Appendix Table 24). However, differentials associated with Jurmala, Liepaja and Daugavpils are almost unchanged from specifications which do not account for local unemployment, suggesting region-specific effects dominate those of local unemployment for people in these towns.

Some of the regional effects depend on gender or ethnicity. The advantage of working in Jurmala, Liepaja or Ventspils is much more pronounced for men than for women. The effects of working in Riga district and Liepaja on non-Latvians’ earnings are two times larger than on Latvians’ earnings, but it is the other way around in Jurmala. Finally, except for Ventspils and Daugavpils, all above-mentioned location effects on earnings are almost completely concentrated in the private sector.

**The further from Riga, the lower are wages.** Another way to look at regional wage effects is to link them with the distance between job location and Riga. It turns out that, Ventspils and Liepaja aside, every 10 kilometers of distance from Riga reduce wages by 1.8 percent for workers without higher education, and by 1.2 percent for employees with higher education. This model is estimated using LFS 2001 data, and is not shown. The main effect is significant at 0.001 level, interaction with higher education – at 0.05 level. All described regional effects remain almost unchanged when (the major group of) occupation is controlled for. In our terminology, these are pure “reward” rather than “access” effects.

**Small firms pay less.** Since 2002 the Latvian LFS has included a question on the number of employees in the local unit where the respondent actually works.  This indicator, usually referred to as plant size, is obviously correlated with firm size. Small firms cannot have big plants. All else equal, an individual working in an establishment with 50 or more employees earns 15% more than an otherwise similar employee in a small unit with 1 to 10 workers.  The ‘small firm’ effect is more pronounced in rural areas and among non-Latvians (see Appendix Table 25). As in other industrialized countries, the larger the firm, the higher are wages.  The size of the effect is somewhat larger than in Lithuania and smaller than in Estonia. Still, the general structure is similar in all three countries, with larger differences between the public and private sectors in Estonia (see Appendix Table 31).

# **4.  EVOLUTION OF THE KEY INDICATORS, 1997-2002**

In conclusion, we examine the changes which occurred between 1997 and 2002 in some key indicators of Latvia’s labor market: the impact of education, gender, ethnicity and region on labor force participation, unemployment risk and earnings. Both 1997 and 2002 were years of strong growth of Latvian economy, therefore the comparison is not likely to be distorted by cyclical factors.

**Education effects increased.** Appendix Tables 32-34 show that for men education effects on earnings, participation, and unemployment risk have in general become stronger. Wage differential associated with higher education (as compared to less than secondary) has increased from 61 percent to 69 percent; moreover, both marginal effects of higher vs. secondary and secondary vs. basic education have also widened<sup>16.</sup> In 2002 probability to be unemployed for a man with (general or technical) secondary education or basic vocational education was by 7 to 8 percentage points lower than for otherwise similar man with basic education, while in 1997 the difference was just 2 percentage points (the change is even bigger in relative terms, because the unemployment rate dropped from 15 to 13 percent).  This evidence for improved quality of vocational education is reinforced by the fact that effect of basic or postsecondary vocational qualification on men’s probability to participate in the labor force has also increased (by 3 and

> 16 Categorization of secondary education in LFS 2001-2002 is not exactly the same as in previous years, but this conclusion follows from models where all types of secondary education are merged (not shown). Notice also that 2002 differentials refer to net earnings, and they will further increase somewhat when translated to gross wage differentials.

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