Wage Arrears and the Distribution of Earnings in Russia1

The increase in wage inequality in Russia during its transition process has far exceeded the increase in wage dispersion observed in other European countries undergoing transition. Russia also has an extremely large incidence of wage arrears. We analyse to what extent wage arrears affect the wage distribution and measures of wage inequality in Russia. We present counterfactual distributions, derived from a variety of different methods, which suggest that conventional measures of earnings dispersion would be some 20 to 30 per cent lower in the absence of arrears. We then go on to show how wage gaps at various points in the pay distribution across gender, education, region and industry are influenced by a failure to allow for wage arrears. Using our counterfactual estimates we show, for example, that the median gender wage gap would be around twenty-five points higher than the actual gap that we observe. Similarly, the counterfactual ratio of mean graduate pay to mean pay of 1 This paper took its inspiration from previous joint work with Ruslan Yemtsov, who has moved on to more important work at the World Bank. The authors are grateful to John DiNardo and Jochen Kluve for making their STATA routines available; to Boris Augurzky, Todd Idson, Alan Manning, Mark Schaffer, Christoph Schmidt, Jan Svejnar, Paul Walsh, participants at the IZA-WDI Conference on Labour Markets in Transition Countries in May 2000 in Bonn, at the CEPR-WDI Conference on Transition in Moscow and at an ACES/Econometric Society session of the ASSA Conference in January 2001 in New Orleans as well as participants in seminars at the Universities of Heidelberg, Heriot-Watt University, the London School of Economics, the University of Trento and the WDI, University of Michigan for valuable comments. The Fritz Thyssen Foundation provided financial support within the project "Economic Reform and Labour Market Adjustment in the Russian Federation." The authors are also grateful to IZA for providing the facilities for the authors to undertake research on this paper. The opinions expressed are those of the authors and do not necessarily reflect those of the institutions with which the authors are affiliated. 2 School of Management, Heriot-Watt University, Edinburgh, EH14 4AS. Tel: 00 44 131 451 3626; Fax: 00 44 131 451 3008. E-mail [email protected]