The Russian labor market: Between inertia and flexibility

The puzzling coexistence of inertia and flexibility in the Russian labor ma rket are explained using a segmentation model. By placing uncertainty at th e center of decision-making by both firms and employees, this article shows that workers, all of whom an risk averse, may adopt behaviors differentiat ed according to their productivity. Some of them, with favorable job prospe cts, become mobile and enter into contracts whereby their pay varies depend ing on their productivity. Others, with less favorable opportunities accept lower wages in exchange for job security and fringe benefits (the firm's s ocial services). This model suggests an interpretation of wage arrears as p art of the implicit "insurance contract" between the firm and certain wage- earners. The model's predictions are tested by using a database of 13.628 R ussian companies observed from 1992 to 1997.