agreements.
From the above description it is clear that Slovenian
wage setting is a very structured, formally
determined system. To what extent is this system
responsive to market forces? In particular, one
could hypothesise that wage policies which set
minimum pay, index wages to inflation and fix the
allowable range of pay within firms tend to
compress wages. In what follows, we will investigate
how the system  works.
3. The Transition's Expected Impact
on Wages
In transition economies one can hypothesise that
the wage structure has been influenced by a whole
series of forces. First, and arguably the most
important, there are forces associated with the
correction of distortions created by systemic
constraints on the labour market – and the wage
structure in particular – under socialism. Second,
there are both short- and long-term changes in the
structure of production that may affect the structure
of wages. Third, there are short-term forces
associated with disequilibrium and uncertainty
created by the transition itself. Because these forces
all came into play simultaneously, it is difficult to
isolate the impact of any single factor.
Correction of distortions created by systemic
constraints in the labour market. Under socialism,
labour markets were characterised by ‘over-full
employment’. Citizens were obliged to work as a
social responsibility, while social/state sector
establishments were encouraged or pressured to
create jobs beyond their production needs. In
return, firms were insured by the state against
losses. Egalitarian wage structures were imposed
through so-called tariff systems and classified jobs
in skill grades with centrally assigned wage rates.
In Slovenia, the same outcome of wage
egalitarianism was produced by the workers’
collective decision-making on relative wages,
coupled by government control of firms’ payrolls
(see above). These egalitarian pay policies tended
to limit pay to skilled labour relative to the pay of
unskilled labour, reducing gains from schooling,
particularly university education.
Given the low returns to education, did the socialist
systems under-invest in education? In principle, the
answer is ambiguous: even though returns to skill
acquisition were constrained by the system so too
were the costs of skill acquisition. Education through
the university level was provided free, and stipends
were often granted to students while at school. This
meant that the direct and opportunity costs of
education were much lower than in the West. Data
on tertiary enrolments in transition countries,
however, overwhelmingly show that the demand for
skilled labour grew tremendously – in the 1990s,
the increase in the number of students ranged from
50 percent in Lithuania to a record 290 percent in
Poland, with Hungary, Latvia, Romania and
Slovenia, among others, more than doubling their
student populations (Kraft and Vodopivec, 2002).
Partly due to society’s pressure to work and partly
due to child-care subsidies, women in socialist
economies enjoyed higher labour force
participation rates than women in Western
economies. Relative wages for women were similar
and in Slovenia they were even higher than in the
West. Egalitarian wage policies tended to limit
differences between all groups so that it might be
expected women would have been treated relatively
well in socialist systems.
Does the removal of these systemic constraints on
labour market adjustments result in a move
towards labour market outcomes more typical of
Western economies? By definition, egalitarian wage
policies involve implicit or explicit transfers from
1 In addition to basic and minimum wages, Slovenia has also introduced the so-called ‘guaranteed wage’ used as a basis for the
payment of certain cash benefits (such as social assistance).  At its inception in 1982, the guaranteed wage applied to workers
in illiquid enterprises, to be paid from special government reserves. Its level was partly based on the minimum basket of
commodities, but it also included elements that had nothing to do with poverty (like the average number of family members
per wage earner in the family). Currently, no wages or earnings are based on the guaranteed wage – all that has been preserved
is the role of the guaranteed wage in defining cash benefits. However, the less-than-COLA adjustments in its level since 1982
further eroded the connection of the guaranteed wage to the subsistence level.
IB revija 1-2/2006       UMAR       41  Članki
high-wage to low-wage workers. The removal of
these egalitarian policies would be expected to
increase wage inequality. Workers with skills in
relatively stronger demand in the transition will
have rising wages relative to those workers whose
skills have become less necessary. The removal of
state subsidies for failing firms meant that workers
in profitable firms could gain relative to workers
in unprofitable firms. Another consequence of the
transition relates to the labour market position of
women. Because women fared relatively well under
socialism, one might presume that they would lose
in the transition. If the formalised wage system
under self-management limited forms’ ability to
discriminate, then the removal of these institutions
might be expected to reduce the relative earnings
of women.
