Russia’s low unemployment puzzle
Interview with Vladimir Gimpelson
February 28, 2023
  • Vladimir Gimpelson
    Professor of Practice in Russian Studies at UW Madison
  • Mack Tubridy
Vladimir Gimpelson explains how Russian firms avoided mass layoffs last year.
Unemployment Rate (% of Total Labor Force).
Source: International Monetary Fund (IMF) Forecast
Few people better understand Russia’s labor market than the economist Vladimir Gimpelson. He has authored a book and countless papers on labor in post-transition and emerging economies. For more than 20 years, Gimpelson headed the Centre for Labour Market Studies at the Higher School of Economics in Moscow. He is now Professor of Practice in Russian Studies at the University of Wisconsin Madison.

Despite immense pressure from Western sanctions and a production slump across several industries, Russia experienced record-low unemployment in 2022 – just 3.7 percent, according to government data. In an interview for Russia.Post, Gimpelson explains how Russia has historically managed to keep unemployment down even in the face of economic crisis.

What requisite knowledge do we need to understand what’s been going on in Russia’s labor market the past year?

Like any other market, labor markets are governed by the rules of supply and demand. If the supply of workers is higher than demand, then we can get unemployment. If demand for workers is higher than supply, then wages can increase and bring the market back to equilibrium. The structure of Russia’s labor market is very distorted. There are several reasons for this. For one, employment protection legislation is rigid, and the compensation employers are required by law to provide laid off workers is costly. At the same time, wages are flexible – they can go up and down quite freely. Plus, unemployment benefits are insufficient and difficult to acquire, and so this is a support system on which people cannot depend. Without that support, people take whatever work they can get. These factors lead to the general low unemployment situation that we see in Russia. Of course, this comes with a price. The price is that, while many workers can be retained in employment, they are also not very productive, which is reflected in the low wages they receive. These workers can be considered working poor, meaning their incomes fall below the poverty line.

And this structure of employment that you’re describing has helped Russia’s labor market weather the current economic crisis, as well as previous crises?

In all recent crises that Russia has faced, we see that unemployment stays relatively low while wages are reduced. When labor market institutions raise the costs of layoffs, but nothing prevents wages from going up or down, then the most rational strategy is to adjust wages. You don’t need to lay off any workers. Mass layoffs are always difficult – politically, administratively, and financially. You need to compensate workers when you fire them. In the case of Russia, often the government gets involved. The authorities may try to prevent a firm from laying off its workers because they don’t want any protests – they need “social stability.” This system may look unusual when compared to the United States, Germany, or France. In these countries, companies can fire workers and stop hiring new employees, but it’s difficult to renegotiate existing labor contracts. Yet if we compare Russia to middle and low-income countries, then it doesn't look so strange. It’s quite common.

So the key is wages. Do we know what’s happening on the wage side?

Unfortunately, we don’t have good monthly data on wages. Large and medium-sized enterprises report their wage funds and employment on a monthly basis to the state statistics service Rosstat, which then divides the wage funds by employment in order to get the average wage. According to this data, there’s been a small decrease in wages. But there are simple tricks here. Let’s pretend that Gazprom decreases wages for most of its employees, but the top management gets big salary bonuses, and so these changes balance out each other. In other words, according to the average wage data, nothing changed. And these types of statistics account for about 40 percent of total employment. For the other 60 percent of employment we have no monthly data. It’s reasonable to assume that the wage decline there is much larger. However, we need to wait until annual employment data is published.

What about employment? Do we have any sense of where real employment in Russia stands?

Well, what do we mean by real employment? What is employment? A standard definition for employment among economists is receiving pay for at least one hour of work in a given week. It’s a very loose definition. But now we’re starting to move away from the rate of employment to the issue of the quality of employment, or the composition of employment. What does a person do? How many hours does he or she work? How productive is the worker? Is he or she protected by labor contracts? And so on. In order to understand all of this, we need more time, as well as more data that, at the moment, we don’t have. We know that a significant portion of employment in Russia is very precarious – it’s not good work.
We also know that mobilization and mass emigration decreased the supply of labor. Suddenly, there are fewer people in the workforce, yet demand remains more or less the same."
There is always plenty of low-quality work, like driving taxis, that people in Russia can get if they want. Source: VK
In terms of labor composition, what changed this past year?

I think that it remains mostly the same. Around 20 percent of people are engaged in various types of informal work – these jobs are relatively stable. Some may work on a formal basis, but their labor contracts are not enforced – they are not protected. Then there are what I call “free-entry jobs,” or jobs that you can get very easily and where turnover is high. Many Russians work in the retail and service sector, which includes large chains and very small shops. These firms have very high turnover and permanently post vacancies. Men can work as taxi drivers and women can work in large retail chains. There is plenty of low-quality work like this that people can get if they want it. But since they cannot live without some kind of income, many take these jobs thinking it will be temporary, before they can find better work.

