This study provides the first set of estimates of the returns to schooling over an extended
period in Russia and Ukraine (1985-2002). There has been an increase in returns to
schooling in both countries but the increase is much bigger in Russia than in Ukraine. The
intriguing question is why returns to schooling in Russia and Ukraine diverged so much over
the transition period while the skill composition of employment did not. Our approach in
analyzing the sources of cross-country differences in returns to schooling is to compare the
Mincerian earnings functions between the two countries and then to employ decomposition
techniques. Using semiparametric methods, we construct counterfactual wage distributions
for university and secondary school graduates for Ukraine using the distributions of Russian
characteristics, returns to characteristics, and unobservables. This allows us to decompose
differences in returns to schooling between the two countries due to differences in the labor
market returns (price effect), differences in unobservables (residual effect), and differences in
the labor force composition (composition effect). We conclude that of these three effects the
price effect makes a major contribution to the observed differences in the returns to
schooling.