Wage policies of a

We use a rich personnel data set from a Russian firm for the years 1997 to 2002 to extend the analysis of internal labor markets to economies in transition. Our focus is on the effect of the financial crisis in 1998 and its aftermath on wages and the welfare of workers in the firm, providing evidence of how costs are distributed inside firms during such dramatic macroeconomic upheavals. We show that the firm does not refrain from cutting real wages. As it was a high wage firm before the crisis, it paid rents to many of its employees. Taking advantage of a high-inflationary environment and of a fall in outside options after the financial crisis, it is able to extract rents from its employees. The welfare losses are, however, not spread evenly across all employees, since the firm curbs earnings most for those who earned the highest rents, resulting in a strong compression of real wages. The fact that real wages and real compensation levels never recovered to pre-crisis levels even though the firm’s financial situation was better in 2002 than before the crisis and the differential treatment of employee groups within the firm can be taken as evidence that market forces strongly influence the wage policies of our firm. ∗ The authors are grateful to David Brown, Tilman Brück, Vladimir Gimpelson, Rostislaw Kapeliushnikov, Alexander Muravyev and audiences at the Annual Scottish Economic Association Conference in April 2007, in Perth, and at the 8 International Conference of the Higher School of Economics in April 2007, in Moscow, for comments and suggestions. Dohmen and Lehmann acknowledge financial support from the Deutsche Forschungsgemeinschaft (DFG) within the research program “Flexibilisierungspotenziale bei heterogenen Arbeitsmärkten” (DFGSP1169). Lehmann and Schaffer are grateful to the European Commission for financial support within the 6th framework project “Economic and Social Consequences of Industrial Restructuring in Russia and Ukraine” (ESCIRRU). Schaffer also thanks the William Davidson Institute and the U.S. Department of State (Title VIII) for financial support. ♣ Corresponding author: [email protected].