published in: Journal of Urban Economics, 63 (1), 2008, 25 - 55
The existence of compensating differentials in Russian labor and housing markets is examined
using data from the Russian Longitudinal Monitoring Survey (RLMS) augmented by city and
regional-specific characteristics from other sources. While Russia is undergoing transition to a
market economy, we find ample evidence that compensating differentials for location-specific
amenities exist in the labor and housing markets. Our estimated wage and housing value
equations suggest that workers are compensated for differences in climate, environmental
conditions, ethnic conflicts, crime rates, and health conditions, after controlling for worker
characteristics, occupation, industry, and economic conditions, and various housing
characteristics. Moreover, we find evidence that these compensating differentials exist even after
controlling for the regional pay differences (“regional coefficients”) used by the Russian
government to compensate workers for living in regions that are designated as less desirable. We
rank 953 Russian cities by quality of life as measured by a group of eleven amenities. Sizable
variation in the estimated quality of life across cities exists. The highest ranked cities tend to be in
relatively warm areas and areas in the western, European part of the country. In addition, our
quality of life index is positively correlated with net migration into a region, suggesting workers are
attracted to amenity-rich locations. Overall, we find that sufficient market equilibrium exists and a
model of compensating differentials with controls for disequilibrium yields useful information about
values of location-specific amenities and quality of life in this large transition economy.
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