A NEOCLASSICAL THEORY OF WAGE ARREARS IN TRANSITION ECONOMIES

The paper proposes a theory of the wage arrears phenomenon in transition economies. We build on the standard one-sector neoclassical growth model. The neoclassical firms in transition make losses and use wage arrears as the survival strategy. At the agents' level, the randomness in the timing and extent of wage payments act as idiosyncratic shocks to earnings. We calibrate the model to reproduce evidence from the Ukrainian data and assess its quantitative implications. We find that wage arrears imply substantial social costs such as the consumption loss of 8% - 16% and the welfare loss from idiosyncratic uncertainty, equivalent to an additional consumption loss of 1% - 6%.