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Measuring the "Sheepskin Effect" in the Czech Republic

7/13/2005 --
Women in the Czech Republic's post-communist market economy were paid more for their human capital than under the previous communist system.

ANN ARBOR, Mich.—The fall of communism in the Czech Republic in 1989 triggered dramatic changes in the wages paid to women (and men) based on their education.

A new study from the University of Michigan's Ross School of Business found that markets paid women and men equally more for their human capital than the planners did under the communist system. Furthermore, all the adjustment to compensation was made during the early phase, i.e., the first six years, of the transition period and was driven by market forces rather than private ownership.

"Some have argued that communists were good human capitalists, but our results show markets provide considerably higher education-related returns than planners, although markets maintain the same return to human capital gained from experience in the labor force," said Jan Svejnar, professor of business economics at the Ross School. "Furthermore, the increase in the rate of return to education is very similar in the private and state sectors, indicating that wages are set by overall labor-market competition rather than differences in firm ownership."

Svejnar and colleagues Katherine Terrell of the Ross School and Daniel Munich of CERGE-EI (Prague) used two surveys of more than 3,000 Czech households, conducted in 1996 and 2002, to obtain information on about 1,300 full-time working women, ages 15 to 60. The women in the study averaged 12 years of education and two-thirds had attained a vocational or academic high-school degree. The years of labor-market experience increased from 17 under communism to about 20 during the transition, indicating more women were less likely to drop out of the labor force.

The study found that women fared far better during the early post-communist transition period than they did under the communist-controlled economy where their rate of return to education was extremely low. The returns to an additional year of schooling rose significantly from 3.7 percent in 1989 to 7.1 percent in 1996, and then leveled off to an estimated 6.8 percent in 2002.

Similarly, women received higher pay for each completed level of education during the transition's first six years. For example, in 1989, a university education yielded 45 percent higher earnings than a junior high school education. By 1996 and 2002, university graduates received 85 percent to 90 percent more.

Although the "sheepskin effect" was prevalent during communism for vocational high school and university graduates, the effect strengthened between 1989 and 1996 for vocational degrees and grew to include academic diplomas.

Counter to expectations, education acquired under communism did not prove less appropriate for a market-based economy than education obtained during the transition, the researchers found.

"This suggests that communist education, which was always highly reputed internationally in areas such as mathematics and sciences, constituted good preparation for working in both economic systems and/or that reforms in the educational system during the 1990s were limited in their impact on an individual's performance in the labor market," said Terrell, professor of business economics and public policy at the Ross School.

A comparison of these findings with an earlier study on men's returns to human capital based on the same two household surveys reveals that men's gains appear to have been very similar to those of the women. Hence, the researchers conclude that market returns to human capital did not increase the gender wage gap during the transition.

For more information, contact:
Bernie DeGroat
Phone:(734) 936-1015 or 647-1847