Workers' heterogeneity and risk aversion: a segmentation model of the Russian labor market

This paper proposes an explanation of the puzzling coexistence of elements of both inertia and dynamism in the Russian labor market. In an environment of high uncertainty, risk averse and heterogeneous workers face a trade-off between wages and insurance against risk. The firm proposes a contract that includes a low monetary wage and access to social services. Workers choose to accept the contract or to leave the firm. Their choice gives rise to ex post segmentation: the most productive workers leave the firm and concentrate in the most productive firms; the less adaptive workers remain in their initial firm, where they accept lower wages as a price for security. In this framework, wage arrears can be viewed as an element of the implicit contract between firms and less productive workers. We test the relevance of this model using a panel data set containing 9,233 Russian firms for 1993 to 1998 as well as a subsample for which we have information on firms' wage arrears.