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Contract Violations, Neighborhood Effects, and Wage Arrears in Russia

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  • Earle, John S.

    ()
    (George Mason University)

  • Peter, Klara Sabirianova

    ()
    (University of North Carolina, Chapel Hill)

Abstract

We present a model of neighborhood effects in wage payment delays. Positive feedback arises because each employer’s arrears affect the late payment costs faced by other firms in the same local labor market, resulting in a strategic complementarity in the practice. The model is estimated on panel data for workers and firms in Russia, facilitating identification through the use of a rich set of covariates and fixed effects at the level of the employee, the employer, and the local labor market. We also exploit a policy intervention affecting public sector workers that provides an instrumental variable to estimate the endogenous reaction in the non-public sector. Consistently across specifications, the estimated reaction function displays strongly positive neighborhood effects, and the estimates of four feedback loops – operating through worker quits, effort, strikes, and legal penalties – imply that costs of delays are attenuated by neighborhood arrears. We also study a nonlinear case exhibiting two stable equilibria: a “punctual payment equilibrium” and a “late payment equilibrium.” The estimates imply that the theoretical conditions for multiple equilibria under symmetric local labor market competition are satisfied in our data.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 1198.

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Length: 57 pages
Date of creation: Jun 2004
Date of revision:
Handle: RePEc:iza:izadps:dp1198

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Keywords: wage arrears; neighborhood effect; contract violation; social interactions; multiple equilibria; network externality; strategic complementarity; transition; Russia;

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References

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Cited by:
  1. Hartmut Lehmann & Norberto Pignatti & Jonathan Wadsworth, 2005. "The Incidence and Cost of Job Loss in the Ukrainian Labor Market," CERT Discussion Papers 0504, Centre for Economic Reform and Transformation, Heriot Watt University.
  2. Linz, Susan J. & Semykina, Anastasia, 2008. "How do workers fare during transition? Perceptions of job insecurity among Russian workers, 1995-2004," Labour Economics, Elsevier, vol. 15(3), pages 442-458, June.

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