Effects of changes in the structure of production.
The transition caused both short- and long-term
changes in the composition of final demand for
products in Slovenia and these changes may have
different effects on workers with different skills.
Because socialist economies placed a particular
emphasis on manufacturing and, within
manufacturing, on heavy industries such as
metallurgy, the abandonment of subsidies for these
industries caused a permanent reduction of labour
demand in those sectors. At the same time, service
(for example, finance, insurance and real-estate,
consulting, information services, catering and
tourism) and retail sectors were underdeveloped
under socialism and would be expected to have
expanded in transition. In Slovenia, shifts seen in
the final demand for products also represent a move
away from relatively low-skill-intensive sectors
(manufacturing, mining) towards more high-skill-
intensive services.3 The sectors adversely affected
by such changes in production were also
predominantly male, whereas the expanding sectors
were relatively female intensive. Thus shifts in the
composition of final demand tended to favour
more educated workers and women.
The main short-term shift in final demand was
associated with the breakdown of traditional trade
links between Central and Eastern European
countries associated with currency inconvertibility
and the break up of the former Soviet Union. These
problems were compounded by war which virtually
stopped trade between Slovenia and most of the
other former republics of Yugoslavia. The traded
goods sectors and transportation also tended to be
low-skill-intensive, exacerbating the shift in relative
labour demand away from those less educated.
Forces associated with disequilibrium and
uncertainty created by the transition. Additional
short-term shifts in relative labour demand toward
more educated workers are due to the process of
transition itself. Disequilibrium and uncertainty
create a greater need for entrepreneurial skills that
would have been less in demand under the socialist
system. Schultz (1975) argued forcefully that
stationary states do not require entrepreneurial
skill. Economic systems characterised by constancy
‘place no premium for the human ability to deal
with secular economic change.’ The socialist
education system, geared towards producing skills
needed by ‘steady state’ enterprises, would not have
been geared toward producing entrepreneurial
skills that were unnecessary under the old system.
Because entrepreneurial skills would be in short
supply relative to their enhanced usefulness in
transition, these skills should be rewarded with
higher relative employment and wages. If
entrepreneurial ability is complementary to
education and skills in general, then the relative
wages and employment of the most educated
groups should rise in the newly emerging market
economies relative to pre-transition returns when
entrepreneurial skills were not in such demand.
Schultz stressed that the presumed gains for
entrepreneurial ability during periods of change
are relative gains, meaning that it is unnecessary
that entrepreneurs be better off than they were
before the disequilibrium for the gains to be
realised. ‘For people to have gains from their
resource allocations does not imply that they are
necessarily better off than they were prior to the
disequilibrium, but it does imply that their
economic position has been improved relative to
what it would be if they had stayed in equilibrium’
(Schultz 1975, p. 834).
Other forces associated with the transition. There
may also be other forces at work that inf luence
labour market outcomes. For example, early
retirement programmes affected the supply of
experienced labour in Poland and Slovenia, among
others. In Slovenia, returns to retirement were
particularly attractive since pensions were fully
indexed to inflation, whereas wages were not. As
a consequence, retirements exploded in the early
transition when the economy experienced bouts
of hyperinflation. By making experienced workers
artificially scarce, pension policies tended to push
up wages for workers of a pensionable age.
To summarise: several factors may have caused
the premium associated with skilled labour
3 At the beginning of the transition, manufacturing, agriculture, and construction were those sectors with the share of low skilled
labour (those with a primary school education or less) of about 50 percent.
