Ebook Wage policies of a Russian firm and the financial crisis of 1998: Evidence from personnel data – 1997 to 2002
Observing how a firm adjusts its personnel policies in response to a large shock can yield vital insights about the nature of adjustment processes in labor markets. We analyze a rich personnel data set from a Russian firm for a period (1997 to 2002) that spans the Russian financial crisis in 1998, in order to shed light on crucial, but largely unresolved questions about the functioning of labor markets in general. For example, do firms adapt their wage policy to changes in labor market conditions? And if so, are all workers affected in the same way, or are incumbent workers shielded from external labor market shocks as early theoretical work on internal labor markets suggests (see Doeringer and Piore, 1971)?
In particular, we investigate how the firm adjusts employment, wages and other components of pay in response to the crisis, and study how the burden of the crisis is spread across the workforce. The very detailed information on employee remuneration and wage arrears enables us to provide a much clearer and more complete description of the mechanisms that are used to adjust earnings at the firm level than is typically possible. Such an analysis is important for at least two reasons: First, despite some attempts in the literature to assess the costs of economic crises on the workforce and on households (see, for example, Fallon and Lucas, 2002), we know virtually nothing of how these costs are distributed among employees inside firms during such dramatic macroeconomic upheavals. Second, although several studies have explored to what extent internal labor markets cushion incumbent workers from external labor market shocks (e.g., Baker et al., 1994, Lazear, 1999; Lazear and Oyer, 2004), it is still not well understood how workers’ welfare is affected by firm performance over the business cycle.
Evidence on the degree to which firms are disciplined by external labor market conditions is mixed. Baker et al. (1994) find that workers are partly shielded against adverse shocks to external market conditions. Lazear and Oyer (2004) report findings from the Swedish labor market, which indicate that external market conditions affect wages over the long run. The picture that emerges in the empirical literature suggests (1) that hiring wages track industry wages, but (2) that differences in hiring wages are persistent; indicating that market induced variations in marginal productivity are not fully reflected in wages of incumbent workers.
In all of the studies discussed above it is difficult to establish a direct link between shocks to (external) labor market conditions and changes of firm’s personnel policies. This is because shocks have typically been small in most advanced Western economies during the last decades. If firms gradually adjust their personnel policies in response to such small but relatively frequent changes in external conditions, the impact of small shocks is typically difficult to measure and hardly observable in available data. If firms, on the other hand, sporadically react to accumulated shocks by major adjustments, it is difficult for the researcher to relate such a policy change to a particular external shock. Therefore, there is much insight to be gained by assessing how firms react to larger exogenous macroeconomic shocks, such as the financial crisis that occurred in Russia in 1998. This crisis had severe consequences, leading to a substantial devaluation of the Ruble, a collapse of a large part of the private banking sector, a surge in inflation and interest rates, and liquidity problems, which adversely affected demand in the goods market.
Our results show that these changes in economic conditions strongly influence the personnel policies of our firm. Real wages and real compensation fell substantially in the aftermath of the financial crisis. Employment levels at the firm, on the other hand, remained rather stable. The downward adjustment of earnings leads to persistent welfare losses among employees since real wages and real compensation levels had not recovered to pre-crisis levels by 2002, even though the firm’s financial situation was then better than before the crisis. These welfare losses were, however, not spread evenly across all employees. In fact, employees at the top of the earnings distribution tend to take the highest real wage cuts in relative terms, which is in part driven by external labor market conditions that limit the scope for cutting wages of employees at the bottom end of the firm’s wage distribution. External conditions also appear to affect the firm’s recruitment policy as hiring wages track market wages.
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