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

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.