The consumption and welfare implications of wage arrears in transition economies

The paper investigates the macroeconomic consequences and the welfare implications of wage arrears in transition economies using a one-sector neoclassical growth model. In our model, a neoclassical firm makes losses during the transition period and uses wage arrears as a survival strategy. At the workers' level, the randomness in the timing and extent of wage payments acts as an idiosyncratic shock to earnings. We calibrate the model to reproduce the characteristics in Ukrainian data and study its quantitative predictions. We find that wage arrears imply substantial social costs, e.g., a consumption loss between 8 and 16%, and a welfare loss from idiosyncratic uncertainty equivalent to an additional consumption loss of 1 to 5%. Journal of Comparative Economics33 (3) (2005) 540-564.