Sometimes, economies suffer massive changes that affect the productivity of fixed capital in different sectors. In a world of perfect markets, workers would swiftly reallocate from the declining sectors (or regions) to the more profitable ones, but there are many exogenous obstacles to migration
We point to an additional, endogenous, obstacle that has not been considered before. Firms may devise “attachment” strategies to keep workers from moving out of a local labor market. By providing non-monetary compensation, firms make it difficult for the workers to raise the cash needed for migration. We show, first, that the feasibility of attachment depends on the inherited structure of local labor markets. Attachment can only be equilibrium when there are few firms. It collapses beyond a certain number of firms. Second, attachment is beneficial for both employers and employed workers, but it hurts the unemployed.
Russia in transition is an interesting testing ground for our theory. Here, there is little migration, and workers’ compensation shifts to non-monetary forms. We investigate two predictions of our theory. First, outmigration should be lower in more concentrated local labor markets. Second, in-kind payments should be more frequent in more concentrated local labor markets. An econometric analysis of matched household-firm data finds evidence that is in line with these predictions.