Wage Policies of a Russian Firm and the Financial Crisis of 1998:Evidence from Personnel Data – 1997 to 2002

We use a rich personnel data set from a Russian firm for the years 1997 to 2002 toextend the analysis of internal labor markets to economies in transition. Our focus is on the effect of the financial crisis in 1998 and its aftermath on wages and the welfare of workers in the firm, providing evidence of how costs are distributed inside firms during such dramatic macroeconomic upheavals. We show that the firm does not refrain from cutting real wages. As it was a high wage firm before the crisis, it paid rents to many of its employees. Taking advantage of a high-inflationary environment and of a fall in outside options after the financial crisis, it is able to extract rents from its employees. The welfare losses are, however, not spread evenly across all employees, since the firm curbs earnings most for those who earned the highest rents, resulting in a strong compression of real wages. The fact that real wages and real compensation levels never recovered to pre-crisis levels even though the firm’s financial situation was better in 2002 than before the crisis and the differential treatment of employee groups within the firm can be taken as evidence that market forces strongly influence the wage policies of our firm.