Labor Earnings in One-Company Towns: Theory and Evidence from Kazakhstan

One-company towns, characterized by the presence of a largeemployer in a local labor market, are a frequent legacy of state-leddevelopment strategies. How will downsizing or closing unprofitablestate-owned enterprises affect these towns?This article developsa simple model combining monopsony power in the labor marketwith a Keynesian closure of the product market and uses it tointerpret the findings of previous studies. The article evaluatesthe impact of the company's employment level on the town's laborearnings in Kazakhstan, where one-company towns are still prevalent.The evaluation is based on data from the 1996 Living StandardsMeasurement Survey. The results show that labor earnings inthe town decrease roughly 1.5 percent when the share of itspopulation working for the company decreases 1 percent. Theresults are robust to changes in the definition of labor earningsand to the inclusion of a variety of other community characteristicsin the analysis. These results and the theoretical model arecombined to evaluate the welfare impact of company downsizingand, consequently, to derive the optimal extent of labor retrenchment.