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Attaching Workers Through In-kind Payments: Theory and Evidence from Russia

  • Guido Friebel

    ()

    (University of Toulouse (EHESS and IDEI), CEPR, IZA)

  • Sergei Guriev

    ()

    (New Economic School/CEFIR and CEPR)

As a result of external shocks, the productivity of fixed capital may sometimes decrease in certain regions of an economy. There are exogenous obstacles to migration that make it hard for workers to reallocate to more profitable regions. We point to an endogenous obstacle that has not been considered before. Firms may devise “attachment” strategies to keep workers from moving out of a local labor market. When workers are compensated in kind, they find it difficult to raise the cash needed for migration. We show, first, that the feasibility of attachment depends on the inherited structure of local labor markets: Attachment can exist in equilibrium only if the labor market is sufficiently concentrated. Second, attachment is beneficial for both employers and employed workers, but it hurts unemployed and self-employed. An analysis of matched household-firm data from Russia corroborates our theory.

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Paper provided by Center for Economic and Financial Research (CEFIR) in its series Working Papers with number w0057.

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Length: 36 pages
Date of creation: Mar 2005
Date of revision:
Publication status: Published in World Bank Economic Review, September 2005
Handle: RePEc:cfr:cefirw:w0057
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