Wages in Transition Human capital and Wage Inequality

1. Wages in TransitionHuman capital and Wage Inequality VŠE Transition Economics November 25th, 2009

2. Wage developments

3. Real wage growth

4. Real wages as % of 1989 wages

5. Wage distribution

6. Minimum wages and poverty

7. Human capital and TransitionThe Czech Case

8. Human capital What is human capital? How do we measure it? positive link between the level of human capital and economic growth (e.g., Benhabib and Spiegel, 1994) highest returns in developing countries (as much as 30% for primary edu, Psacharopoulos, 1985) returns to investment in education fall with education level

9. Wage grid earnings structures in centrally plannedeconomies greatly compressed decompression during the transition to a market system the former grid supplantedby free wage setting modified wage grid inthe public sector and many privatized firms.

10. 1985 and 1998 wage grids

11. Data issues - Why Czech Republic? prototype of a sudden change of regimes among the leadingtransition economies in other transition countries (e.g., Poland and Hungary), central planners losing control well earlier and did not stick rigidly to the central wage grid in the Czech Republic, the system intact until the very end of the communist regime no significant rent sharing by workers Czech economy was almost 100% stateowneduntil 1990

12. Data issues cntd previous studies just compared cross-sections in two points in time here data on the same individualsduring a large part of the communist period and thefirst 6 years of transition use of the panel data to assess the role of unobservable characteristics for skill premia data on thework histories of 2,284 men from a stratified random sampleof households in the Czech Republic

13. Empirical strategy ln Wi, the natural logarithm of the monthly earningsof individual i individual’seducational attainment Ei the number of years of potential labor market experience Xi dummy for Prague Pi ten industry dummies Ai

14. Returns to a year of edu

15. Returns to a year of edu The pattern of increased return on education similar to other CEE countriesexcept for east Germany within a few years after the start of thetransition, the rates of return on a year of education in CEEand Russia similar to western Europe yet not as high as the rates in the United States and LatinAmerica

16. Returns by type of edu

17. Wage structure interindustry wage structure changed substantiallybetween 1989 and 1996 mining and quarrying lost muchof former wage premium trade, transportand telecommunications (i.e. sector supporting exchange and matching between firms), and light manufacturing gainedsignificantly changes in part attributable to the denovo firms generally paying higher wage premiumirrespective of a worker’s human capital

18. Wage structure cntd

19. Main results extremely low and constant rates of return to education under thecommunist wage grid dramatic increases in transition results independent of ownership radical changes in returns to several fields ofstudy “sheepskin effects” in both regimes changes in theinterindustry wage structure

20. Wage Inequality in TransitionCase study Russia

21. Soviet era most studies concluded Soviet wagesrelatively unequal given proclaimed equality wage inequality in the S.U. within the range of many WestEuropean countries lack of micro-leveldata – results of the Soviet statistical agency’s household survey onlyinaggregateform

22. Economic situation in Russia 1992-94 GDP fell an average of 12 percent peryear between 1992 and 1994 inflationmeasuring 2,509 percent,840 percent, and 215 percent in 1992, 1993,and 1994,respectively unemployment relatively low compared with other transitioneconomies (7.5 percent in 1994) low unempl. partly due to extensive use of unpaid administrativeleave, shortened workinghours (affecting about 6 percent of thelabor force in 1994), and arrears demographic crisis - sharp increasesin mortality rates and declining birthrates by late 1994 nearly 70 percentof industrial workers were working in privateor privatized firms

23. Economic situation in Russia 1992-94

24. Economic situation in Russia 1992-94

25. Data issues series of monthly cross-section householdsurveys conducted by the All-Russian Centerfor Public Opinion Research in 1991, 1993, and 1994-5 adult population ofRussia aged 16 and over; each monthly surveycomprises 3,000-4,000 randomly selected individualsacross the country the areas coveredrepresent roughly one-thirdof Russia's 88 regions empirical analysis restricted to employed,working-age civiliansearning at least one-half the realminimum wage in May 1991 the last restriction meant to eliminatecoding errors

26. Formalization of skills Skill defined as wageand worker's position in wagedistribution e.g., 90th percentilerepresents highly skilled workers, 10th percentileleastskilled skill differentials analyzed within groups defined by edu and occupational status

27. Simple inequality statistics

28. Excess wages tax and wage inequality The upper part of distribution most likely underreported Lower part on the other hand widened Until 1996 a tax on the excess of the average wage of the enterprise over 4x minimum wage Yet the minimum wage at extremely low levels

29. Minimum wage

30. Excess wages tax and wage inequality cntd This created incentive for employers compensatehighly skilled workers with nonmonetary benefitsor unreported cash payments unproductive workers were retained at low wages so as to depress the average wage in the enterprise innovative schemes introduced to evade the tax (e.g., paying employees "life insurancepayments" rather than wages)

