1. Income volatility, labor mobility, and fiscal policy in Russian regions Goohoon Kwon Antonio Spilimbergo IMFIMF, CEPR, WDI

2. Outline Brief Description of Regions (GDP. Income shocks. Welfare. Integration) Tale of three adjustments Consequence for Unemployment Source of regional volatility Fiscal Response to oil shocks Transfers Conclusions

3. Data Russia (89 regions) US (50 states + DC) China (30 provinces) Canada (11 provinces) Europe 15 (178 regions)

4. Regional Income Differences

5. Regional Income Shocks

6. Regional shocks (controlling for regional trends)

7. Why are Russia regions subject to large idiosyncratic shocks? Natural Resources are concentrated in few regions Soviet faith in economy to scale has created “excessive” specialization

8. How to measure shocks? Oil shock = (oil price) * (size energy sector) Industrial shock = rer * (size manufacturing sector)

9. Source of Shocks Table 1. Regional growth and regional shocks Fixed effectsArellano-Bond oil shock1.64*** industrial shock-0.11** Lag D.gdpgrowth-0.04 D.oil shock 2.28 *** D.industrial shock-0.23*** Constant2.851.98*** Number of samples760608 Number of Regions76 ** p<.05; *** p<.01

10. Tale of three adjustments How do economies react to regional shocks? Do people stay in distressed areas or do they move? To answer this question we need to make an econometric detour

11. (Small) Econometric Detour

12. Income Shocks: response of Income

13. Income Shocks: response of population

14. Consequence on Regional Unemployment

15. Adjustment - American Style Flexible Labor and housing markets. Limited unemployment benefits. Labor is highly mobile. Variation in regional unemployment is limited.

16. Adjustment – European Style Rigid labor and housing markets Unemployment subsidies. Regional fiscal transfers. Scarce labor mobility. Large variation in regional unemployment. Persistency in regional unemployment.

17. Adjustment – Russian style Large shocks Scarce labor mobility Rigid housing market (housing subsidies) Fiscal transfers not necessarily targeted to compensate shocks

18. Adjustment – Latin American style Large shocks Small role for fiscal policy (procyclical) Population concentrates in large cities (Argentina, Chile, Uruguay among the highest urban concentration)