  Članki42       UMAR      IB revija  1-2/2006
(education and, to a lesser degree, experience) to
rise during the transition. Corrections of previous
distortions, and particularly changes in the
composition of final demand and the existence of
disequilibrium, all point to shifts in relative
demand for skilled workers. Returns to experience,
to the extent experience reflects the accumulation
of skills, may also increase but in a market
environment one can hypothesise an inverse U-
shape of returns (that is, a reduction of returns for
a certain year before retirement). There may also
be a temporary increase of returns to education
caused by the heavy withdrawals from the labour
market seen in the early 1990s to escape the pension
reform, to the extent that this process was more
intense for lower-paid workers whose retirement
was relatively more attractive. Women might have
been disadvantaged due to the dismantling of
egalitarian policies which allowed them to fare
relatively well under socialism – but the favourable
relative demands for female-intensive sectors may
have countered these forces.
4. Data Sources
The empirical analysis rests on three unusually
rich administrative databases covering all of
Slovenian workforce participants and all business
subjects. Common identifiers allow us to combine
records from the different bases. Below we briefly
describe the databases.
1. Work history database (maintained by the
Statistical Office of Slovenia). This database
was established by a census of workers in 1987
and initially included information on all formal
sector jobs in progress as of 31 December 1986.
Information collected about the individuals
involved in these jobs included age, educational
attainment, gender, years of labour market
experience counted towards eligibility for the
state-sponsored pension plan, and years with
the current employer. The dataset also included
information on the type of appointment held
(fixed-term versus permanent) and on certain
other aspects of the terms of employment. The
database has been updated to include
information on job terminations and job
commencements, as well as some information
on changes to the terms of employment. All
information used to update the base was derived
from forms employers were required to file in
connection with the maintenance of social
insurance records (the so-called M1, M2, and
M3 forms). They contain information on the
starting and ending date of an employment
spell, the type of appointment, occupation, and
employer’s identification code, and personal
characteristics (gender, age, education). The
dataset covers the 1992-2001 period.
2. Workers’ earnings database (maintained by the
Pension and Disability Fund). The database
contains information on earnings associated
with each employment spell of workers
employed in the formal sector. For each year
(or part of an employment spell within a year)
the information collected includes, among
others, the amount of earnings, the number of
hours worked in regular time and overtime,
and the starting and ending dates of the earnings
period. The dataset covers the 1992-2001
period.
3. Accounting data on enterprises (maintained by the
Agency for Payments). Data consist of yearly
profit and loss statements and balance sheets
for all businesses incorporated in Slovenia (data
for 1997-98 were available).
4. Business registry of firms (maintained by the
Statistical Office of Slovenia). The registry
records, among other items, the following
information about each firm: the starting date
(and, if it exists, the ending date), organisational
type, ownership type, whether the firm has
domestic or foreign owners, and what is the
size of the firm. The dataset covers the 1992-
2001 period.
5. Results of the Empirical Analysis
Below we describe our analysis of wages for the
1992-2001 period. We f irst analyse the
determinants of wages via the earnings function
approach, and then investigate the evolution of
wage inequality. The regression analysis for the
1992-2001 period does not reveal any dramatic
changes in the structure of wages, in contrast to
the large changes seen in the wage structure for
the 1987-91 period reported by Orazem and
Vodopivec (1995). Similarly, the analysis below
suggests that, after the strong rise in wage inequality
at the onset of the transition to a market economy,
wage inequality stopped increasing in the second
half of the 1990s.
Results of the earnings function
estimation
To analyse how the earnings structure in Slovenia
changed during 1992-98, we apply the standard
Mincerian earnings function approach to the
Slovenian data described above. The dependent
variable is W
t
, the natural logarithm of the average
monthly wage over a portion of the employment
spell which takes place in a certain year. The vector
IB revija 1-2/2006       UMAR       43  Članki
of independent variables, X
t
, includes several sets
of dummy variables, indicating (a) gender, (b) level
of formal education; (c) years of tenure (that is,
employment with the same firm); (d) work
experience (a cumulative period of employment,
which may be spent with different employers); (e)
type of appointment (permanent, temporary or
internship position); (f) number of shifts in the
work place; and (g) a set of monthly dummy
variables indicating the months of the year in which
the individual worked.4
The wage function in year t can be written as:
(1) W
it
 = X
it
ß
it
 + e
it
where e
it
 is an error term. Changes in the earnings
structure over time are measured by changes in
the coefficient, ß
it
. The joint restriction, that over
two periods t and t’, ß
it
 = ß
it’
 can be tested to
establish whether changes in the earnings structure
are statistically significant.
