On the Horizon: Money Talks

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The Inequality Gap Heads East 

In just 25 years—the Soviet Union shattered in December 1991—Eastern Europe has sprinted ahead of the West on a key economic front. Unfortunately, it is a race best not won: income inequality.

Gaps in earnings are typically large and growing throughout the world, according to Korn Ferry’s Hay Group division, which analyzes pay data in more than 110 countries. In the United States, that gap has become one of the central issues in the presidential campaign.

It turns out, however, that Eastern Europe, where controlled economies once reigned, has some of the biggest gaps of all, nearly twice the U.S. national number and more than double Western Europe’s average. What’s more, the gaps are only getting bigger in most of the region.

The reason? Joining the world’s market economy.

Pay on the high end of the employment ladder is tending to go up faster than on lower levels, where demand is less and the supply is greater, said Ben Frost, a Hay consultant. In the former Soviet bloc, salaries were traditionally much lower than in the West and bunched more tightly together. Now, Frost said, “the bottom end is sort of stuck, tied to the region’s lower cost of living. But at the high end, global pay levels are pushing things up.”

For example, Hay compared median salaries in two of its 35 job categories: Level 12 (which includes top manual labor, like electricians, and administrative supervisors) and Level 20 (the starting rung of senior management). In Eastern Europe, Level 20 pay was 7.4 times higher on average than Level 12 pay in 2015, Frost said, compared with 3.8 in the U.S. and 3.2 in Western Europe.

The higher the number, the greater the implications. “Large pay gaps have the potential to cause discontent among the workforce,” Frost noted.

That said, the economies in Eastern Europe aren’t marching in lockstep. National differences are also at play—the pay multiples last year ranged from 4.9 (Latvia) to 12.4 (Ukraine). And two countries (Poland and Romania) even saw their gaps shrink since 2011.

Big Differences in Pay
“X” (times) difference in median salaries between senior management
and manual/administrative supervisors.

Source: Hay Group database of 20 million job holders in 110 countries.

Czech Republic 6.2X
Hungary 6.5X
Kazakhstan 7.0X
Latvia 4.9X
Lithuania 6.5X
Poland 7.9X
Romania 8.6X
Russian Federation 8.7X
Slovakia 5.7X
Ukraine 12.4X

Comparing Averages
Eastern Europe > 7.4X
Western Europe > 3.8X
United States > 3.2X

The Widest Gaps
Russian Federation and Ukraine. Their ongoing economic, political and oil-price turmoil has disproportionately affected people nearer to the bottom. Stiff currency declines don’t help, since those at the high end can often protect themselves better.

The Smallest Gaps
Latvia and Slovakia. Members of the European Union since 2004, who have adopted the euro, these two countries are even more embedded in the market economy than their peers, with higher low-end pay narrowing the gap. Euro membership “has something of a halo effect in this region,” said Hay’s Ben Frost. “However, you don’t become Germany overnight.”

The Declining Gaps
Poland and Romania. Poland is experiencing a boom in business processing and shared-services centers, with foreign companies attracted to the labor force’s language skills. For its part, Romania has leveraged its 2007 EU entrance to attract foreign employers.