Returns to human capital under economic transformation: the cases of Russia and Slovakia

This paper employs data from the Russian Longitudinal Monitoring Survey and Slovak Microcensus to investigate human capital determinants of wage and employment changes from 1992 to 1996. We investigate how returns to schooling are changing over the transformation period in these two countries. Both countries, Russia and Slovakia, although belonging to the group of transitional economies, are very different. They can be considered to be representatives of two types of transitional economies. Slovakia-a small open economy-ranks among the Central European countries which seem to be more advanced in economic terms, facing a perspective of becoming in short or medium-term members of an enlarged European Union. Russia, on the other side, is the largest among Eastern European transition economies, characterized by persisting rigidities, a huge share of informal sector, low rate of registered unemployment, serious problems with wage arrears, etc. However, the differences at macroeconomic level do not automatically imply that the underlying labor market processes at the level of individuals have to be different, too. We would like to show that there are certain tendencies common for all the transitional economies, whatever their size or location, or other characteristics are. The evidence for Russia indicates that unconstrained wage setting shifted returns in favor of more educated individuals at the beginning of economic reforms (1992-1994). But the consequent structural changes along with devaluation of some skills and reduction of supply of skilled jobs caused the rates of return to schooling to decline. The returns to experience also tend to decline substantially over the transformation period. Compared with workers in state-owned and privatized companies, workers from new private firms have greater returns to schooling and smaller returns to experience. This pattern is different in Slovakia, where state-owned firms evaluate education most compared to private firms and foreign firms, while foreign firms tend to evaluate experience and managerial occupations more than the other two categories of firms. We also find robust evidence of a strong impact of firm-specific and regional characteristics on wages in Russia. Among other results, higher education tends to reduce the probability of exit from employment and duration of unemployment. We also show that sample selection bias may play a role in the evaluation of the results, as the Heckman correction procedure increases the magnitude for the coefficients of interest (schooling, education, experience, age and gender) in both countries.

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