Evolution of Income Inequality in Hungary

Is Hungary different from other post-Socialist countries, where income inequality has increased in recent years? An analysis of Márton Medgyesi from Tárki, organisation member of Inequality Watch.

According to the recent report of the OECD (Divided We Stand. Why inequality keeps rising?, OECD Paris 2011), Hungary - together with France and Belgium - belongs to a group of countries where inequality changed only little during the period studied (mid 1980s to late 2000s, see article on Inequality Watch website, "The rise of income inequality amongst rich countries"). Is Hungary really different from other post-Socialist countries, where income inequality has increased during this period according to the report? Here the analysis of income inequalities is based on a longer time-series and different phases of the period will be compared.

The Hungarian society underwent profound changes during the past two decades. In 1990 the country has begun a long process of transition to a market economy and a democratic political system. Inequality of household disposable income – already rising in the eighties – increased significantly during first years of this transition process. The Gini index increased from a level close to Scandinavian countries to a level close to that of France or Germany (Gini index around 0.30) in 1995 (see Figure below). The early 1990s were characterized by rapid and deep changes in the structure of the economy. Trade with eastern neighbours collapsed, and socialist mega-enterprises went bankrupt and were dismantled. This period was characterised by massive decline in employment and a fall in the country’s GDP between 1990 and 1993.

Between 1997 and 2006 GDP was growing around 4% annually. The inflow of foreign direct investment brought about technological modernization of production which increased demand for young educated labour, while employment prospects for the low educated and older cohorts worsened. Wage inequality continued to rise but changes in inequality of household disposable income were smaller during these years. Between 2003 and 2007 we can even see a moderate decline of overall income inequality. Redistribution policies have played a significant role in this, by first increasing transfers to lower middle class, and then increasing tax burden on the upper middle class.

Figure Long run evolution of inequality of per capita household income


Source: Tóth, 2002, 2009. Data are from: 1962-1987: Hungarian Central Statistical Office Income Survey; 1992, 1995, 1996: Hungarian Household Panel; 1999–2009: Tárki Household Monitor.

Latest available data cover incomes of year 2009, which permits the analysis of income inequality during the first year of the economic crisis. The crisis might have an impact on household incomes through various channels. The rise in unemployment decreases labour income of households, the stock market crash has a negative effect on capital incomes, while governments’ austerity packages diminish social transfers to households and/or increase tax liabilities. There is yet another impact which is important for the living standards of households, which is indebtedness. The unfavourable movement of Forint exchange rates since the crisis hit in 2008 led to an increase in the interests and repayment instalments on foreign currency denominated loans.

With regard to the trends between 2007 and 2009 different inequality indices seem to imply different trajectories: there is an increase in the percentile (P90/P10) ratio, while the Gini index remains constant. Despite the mixed results concerning inequality, Hungarian households could not avoid feeling the effects of the crisis. Indicators of self-assessed living standards do show a significant increase in the proportion of those experiencing financial need or an inability to pay for rents or public utility bills. As expected, low-income households suffer the most from the burden of loan repayment obligations. Indebted households in the lowest income quintile pay a higher share of their income as debt repayment, and they are also more likely to be in arrears with their repayments because of financial difficulties.


Photo : Ludovic Lepeltier


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23 April 2012

Themes : • Central and Eastern Europe • Summary Data

Analysis

In partnership

TÁRKI has 25 years of experience of empirical social science research in Hungary. Its background includes research on a wide range of issues related to social stratification, labour markets, income distribution, consumption and lifestyle patterns and attitudes, and it has increasingly focused on market research applications. There are various types of research activities that TÁRKI carries out for its clients, but social research is the most important part of its work. TÁRKI’s clients include various government agencies, research funds, international organisations and private companies in Hungary and internationally.

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