Below we discuss the results of the estimated
earnings functions for 1992-98. Of interest are both
the effects of the abovementioned independent
variables, as well as their changes over the period
under investigation.5
Male-female wage gap. Controlling for skill and
job characteristics, during 1992-2001 Slovenian
women earned 9 to10 percent less than otherwise
identical men. The dramatic fall of the wage gap
reported by Orazem and Vodopivec (1995) for the
very first years of transition stopped and was very
slightly reversed in 1992-2000 so that in 2001 the
gap amounted to 10 percent (see Table 1, Panel
A). The narrowing of the wage gap at the onset of
transition was produced, above all, predominantly
by women’s industries being hit less hard than
predominantly male industries and, viewed from
that aspect, the slight reversal of the trend comes
as no surprise. That the gap did not widen more
substantially in the late 1990s and that it is very
low by international standards is certainly a positive
development.
Education. The coefficients for the education
dummy variables in the earnings function are
remarkably stable throughout the 1990s. In fact,
relative to the least educated group (those who
did not finish primary school), the two most
educated groups slightly increased their advantage,
whereas the two groups at the bottom (those who
finished primary school and have a vocational
education) slightly lost their advantage (see Table
1, Panel B).6 Converted to yearly rates, returns to
education in 2001 amounted to 1.7 percent with
those with a primary school education, 3.4 percent
for those with a vocational education, 8.3 percent
for those with a high school education, 14.7 percent
for those with a two-year college degree and an
astoundingly high 19.6 percent for those with a
four-year college degree.7
Returns to work experience. In the 1990s there
were no dramatic changes in returns to experience
and tenure (Table 1, Panel C). The premiums
showed a slight tendency of shrinking throughout
the 1990s, with workers having low work service
increasing their premiums and those with a long
service decreasing theirs. Still, in 2001 each year
of work experience brought a roughly one
percentage point increase in wages. For example,
there was a 9 percent premium for experience from
6 to 10 years, a 27 percent premium for experience
from 26 to 30 years, and a 31 percent premium
for experience of 30 to 35 years. This pattern differs
from international experience (see below) and is
consistent with the regulations described above of
collective agreements which call for at least a one
percent increase in the basic wage for two years of
work experience. The identified pattern of wages
thus suggests the heavy influence of the institutional
set-up on wages.
Returns to job characteristics and type of
ownership. The results given in Table 1 (panel D)
show that in 2001 workers with f ixed-term
appointments (also interns under probation) were
earning 12 percent less than otherwise identical
workers, and interns with a permanent
appointment were paid 5 percent less. Moreover,
4 Earnings reported to the Pension and Disability Fund were obtained from employment spells of different lengths and in
earned in different months of the year. To control for wage inflation over the reported spell, monthly dummy variables are
used. This problem was more acute in the early 1990s.
5 Orazem and Vodopivec (1995) provided a similar investigation of the 1987-1991 period.
6 This contrasts sharply with the pre-transition results. Bevc (1993) reported that during 1976 and 1986 private returns to
education in Slovenia increased dramatically for workers with a primary school education (from 13.6 to 18.5 percent) and
only slightly for those with a tertiary education (from 4.3 to 5 percent), and that they decreased for those with a high school
education (from 6.9 to 5.2 percent).
