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Interregional wage differences

Essay in Labour Economics

“Interregional wage differences”

Price compensation in wages makes sense in Russia

Moscow
2008



Table of contents

Introduction 2
General reasons 2
History 3
Reasons for compensating income 4
Moving to a better paying region 5

Conclusion 5

Introduction
For this essay I have chosen to highlight the reasons behind interregional wage difference. About this topic many things have been written about other industrialised countries. However Russia is different because it’s large size and disturbed economic development.
The size and the different climates there are within the country makes that there should be a compensation for the harsh living conditions of the employees. This is what this essay will explain in more detail.

General reasons
The reasons that interregional wage differences exist is because there it is not possible to have a homogenous economy and labour market in a country. This is because there is an uneven territory and uneven demand for labour in the country.
There are unintentional reasons and intentional reasons to be name for this difference. The unintentional differences are mainly geographical and sector related.
Parts of a country which connected to the sea and have natural harbours will have for example more demand for labour connected to this harbour. The same will go for locations with natural resources. This difference in demand can directly influence the wage that a company is willing to pay for an employee. At the same time most likely there will be a different demand for employees, some sectors demand more skilled employees and other lower skilled. Automatically this will influence the average wage level directly.

However companies can also choose to compensate with a higher wage for conditions that are not that attractive. This is something they will have to do in order to get a high enough supply of employees willing to work for them. These reasons differ per company or per region where the company is located. For that reason this essay will focus on the intentional reasons for wage compensation present or possible in Russia.

History
During the process of the industrialization the wage differences between urban and rural areas became bigger. This because there was the opportunity to earn more money in factories compared to living from the land. Although travelling was not that easy as it is now, the difference of unemployment levels and wage levels draw more people towards the cities.
A good example would be comparing what an average employee could earn in 1904 in the Sint Petersburg region. The average annual income was 213.9 roubles, while a factory worker could earn around 366.2 roubles per year. However when working in the Iron sector they could earn up to 530 roubles per year.


The trend of having a large income difference between the rural and urban difference, is clearly shown in this graph. This trend can be seen in many more countries and would last quite long. For example even in the 1950 the rural areas of Europe would earn on average 30% less.

The compensating factor of labour can also be traced back a long time ago. For more difficult work, more dangerous work, the pay was higher. And even during the Soviet times there was the concept of including higher wages to compensate for living in the countries most difficult areas.
Reasons for compensating income
Every employee is different, for that reason it will depend on the personal preferences of how high the compensation should be before it becomes attractive enough to overcome a barrier. For that reason it is not possible to say ‘in order to overcome this barrier, the income should be x % higher’.

When looking at the researches done to explain regional differences, it shows that there are a couple of factual data that have a direct relation. The most important points that have to be compensated by a higher wage are:
1. Higher regional prices / higher costs of living
2. Lower life expectancy / low level of medical services available
3. Low number of telephones available
4. Harsh climate
5. Pollution of the air and water

According to this research the higher prices is the main reason that has to be compensated. For that reason one could say that the purchasing level should be equal between regions. If you will have to spend 30% more on the things you buy, you will want to have a wage that is also at least 30% higher, otherwise it would be cheaper to stay where you currently are.

This also makes that having a higher income does not necessarily mean having more money to spend. Because if the income is higher but also the costs are, you purchasing power is equal or even lower. The best example in Russia would be Moscow, indeed the salaries they pay are higher, but at the same time the real estate prices are sky high and everything is more expensive compared to living in the rural areas.
This is something one should take into consideration when accepting a job for a higher wage level, with the goal to save up more money.

The second, fourth and fifth most important reasons have to do with money compensation for living in a difficult or a dangerous or physical demanding job. If there is the option between a job in a nice climate and the same job at -40º most people would choose for the job in the nice climate. The higher wage could compensate for people who find income more important than an easy living climate.
The third reason has pretty much to do with the same reason, the lower the number of landlines available, the more desolate the place will be. More desolate areas are in a more difficult climate or have other reasons which make them less attractive to live.

Moving to a better paying region
For the unintentional wage differences between regions, often this increases the labour migration between the regions. However this depends on cost of migration. If you have to move from an area with hardly any infrastructure, to another part of the country, your costs will be much higher. The other aspect is in emotional costs, migration often means leaving family behind, which raises the question of how is your family worth.

Conclusion
Because in Russia the costs of living differs so much between the regions and there is such a large variety of climates within the country borders, it makes perfect sense to have different incomes in the different regions.
The country is simple too big to have a very homogenous labour market. There is too much of harsh land in between. And in order to attract people to these very harsh climates, you will have to pay them more. While in the areas that are easier to live, the costs of living are higher and therefore you will need more income to compensate this.

Bibliography
1. Carbaugh. Robert J (1995). International Economics. Belmont: Wadsworth Publishing Company.
2. Guriev. S, Friebel, G. Should I Stay or Can I Go? Worker Attachment in Russia. 2000,
Oshchepkov, Discussion papers 750, Are Interregional Wage Differences in Russia Compensative? . Berlin 2007, DIW Berlin,
www.diw-berlin.de/documents/publikationen/73/77377/dp750.pdf
3. Borodkin, L. Granville, B. Leonard, C. The Rural Urban Wage gap in the industrialization of Russia, 1884-1910,. Ejournal article http://ideas.repec.org/p/cgs/wpaper/1.html





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