Labor market, human capital and unemployment

1. Labor market, human capital and unemployment MA EITEI May 29th, 2009

2. Human capital • level of human capital linked to returns to education • positive link between the level of human capital and economic growth (e.g., Benhabib and Spiegel, 1994) • highest returns in developing countries (as much as 30% for primary edu, Psacharopoulos, 1985) • returns to investment in education fall with education level

3. Human capital during communism and transition (Munich et al., 2005) • Main motivation: • analyze returns tohuman capital under the communist wage grid • examine how wages and returns to human capital changedin the emerging market economy

4. Wage grid • earnings structures in centrally plannedeconomies greatly compressed • decompression during the transition to a market system • the former grid supplantedby free wage setting by newlycreated private (de novo) firms • modified wage grid inthe public sector and many privatized firms.

5. 1985 and 1998 wage grids

6. Wage grid cntd • unskilled workers thepillar of the regime • the communist ideology dictated small wage differentials between the skilled and unskilled • income distribution in communist Czechoslovakia and the other CEEcountries one of the most egalitarian in the world • 1998grid substantiallysimplified by eliminating the industry dimension and creating12 experience-related categories (columns), plus 12 salary classes (rows) based primarily on education • the grids used by the private sector duringthe 1990s similar to those in the public sector

7. Data issues - Why Czech Republic? • prototype of a sudden change of regimes among the leadingtransition economies • in other transition countries (e.g., Poland and Hungary), central planners losing control well earlier and did not stick rigidly to the central wage grid • in the Czech Republic, the system intact until the very end of the communist regime • no significant rent sharing by workers • Czech economy was almost 100% stateowneduntil 1990

8. Data issues cntd • previous studies just compared cross-sections in two points in time • here data on the same individualsduring a large part of the communist period and thefirst 6 years of transition • use of the panel data to assess the role of unobservable characteristics for skill premia • data on thework histories of 2,284 men from a stratified random sampleof households in the Czech Republic • most of the menworked under communism, all worked during at least part ofthe 1990–1996 transition period • survey performed in December1996

9. Data issues cntd • 3,157 randomly selectedhouseholds in all 76 districts of the Czech Republic • questionnaire asked for the wage and other characteristicsof the jobs held in January 1989 • continuous labormarket histories for each individual during the entire 1991–1996 period • each person’s household and demographiccharacteristics, including changes in education • the starting dates of the jobs held inJanuary 1991 span the entire 1948–1989 communist period

10. Empirical strategy • ln Wi, the natural logarithm of the monthly earningsof individual i • individual’seducational attainment Ei • the number of years of potential labor market experience Xi • dummy for Prague Pi • ten industry dummies Ai

11. Measuring edu variable • number of years of education - yields a constant marginal rate of return on an additionalyear of schooling • highest level ofeducational attainment by type of degree obtained • allowsthe rate of return to vary across types of completed education • inclusion of both so as to test between the competing specifications

12. Returns to a year of edu

13. Returns to a year of edu • The pattern of increased return on education similar to other CEE countriesexcept for east Germany • within a few years after the start of thetransition, the rates of return on a year of education in CEEand Russia similar to western Europe • yet not as high as the rates in the United States and LatinAmerica

14. Changes in returns

15. Returns by type of edu

16. Wage setting • de novo firms market leaders in settingwages • yet state and privatized firms adjusted theirwage grids and almost caught up with wages in the de novofirms by 1996

17. Edu levels • (vocational) high school and university degreesexperienced more rapid rates of increase in theirreturns • than those with basic education (junior high schoolor apprentices)

18. The sheepskin effect • sheepskin effect prevalent and especially detectable in transition • for higher levels ofedu notable in both regimes

19. The sheepskin effect sntd

20. Study specialization • certain fields of study experienced tremendous increases in their returns (e.g.,law) • others have not gained in the new marketeconomy (e.g., health and education)

21. Edu in communism and transition • education and work experience from transition do not have higher returns than educationand experience gained under communism • returnson apprenticeship and vocational education even lower for those edu during transition • i.e., it seems the major investment in this typeof education under communism was excessive

22. Wage structure • interindustry wage structure changed substantiallybetween 1989 and 1996 • mining and quarrying lost muchof former wage premium • trade, transportand telecommunications (i.e. sector supporting exchange and matching between firms), and light manufacturing gainedsignificantly • changes in part attributable to the denovo firms generally paying higher wage premiumirrespective of a worker’s human capital

23. Wage structure cntd

24. Unobservable effects • varianceof worker-specific decomposed into • components due to observabledeterminants • and those due to unobservable determinantsin the old versus the new regime

25. Unobservable effects cntd

26. Unobservable effects cntd

27. Main results • extremely low and constant rates of return to education under thecommunist wage grid • dramatic increases in transition • results independent of ownership • radical changes in returns to several fields ofstudy • “sheepskin effects” in both regimes

28. Main results cntd • identical wageexperienceprofile in both regimes • changes in theinterindustry wage structure • individuals’ unobservable effects from communism persist intotransition • yet most of the variance is due to unobservable effects introducedin the transition.

29. Brainerd (1998)’s winners and losers • Main motivation • is increased wageinequality in Russia ‘real’? • or is it only achange in compensation from nonwage benefitsto wages? • does it only reflect high inflationand imperfect wage indexation and is thus a transitory feature?

