Compensating differentials in emerging labor and housing markets: Estimates of quality of life in Russian cities

The purpose of this paper is to see if an equilibrium model of compensating differences for amenities can be applied to a major transition economy, Russia. We analyze Russian labor and housing markets using data from the Russian Longitudinal Monitoring Survey (RLMS) augmented by city and regional-specific characteristics from other sources. 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. 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 public sector workers for living in regions that are designated as less desirable. Quality of life, as measured by a group of eleven amenities, varies substantially. The highest ranked cities tend to be in relatively warm areas and areas in the western, European part of the country. 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 a model of compensating differentials with controls for disequilibrium yields useful information about compensation for location-specific amenities and quality of life in this large transition economy. (C) 2007 Elsevier Inc. All rights reserved.