7 The computations assume that these groups spent 11,12,14, and 16 years to obtain their education, respectively, and that the
base category, those with an unfinished primary school, spent 5 years at school. The coefficients β
i
, reported in Table 1, are
converted to returns as 100*(exp(β
i
)-1).
  Članki44       UMAR      IB revija  1-2/2006
while interns improved their position in
comparison to the early 1990s, fixed-term workers
received slightly worse relative pay. Interesting
differences in pay are also associated with the type
of shift work (Table 1, Panel E). While in general
the differences seen in pay among workers with
different shifts were reduced in the 1990s, in 2001
workers employed in three-shift establishments
earned 18 percent more than those in one-shift
establishments; block-time work and work in more
than three-shift establishments brought about a 10
to11 percent premium. Interestingly, returns to
type of ownership do not reveal any strong
differences. In particular, in some years workers
in private f irms were paid a 8 to10 percent
premium over workers in state-owned enterprises,
but in some other years they were paid worse. The
evidence thus suggests that wages do not differ
greatly across firms of different ownership types.
Firm/sector determinants of pay. Our data for 1997
and 1998 also allow us to investigate how different
types of firms, and the business results of firms,
affect a worker’s pay. The results offer several
interesting insights. First, both industry and
geographical variables matter (see Table 2). For
example, in comparison to manufacturing, utilities,
trade and transportation and communications pay
higher wages to otherwise identical individuals.
Moreover, employers in some major cities
(including the capital of Ljubljana and particularly
in Nova Gorica, a city on the Italian border) pay
higher wages than employers in rural areas.
Second, in comparison to private employers, firms
in state and social ownership pay higher wages,
with other things being equal. Particularly
surprising is the premium in state enterprises,
which in 1998 amounted to 19 percent. Third,
wages in large enterprises are also associated with
extra pay – in 1998, the wage in an enterprise with
over 1000 workers exceeded by 34 percent the
wage of otherwise identical worker in a firm with
less than 5 workers.
Some other firm characteristics were also
associated with wage gains or losses. Interestingly,
in 1998 those firms whose revenues from sales
abroad exceeded domestic revenues paid, on
average, 6 percent lower wages than domestically-
oriented firms. Moreover, the pay in profitable
firms was, other things being equal, 9 to11 percent
higher than in loss-making firms. Finally, the wages
of workers who worked for foreign owners were 6
to 10 percent higher than those of otherwise
identical workers employed by domestic owners.
 International comparison. How do the above
results on the determinants of the wage structure
compare to those of other economies? First, as
alluded to above the female wage gap in Slovenia
seen in the 1990s is deemed very low by
international standards. For example, in the late
1990s the gap was 29 percent in Bulgaria, 24
percent in Hungary, 25 percent in Macedonia, and
31 percent in Poland (Rutkowski, 2001). Second,
virtually all studies of transition economies find
that returns to education have increased and that
higher increases are recorded by more educated
groups (Rutkowski, 2001, Orazem and Vodopivec,
1997). Third, our results on the returns to
experience, however, are in contrast with those of
most other studies. Both by the pattern (the fact
that the premium continues to increase for workers
with over 30 years of experience), as well as by its
size, the established pattern of the experience
premium in Slovenia deviates from that observed
in most other transition economies (see Rutkowski,
2001). Some other findings (for example, that
larger firms pay higher wages) also conform to
the international experience.
Wage inequality. Orazem and Vodopivec (1995)
reported that during 1987-91 the dismantling of
government controls produced a strong rise in wage
inequality: wage variation increases between and
within skill groups, within groups with identical
industry and human capital characteristics, and
across firms within an industry. Our results show
that later in the 1990s wage inequality only
modestly increased: the Gini coefficient increased
from 28.9 in 1992 to 30.0 at the end of 1994, it
fell to 29.1 following introduction of the minimum
wage in 1995, and rose again to 30.6 in 2001.
Interestingly, the coefficient of the determination
of the earnings function steadily increased during
1992-2001, suggesting that the reward for
observable skills became more equal.