30. Previous studies • most studies concluded Soviet wagesrelatively unequal given proclaimed equality • wage inequality in the S.U. within the range of many WestEuropean countries • lack of micro-leveldata – results of the Soviet statistical agency’s household survey onlyinaggregateform

31. Econ situation in Russia 1992-94 • GDP fell an average of 12 percent peryear between 1992 and 1994 • inflationmeasuring 2,509 percent,840 percent, and 215 percent in 1992, 1993,and 1994,respectively • unemployment relatively low compared with other transitioneconomies (7.5 percent in 1994) • low unempl. partly due to extensive use of unpaid administrativeleave, shortened workinghours (affecting about 6 percent of thelabor force in 1994), and arrears • demographic crisis - sharp increasesin mortality rates and declining birthrates • by late 1994 nearly 70 percentof industrial workers were working in privateor privatized firms

32. Data issues • series of monthly cross-section householdsurveys conducted by the All-Russian Centerfor Public Opinion Research in 1991, 1993, and 1994-5 • adult population ofRussia aged 16 and over; each monthly surveycomprises 3,000-4,000 randomly selected individualsacross the country • the areas coveredrepresent roughly one-thirdof Russia's 88 regions • empirical analysis restricted to employed,working-age civiliansearning at least one-half the realminimum wage in May 1991 • the last restriction meant to eliminatecoding errors

33. Data issues cntd • data drawbacks • monthly wages unadjusted for hours worked -> monthlyrather than hourly wages may overstate therise in wage inequality • some individualsdeclined to provide information onwages (wages not top-coded) -> missing wage observationsdropped • high inflation and imperfectly indexed wages -> differing indexationmechanisms across industries and occupations leading to large transitory differentials inmonthly data • test of the inflation hypothesis suggesting this was not a big deal

34. Formalization of skills • Skill defined as wageand worker's position in wagedistribution • e.g., 90th percentilerepresents highly skilled workers, 10th percentileleastskilled • skill differentials analyzed within groups defined by edu and occupational status

35. Simple inequality statistics

36. Excess wages tax and wage inequality • The upper part of distribution most likely underreported • Lower part on the other hand widened • Until 1996 a tax on the excess of the average wage of the enterprise over 4x minimum wage • Yet the minimum wage at extremely low levels

37. Minimum wage

38. Excess wages tax and wage inequality cntd • This created • incentive for employers compensatehighly skilled workers with nonmonetary benefitsor unreported cash payments • unproductive workers were retained at low wages so as to depress the average wage in the enterprise • innovative schemes introduced to evade the tax (e.g., paying employees "life insurancepayments" rather than wages)

39. Comparison with other cases

40. Distribution of wage changes

41. Real vs inflationary inequality • Inflation averaging 19 percent/month in 1993 and 7 percent in1994 • Imperfect wage indexation? • If wages are adjusted more frequentlyfor skilled workers than for unskilled workers,the monthly wages may overstatewage inequality • But inflationrate fell significantly from 1993 to1994 and 90- 10 log wage differentialsessentially unchanged • Even explicitly adjustingfor differing wage indexation across workersaffects the 90-10 differential only slightly • Inflationary distortions probably smaller in 1994 than in 1993, because of lower inflation and more efficientwage indexation mechanisms in 1994.

42. Compensations turned into wages • Soviet enterprises provided generous nonwagebenefits to employees in the form of housing, day care, medical facilities, and accessto subsidized food and goods • If unequalbenefit distribution acrossworkers, the Soviet wage distribution mayhave been in fact highly unequal • During transition,firms may have simply converted the benefitsinto cash wages and increased reported wage inequality • Evidence limited, in general firms have been slow toshed benefits

43. Changes in returns to edu

44. Returns to edu cntd

45. Experience differentials

46. Experience differentials • Shift of relative demand over cohorts, Soviet-time knowledge not needed in new environment • Discounting effect – • retraining investment into younger people • less incentive to learn for older

47. Female/male wage ratio fell over 1991-1994, even controlling for edu and work characteristics The breakdown of state controlover enterprises may have enabled employersto discriminate against women moreopenly The most important factor is the shift in the overallwage structure in the economy Male-female wage gap

48. Changing wage structure • Womendisproportionately among the low-wageworkers • The increase in wage dispersion haspenalized female wages relative to malewages • The position of the median female in themale wage distribution almost unchanged (at the 30.2 percentilein 1991 and the 30.4 and 33.0 percentilesin 1993 and 1994, respectively) • Decline in the medianfemale percentile over time would indicate either • thatobservable skills have declined • or that discriminationhas increased le in the male wage distribution remained • i.e., gender-specificfactors appear to explain little of thepoor labor-market outcomes of women in Russia

49. Within-group inequality • Mostdimensions of between-group inequalityhave increased • Yet changes too modestto have alone accounted for the substantialincrease in overall inequality • Within-group inequality matters equally or even more

50. Juhn decomposition in Table 4, quantities did not matter, unobservables do The 90-10 differential forthe residual distribution for men increasedfrom 0.98 to 1.78 from 1991 to 1994 and from0.86 to 1.56 for women I.e., the most skilled within groups have gained roughly 75percent relative to the least skilled Residualinequality falls slightly when industry, occupation,and state-sector variables included Within-group inequality