05 August 2003 11:35
A Belabored Market
Though it played an important role in offsetting the negative consequences of collapse of Russian industry, today the distorted Russian labor market has become an obstacle to economic growth.
Rostislav Kapelyushnikov (Leading Researcher at the Russian Academy of Science’s Institute of Economic and International Relations [IEIR] and Doctor of Economics)
In the last ten years of economic reform, a particular model for the Russian labor market has emerged. This model was not commanded “from above” according to some preordained plan. It evolved spontaneously under the influence of the decisions of various state agencies, employers, and workers, all made independently of each other.
Unusual reactions
 In the early 90s, Russia, along with the other transitional economies of Central and Eastern Europe, adopted the standard set of “imported” institutions. A minimum wage was set, strikes were legalized, a complex collective bargaining system was established, income taxes appeared, and some attempts were made to index wages. Most people expected the Russian labor market to start to work similarly to the labor markets of other post-socialist countries that began reforms earlier. Naturally, as the crisis of economic transformation proved deeper, the scale and intensity of problems would assumedly also be different. Companies would be quicker to get rid of employees, unemployment would be higher, labor conflicts more common, and the inflationary pressures of unpaid wages on the labor force more acute. However, this was not the case.
Employment in Russia proved surprisingly stable and did not react as sensitively as many assumed to the shocks of the transitional period. For the entire reform period, it fell by 12-14%, clearly out of proportion with the fall in the GDP which according to official estimates reach 40% during the worst moments of the crisis.
Despite the depth and length of the crisis, the increase in unemployment in Russia appeared milder and less “explosive” in nature, as it was spread out over a long period of time. And as soon as the Russian economy showed signs of growth, unemployment figures fell dramatically.
Flexible hours
According to Russian law, the standard work week cannot exceed forty hours, and only certain categories of workers are permitted to work overtime. Even they are only allowed to work 120 hours of overtime a year. In addition, there are strict legal limits on part-time employment.
However, in practice, Russia has seen a significant reduction in working hours. Over the first half of the 1990s, the average number of days worked in manufacturing fell by almost a month. The length of the workday has yet to return to previous levels.
Low pay, not layoffs
Officially, Russia has a complex system of interlocking collective labor agreements. The conditions guaranteed by agreements at various levels are capable of severely limiting employers’ room to maneuver. In addition, laws grant unions such a wide range of powers that one would think they could make whatever demands they wanted in terms of raising wages and improving working conditions.
Nonetheless, according to official data, real wages in Russia fell by around 60% from 1991-2000. Though the decline has been overestimated for various reasons, the fact that real wages fell dramatically is undeniable. The most extreme factor contributing to the decline in real wages was systematic payroll delays and wage non-payment (this approach became a priority in inflation reduction). The progressive cheapening of the labor force kept demand high, preventing a sudden explosion in open unemployment.
Contrasts, not solidarity
Russian law gives various categories of workers a multitude of benefits and insurance, which are supposed to be financed by their employers. However, in real life we see a dramatic differentiation in wages. While in 1991 the Gini coefficient equaled 0.32, by the end of the 1990s it had already reached 0.45. Currently, this indicator is one and a half to two times greater in Russia than in the other countries of Central and Eastern Europe.
We fire like we hire
It would seem that the Russian economy should have characteristically low turnover on the labor market due to the serious costs of regulating the number of personnel at a company. An employer is required to provide severance pay when laying off an employee, and the amount varies from one to three times the employee’s monthly salary. The employer must notify employees of possible layoffs at least two months in advance. Employers are also required at least two months before layoffs to notify state labor agencies, and in the event of massive layoffs, the appropriate union must be informed at least three months ahead of time. Importantly, until very recently, a company could not lay off workers without union permission.
However, the facts tell a different story. Labor force turnover is greater in Russian than in the overwhelming majority of other Central and Eastern European countries. This high turnover is not only the result of workers losing their jobs, but of active hiring. When hiring new employees, companies don’t seem to worry about how to fire them.
Limited labor activism
Taking into account the great difficulties the Russian economy experienced in the 90s, we would naturally expect waves of intense and prolonged labor conflict. However, strangely enough, labor activism and strikes remained relatively limited. Though in the majority of Central and Eastern European countries the number of strikes was also fairly limited, in several countries it was notably higher than in Russia. There was also one other crucial difference: most Russian strikes were more like demonstrations and only lasted 2-3 days.
Strong regulations, weak institutions
How can we reconcile the discrepancies between labor regulations and Russian labor market realities? There is only one explanation. The high rate of activity on the Russian labor market has emerged not because of the flexibility of existing labor laws but despite them. The real institutional foundation for the Russian labor market was not laid by laws but by informal connections and practices.
However, these institutions result in a multitude of serious problems. First and foremost, they have undermined respect for one of the most important cornerstones of a complex economy, the contract.
When workers are hired, they have no idea to what extent their employer will keep to the terms of their contract, when they will get their official salary, and whether they will get something extra under the table. This slows down the movement of the labor force from inefficient sectors of the economy to more efficient ones and increases the number of unsuccessful attempts and mistakes.
The changes we need are plain to see: regulations and the realities of the labor market need to be brought into closer alignment. More specifically, reforms should include measures to strengthen and provide for the fulfillment of labor contracts and other regulatory obligations.
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