To obtain further insights into the effects of the
minimum wage, we analyse the distribution of
wages for 1992, 1995 and 1998 (Figure 1). To
correct for wage inflation, the 1995 and 1998 wages
were deflated by the ratio of median wages in 1995
and 1998, respectively, to the median wages in 1992
(note that this forces the median of the three
distributions to be equal, making it easier to
visualise changes in the wage distribution ). While
the three distributions are not strikingly different,
three features are however noteworthy. First, the
mode of the 1998 distribution is the highest,
followed by the mode of the 1995 distribution.
Second, both later distributions are less skewed to
the left. These two observations suggest that
differences in pay narrowed later in the 1990s.
Third, there seems to be a bunching of the 1998
distribution at SIT 19,000 (noting that these are
1992 prices), an indication that the minimum wage
regulations introduced in 1995 are binding.
IB revija 1-2/2006       UMAR       45  Članki
Quite intriguing results are also offered by
inspecting the gap between the richest and poorest.
Figure 2 shows the percentage change in real wages
from 1992 to 1995, and again from 1995 to 1998,
for various points of the wage distribution. Both
periods brought about a rise in real wages but not
at the same rate for different points in the wage
distribution. While the largest gains in the first
period are concentrated in the middle and very
top of the wage distribution, the largest gains in
the second period belong to the lower tail (similar
are the combined gains of the two periods – the
upper and lower tails both gained). The forces
behind these changes need further investigation,
but it is conceivable that introduction of the 1995
minimum wage helped to improve the relative
position of those in the lowest percentiles.
How can one square the results about the rising
returns to education established above with the
relatively stable wage distribution? One possible
explanation lies in the radical changes to the
composition of the Slovenian workforce: during
the 1990s, the workforce became dramatically
older. While in 1990 32.1 percent of the workforce
was younger than 30, by 2001 the comparable figure
was only 24.9. At the same time, the number of
students enrolled in tertiary education increased
dramatically, from 34,000 in 1990 to 88,000 in
2001. The reduced share of young, low paid
workers must have contributed to the greater wage
equality. Presumably also working in the same
direction is the fact that first-time job entrants in
the late 1990s were more educated than those in
the early 1990s. Further, the minimum wage
introduced in 1995 may have helped to reduce
wage inequality.
6. Concluding Remarks
The key findings of the study may be summarised
as follows. During the 1990s, the returns to
education and work experience further increased,
continuing their trend seen from the early
transition. Controlling for skill and job
characteristics, during 1992-2001 Slovenian women
earned 9 to10 percent less than men, which
constitutes a very low wage gap level by
international standards. Wage inequality grew
strongly in 1990-91, but the latter 1990s – a period
when real wages rose for all points in the wage
distribution – arrested this trend due to the
disproportionate wage gains of workers in the lower
tail of the wage distribution; however, those at the
very top of the wage distribution also gained in
relative terms. The gains of workers at the very
bottom of the distribution were realised particularly
in the 1995-98 period, which can be partly
attributed to the 1995 imposition of the minimum
wage (in 1998, for example, there is a notable
bunching effect at the very bottom of the wage
distribution). Various firm characteristics also
mattered, ranging from the type of ownership
(surprisingly, wages in state firms exceeded wages
in other firms, other things being equal, as did
wages in foreign-owned firms), to the profitability
and size of a firm.
Some developments in the evolution of wages are
certainly positive. A clear example is the fact that
the gender wage gap has stabilised at an
internationally low level. Another positive
development is the stabilisation of wage inequality,
coinciding with imposition of the minimum wage.
