The transition to a market economy in Eastern Europe and the Former Soviet Union (FSU) has been associated with greater inequality and social stratification. Living standards have fallen for the majority of people, unemployment and poverty are high, the distribution of assets and earnings has changed radically, and social benefits have fallen. The social distance between the 'winners' and 'losers' of the reforms has widened dramatically. This paper prepared within the UNU-WIDER project on 'Income Distribution and Social Structure during the Transition' analyses trends in social stratification and their causes with the aim of drawing social policy conclusions. Social structures have been deeply affected by macroeconomic and social-sector reforms. Privatization shifted assets towards the wealthy while changes in labour markets have led to the rise in earnings inequality. In the pretransitional socialist societies which were stratified into 'status groups' where social capital rather than economic capital—and social networks rather than market power—determined a person's status. With the transition, people's prospects in life are being increasingly determined by their possession of assets, goods and income opportunities. This study considers emerging social classes and groups—a new elite—the product of rising capitalism, and the new commercial, managerial, and professional middle classes. The large majority of the population, however, consists of blue-collar workers, farmers, and state-sector employees bearing the social costs of the transition. The bottom of the social hierarchy has enlarged due to a considerable number of socially deprived and marginalized people who fell into long-term poverty. The slowly reforming economies of the FSU have particularly high inequality and social polarization. Central Europe's transition countries have shown smaller increases in income inequality. Many professional workers there, especially the young have successfully entered the market economy. In contrast, an extremely wealthy and powerful economic elite has emerged in Russia and some other FSU countries amidst impoverishment and deprivation of a large part of the population. Social polarization has large economic costs. Thus, a more active social policy—promoting better livelihoods and more investment in human capital—could have large economic returns. But there is also a need for more effective public transfers and income redistribution policies to alleviate and reduce poverty. Social cohesion cannot be ignored.