So these low-quality jobs act as a sponge for people who find themselves unemployed?

Yes, you need a large pool of jobs to absorb extra labor. Even if people cannot find work at a large or medium-sized firm, they can find employment or self-employment within this absorbing segment of the economy, which includes micro businesses, small businesses, and even some corporate employment, but with free-entry jobs.

At the same time, according to a recent survey by Russia’s central bank, many enterprises are reporting worker shortages. They can’t find enough qualified workers.

In my view, this is just the unwillingness of employers to provide better wages to prospective employees. Let’s not forget the laws of supply and demand. If any resource or good is in demand, then its price should increase. A labor shortage can occur if labor is physically limited, which is not the case in Russia. Fixed wages can also be to blame. But again, this is not so in Russia, where wages are extremely flexible. So, what’s the problem? You need to pay more and offer better work conditions, and then people will come to you.

Just as it has mobilized soldiers, the Kremlin has also sought to mobilize the economy for its war effort, as well as to stave off the effects of sanctions. What’s the capacity of Russia’s labor market to shift employment – in other words, to move workers from one place to another?

Here we should separate what we expect to happen from what we can see happening in reality, that is, based on the available data. In the current situation, where the government is calling for import substitution, we would expect a relocation of workers from technologically more advanced industries and enterprises to those that are less advanced. The economist Branko Milanovic called this “technologically regressive import substitution.” To get a sense of how this process is playing out on the ground, we need more time. The available macroeconomic data don’t tell us anything about enterprises that are shifting production to more technologically primitive goods – for example, an auto manufacturing plant in Tolyatti that switches from making Renault vehicles to old style Ladas. We need special surveys and research on this specific plant to understand what’s happening. Whereas looking at the economy overall doesn’t tell us much.

Then how can the state manage employment? What instruments does it have at its disposal to relocate workers into industries and enterprises it considers more vital?

When I look at the employment structure in Russia, I don't see any resources available for relocating workers. Let’s say you want to get involved in import substitution. That means you need to build new factories. And to build new factories you need additional labor. But where do you get this labor? I personally have no idea. At the same time, there are two ways to move labor. First, you can use totalitarian methods and move people around as though they’re not human – as though they’re just raw materials. That’s what the Soviet Union did under Stalin. Otherwise, you need to create market incentives for people to move on their own. But when you do this, some industries will see unemployment rise, since you need to boost employment in other industries.
In other words, to stimulate job relocation you need to do what the Russian state always avoids – increase unemployment. You would need to create enormous incentives for people to change jobs. As of now, I don’t see any significant relocation taking place. According to Rosstat, just 5 million people work in large and medium-sized firms in the manufacturing industry. That includes all manufactured goods – food, tobacco, textiles, furniture, automobiles, aircraft, and so on.
This means that there is very limited capacity to relocate workers within the industry sector. Workers from other sectors may have no manufacturing specific skills.

If the Russian government did take major steps to relocate workers, would it be easier to coordinate that policy with large enterprises?

Sure, it would be easier. But it’s still quite difficult. An enterprise employing many people and that wants to increase the number of work hours – thereby boosting production – would still need to significantly increase its labor force. In some individual cases, it can be done. But generally speaking, I don’t see there being enough resources available.

Do workers today have any leverage to demand more from their employers or the state?

It depends on the workers. Trade unions in Russia are almost non-existent, so there’s no collective bargaining going on with employers. But maybe there are negotiations on an individual basis. If workers want to demand anything, then they need to have some kind of strong bargaining chip. They need to possess highly important skills. They need to be difficult to replace. But that happens on an individual level since most workers lack the kind of skills that make them irreplaceable.

What additional problems would a potential second wave of mobilization create for the labor market? Or even a gradual – and therefore less visible – recruitment campaign.

I think mobilization will have greater long-term impacts on the labor market and demography.
Many of the men taken from their families and sent to fight will not return. Others will come back with missing limbs and disabilities. All of this will affect their human capital, birth rates, and fertility – in general, the future prospects of the country."
But in the short-term, the impact will be more limited.

What are your expectations for Russia’s economy in 2023?

I expect the overall economic situation to deteriorate further. There will be a continued recession. Of course, it will be interesting to see how Rosstat calculates data moving forward. But I have no reason to expect any dramatic changes. The labor market will function in the same way. To see any major changes you would need to either drastically alter the institutions shaping the labor market or to go into a very deep recession. By very deep recession I mean about a 10 percent decline in GDP growth. But I don’t believe the recession will be that bad. Most likely, GDP will decrease by a few percentage points. But the labor market will adjust somehow.

So more of the same?

Yes. The existing institutions are very efficient from the government’s point of view, since they don’t care about regular economic efficiency. They care about low unemployment, and the existing institutions automatically help keep unemployment down. If the government doesn't increase unemployment benefits – and it won't – then nothing will change.
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