It remains to be seen, however, whether the
minimum wage – which, as shown in the paper,
has a binding effect – has also reduced the
employment prospects of some workers (consistent
with the drastically reduced shares of young workers
in employment). Among worrying signs, one has
to mention the distorted work experience structure
of wages  clearly produced by the stipulations of
collective bargaining agreements requiring an
automatic increase of the basic wage in line with
seniority. Because this requirement contradicts the
trends of an individual’s productivity, it may
prevent the (re)employment of older workers, an
outcome particularly likely because of the rise in
the pensionable age brought by the recent pension
reform. The premium in pay attached to jobs in
state-owned enterprises is also puzzling.
This study has also identified several areas that
call for further research. One is the effects of the
1995 introduction of the minimum wage, which
seems to have strong effects on the wage formation
at the bottom of the wage distribution – and may
also have produced negative employment effects.
Another area worth further investigation is the
possible negative effects of the wage structure as
imposed by the collective bargaining process on
labour mobility. Third, the effects of the mandated
automatic increase of the basic wage with seniority
also need greater scrutiny. Fourth, the factors
underlying the premium in pay attached to jobs in
state-owned firms need to be explained – they may
be connected to their monopoly market position.
References
Bevc, Milena (1993): ‘Rates of Return of Investment
in Education in Former Yugoslavia in the 1970s and
1980s by Region,’ Economics of Education, Vol.
12, No.4, pp. 325-43.
Kraft, E. and M. Vodopivec (2002): ‘The New Kids
on the Block: The Entry of Private Business Schools
  Članki46       UMAR      IB revija  1-2/2006
in Transition Economies,’ Education Economics,
forthcoming.
Schultz, Theodore W. (1975): ‘The Value of the
Ability to Deal with Disequilibria.’ Journal of
Economic Literature Vol. 13, pp. 827-846.
Orazem, Peter and Milan Vodopivec (1995): ‘Winners
and Losers in Transition: Returns to Education,
Experience, and Gender,’ World Bank Economic
Review, May 1995, pp. 210-230.
Orazem, Peter and Milan Vodopivec (1997): ‘Value
of Human Capital in Transition to Market: Evidence
from Slovenia,’ European Economic Review , Vol.
41, pp. 893-903, 1997
Rutkowski, Jan (2001): ‘Wage Inequality in
Transition Economies of Central Europe.
Trends and Patterns in the Late 1990s.’ The World
Bank, SP Discussion Paper Series (forthcoming).
Vodopivec, Milan (1993): ‘Determination of Earnings
in Yugoslav Firms: Can It Be Squared with Labor
Management?’. Economic Development and
Cultural Change, Vol. 41, No.3, pp. 623-632.
Key words: wage structure, earning function,
minimum wages
Ključne besede: struktura plač, plačna funkcija,
minimalna plača
IB revija 1-2/2006       UMAR       47  Članki
Ta
b
le
 1
: E
ar
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s 
fu
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 (
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  Članki48       UMAR      IB revija  1-2/2006
Ta
b
le
 1
: E
ar
n
in
g
s 
fu
n
ct
io
n
 e
st
im
at
io
n
, S
lo
ve
n
ia
, 1
9
9
2
-2
0
0
1
 (c
o
n
ti
n
u
e
d
)
19
92
19
95
19
98
19
99
20
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C
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t-
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.
C
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ef
.
t-
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at
.
C
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ef
.
t-
st
at
.
E
. T
yp
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o
f 
sh
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 w
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rk
 (
co
m
p
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 t
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F.
 T
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0.
08
4
6.
5
0.
09
3
7.
3
0.
01
4
1.
1
Ty
pe
 o
f o
w
ne
rs
hi
p 
m
is
si
ng
0.
21
8
21
.0
0.
01
4
1.
4
-0
.0
90
-1
0.
2
0.
09
4
10
.7
0.
10
2
11
.7
0.
01
0
1.
2
N
u
m
b
er
 o
f 
o
b
se
rv
at
io
n
s
55
94
31
52
92
94
50
18
15
50
04
18
42
94
85
40
11
68
R
2
0.
38
0.
40
0.
47
0.
47
0.
50
0.
