Wage Arrears, Pay Gaps and the Distribution of Earnings: What can we learn from Russia?

Many countries in the developing world, those undergoing transition from planned to market systems and even those in the industrialised west, experience periods in which a substantial proportion of the workforce suffer wage arrears. We examine the implications for estimates of wage relativities and inequality when countries experience wage arrears on a substantial scale, using the Russian labour market as a test case. The increase in wage inequality in Russia during transition process far exceeds the increase in wage dispersion observed in other European countries undergoing transition. Russia also had much the largest incidence of wage arrears. Given data on wages and the incidence of wage arrears we construct counterfactual wage distributions, which give the distribution of pay in the absence of arrears. The results suggest that measures of earnings dispersion that ignore the presence of wage arrears would, in the Russian case, be some 30 per cent lower in the absence of arrears. If individuals in arrears are distributed uniformly across the underlying wage distribution, as appears to be the case in Russia, then it may be feasible to use wage information on the subset of those not in arrears and still get close to the underlying population parameters.