The human capital heterogeneity at the Russian labor market

Human capital theorists often assume that human capital depends on variables like education and experience. Nevertheless, people with the same education and experience may be different in skills, abilities, behavioural patterns, preferences and other unobservable factors.

The study raises the problem of human capital heterogeneity at the Russian labour market caused by the non-random distribution of unobservable skills across the population of a transition country. At the beginning of the transition, people who grow up in different times or cultures have distinct moral norms, behavioural patterns, preferences and knowledge. This results in the differences in unobservable abilities and earnings capacity of people.

The author argues that the following might serve as proxies for unobservable skills in the transition:

• cohort
• pre-transition occupation
• urban place of birth
• nationality

The study analyses the properties of an earnings function without cohort employed for the estimation of the labour market in transition and separates the effects of the above-mentioned proxies.

This research demonstrates that in the Russian transition economy, human capital heterogeneity is an important problem because the results reveal the significance of all the proxies for unobservable abilities as well as the robustness of estimates. The author also finds that:

• the effect of cohort is the strongest and will not disappear in the immediate future
• Slav people seem to be disadvantaged in terms of current earnings as well as those who are born in a rural settlement, regardless of their gender
• specific occupational skills accumulated before the transition are likely to operate to date, affecting current earnings of both gender groups

The author makes two policy recommendations for economic policy. The first is that the state must control earnings differentials, probably through some kind of active labour market policy aimed to providing older workers with jobs in several sectors of the economy. The second one relates to the presence of the strong cohort effect. Since this will probably enlarge the gap between average earnings of working people and pensions paid from accumulated funds of retired persons, the author believes that the distributive system of pension payments is more appropriate for Russia, because it corrects the income distribution distorted in the transition.