50
IB revija 1-2/2006       UMAR       49  Članki
Table 2:  Earnings function estimation, 1997 and 1998 (including firm and sector variables)
Variable 1997 1998
Coef. t-stat. Coef. t-stat.
A. Size of Firm (compared to firms with 1-5 workers)
6-20 workers 0.170 10.4 0.168 6.7
21-50 workers 0.204 11.7 0.225 9.4
51-100 workers 0.167 10.4 0.199 8.9
101-500 workers 0.221 16.4 0.220 10.9
501-1000 workers 0.259 15.7 0.294 12.9
More than 1000 workers 0.344 22.6 0.336 15.2
B. Industry (compared to firms in manufacturing industry)
Agriculture 0.034 1.4 0.027 1.0
Utilities 0.129 5.5 0.072 2.9
Construction -0.047 -3.1 -0.063 -3.6
Trade 0.054 5.0 0.011 0.8
Hotels and Restaurants 0.085 3.5 0.075 2.9
Transportation and
Communications
0.096 6.5 0.074 4.0
Government, Health, Education
and FIRE
-0.018 -0.8 -0.066 -2.9
Other -0.028 -2.1 0.033 1.9
C. Commune (compared to rural communes)
Celje -0.036 -1.8 0.009 0.4
Koper 0.019 0.9 0.031 1.3
Kranj 0.042 2.1 0.088 4.5
Ljubljan 0.085 9.5 0.123 11.4
Maribor -0.028 -2.1 -0.007 -0.4
Murska Sobota -0.108 -5.1 -0.094 -4.5
Nova Gorica 0.164 7.4 0.268 10.3
Novo Mesto 0.005 0.2 -0.009 -0.3
Commune missing 0.343 22.0 n.a.
D. Ownership (compared to private ownership)
Foreign owned (fully or partially) 0.061 4.8 0.105 7.5
Foreign missing n.a. -0.073 -1.2
F. Exporting firms
Firms in which foreign revenue
exceeds domestic revenue
-0.039 -4.3 -0.062 -6.0
G. Profitable firms (compared to loss-making firms)
Profitable 0.111 13.3 0.092 9.6
Profitability missing n.a. n.a.
Number of observations 16086 11154
R2 0.56 0.58
Notes: Estimates of the parameters for gender, education, work experience, tenure, and type of shift variables are reported in Table 1
and are thus omitted in this table.
  Članki50       UMAR      IB revija  1-2/2006
0
2
4
6
8
10
12
18 26 35 43 51 60 68 77 85 93 102 110 118 127 135 144 152
1992
1995
1998
Table 3: Employment by age structure, Slovenia, 1990-99 (beginning of the year)
Figure 1: Real wage distribution, 1992, 1995 and 1998
Figure 2:  Percentage change in real wage, 1992-95, and 1995-98
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Age under 20 3.0 2.2 2.3 1.8 2.0 2.2 1.8 1.5 1.5 1.4 1.4 1.2
Age 20 to 30 29.1 28.5 27.1 26.1 25.2 25.3 24.8 24.8 24.8 24.6 24.1 23.7
Age 30 to 40 32.5 33.7 35.1 35.7 34.9 34.1 33.8 33.7 33.7 33.5 33.1 32.6
Age 40 to 50 23.2 25.1 26.1 27.4 28.2 28.5 29.7 30.1 30.2 30.3 30.5 30.5
Age 50 plus 12.2 10.5 7.6 7.2 7.8 8.1 8.4 7.9 7.8 8.3 8.8 9.7
Memorandum item:
Number of students
(in thousand)
33.6 38.2 39.3 42.1 43.2 46.0 53.5 64.7 74.6 77.6 82.8 88.1
Source: Statistical office of Slovenia.
0
5
10
15
20
25
30
35
40
45
50
1 7 13 19 25 31 37 43 49 55 61 67 73 79 85 91 97
Percentile
Pe
rc
en
t
1992
vs.
1995
1995
vs.
1998