31. Comparison with other cases

32. Distribution of wage changes

33. Explanations - Real vs inflationary inequality Inflation averaging 19 percent/month in 1993 and 7 percent in1994 Imperfect wage indexation? If wages are adjusted more frequentlyfor skilled workers than for unskilled workers,the monthly wages may overstatewage inequality But inflationrate fell significantly from 1993 to1994 and 90- 10 log wage differentialsessentially unchanged Even explicitly adjustingfor differing wage indexation across workersaffects the 90-10 differential only slightly Inflationary distortions probably smaller in 1994 than in 1993, because of lower inflation and more efficientwage indexation mechanisms in 1994.

34. Explanations - Compensations turned into wages Soviet enterprises provided generous nonwagebenefits to employees in the form of housing, day care, medical facilities, and accessto subsidized food and goods If unequalbenefit distribution acrossworkers, the Soviet wage distribution mayhave been in fact highly unequal During transition,firms may have simply converted the benefitsinto cash wages and increased reported wage inequality Evidence limited, in general firms have been slow toshed benefits

35. Explanations - Changes in returns to edu

36. Returns to edu cntd

37. Experience differentials

38. Explanations - Experience differentials Shift of relative demand over cohorts, Soviet-time knowledge not needed in new environment Discounting effect – retraining investment into younger people less incentive to learn for older

39. Explanations - Changing gender gap Womendisproportionately among the low-wageworkers The increase in wage dispersion haspenalized female wages relative to malewages The position of the median female in themale wage distribution almost unchanged (at the 30.2 percentilein 1991 and the 30.4 and 33.0 percentilesin 1993 and 1994, respectively) i.e., gender-specificfactors appear to explain little of thepoor labor-market outcomes of women in Russia

40. Conclusion The Winners - young well-educated men The Losers – older workers (esp. men) with devalued human low incentives toacquire new skills women The main driving factor changes in returns to human capital

41. Job security and wage arrears Why the adjustment in Russia did not happen rather through quantities? Russian case study

42. Intro – stylized facts on Russia lots of labor market adjustment in Russia through falls in real wages adjustment reinforced by delayed wage payments – arrears arrears at thebeginning of 1997 at around 50 trillion roubles, i.e., approx. 138% of the monthly wage bill in March 1996 only approx. 60 percent of all employees received wagecomplete and on time the unemployment rate under 4% and employment has fallen by less than 10% in 1997 these are less dramatic changes in quantities than observed elsewhere

43. Possible explanations for arrears arrears are a forcedloan from workers with few outside opportunities to firms in distress forced loans more likely if firms dominated by insiders with vested interests in its survival firms in distress can be sued for bankruptcy an implicit contract between the firm and workers can be another option in such contract,workers trade wage arrears for continued employment

44. Other possible explanations for arrears arrears might not serve merely as labour cost adjustment mechanism implicit or explicit agreements between the federalgovernment and the banks seconding of enterprise bank deposits in order to meetfederal tax and debt liabilities many firms left with little cash to pay wages, irrespective ofthe firm’s profitability problem exacerbated by the lack of credit facilities

45. Data March 1996 Russian Labour Force Survey, (RLFS) five representative regions - Moscow City, Moscow Oblast, Chuvash Republic, Chelyabinsk and Krasnoyarski Krai Russian Longitudinal Monitoring Survey, (RLMS) smaller, but nationally sampled longitudinalsurvey of individuals period 1994 to 1996, approx. 4000 households

46. Results – geography and economic sphere variation in wage arrears substantial across the five regions in Moscow City more than ¾ of employees receiveda complete wage on time, in Chelyabinsk only one 1/3 combined w/ worst industry, e.g. male worker in alarge mining firm from Chelyabinsk or Krasnoyarsk -> 90 percent probability of arrears city vs countryside rural areas hurt relatively more – less outside options and lower access to administrative centers arrears in budgetary sector the worst offenders not government agencies but state firms in the"production sphere“ accounts for 35% ofemployment and 30% are in arrears

47. Results - structural vs individual characteristics biggest arrears in certain industries mining - approx. 30%ofemployees received complete wage + on time agriculture andmanufacturing- 43% and48%, respectively job tenure asignificant determinant of wage arrears insider forces facilitatedelayed wage payments

48. Results cntd search unemployment usually not an outside option unemployment benefits not available to job quits benefits small relative to average wages claims on arrears loosened lacking alternative jobs the only exception are the most dynamic labour markets (e.g, Moscow) there searchers in arrears more likely to find a new job one year later i.e., the exit option more of a valid option in a relatively prosperous labour market