This study attempts to explain why the transition to a market economy is skill-biased. It
shows unequivocal evidence on increased skill wage premium and supply of skills in
transition economies. It examines whether similar skill–favoring shifts in the Russian and U.S.
economies are driven by the same set of factors. Our analysis elaborates on the model of
alternative theories of the increased wage skill premium and then evaluates three main
hypotheses: skill-biased technological change, the market adjustment hypothesis, and the
institutional factor hypothesis. To test these hypotheses, the study uses unique linked
employer-employee data that spans the 16 years of the Soviet and transition periods in
Russia (1985-2000), with a special emphasis on data quality, measurement errors, and
retrospective biases. The main conclusion is that there is no uni-causal and time-invariant
explanation for skill-biased changes in wages and employment in the Russian economy. The
increased skill wage premium has been driven mainly by institutional factors during the early
period and by productivity and technological change during the late transition period, and
reinforced by market adjustment of wage ratio to the true differences in labor productivity.
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