Society
‘Major shock to demographics and the labor market’
October 20, 2022
  • Denis Kasyanchuk
    Interviewer
    Journalist
  • Vladimir Gimpelson
    Interviewee
    Director of the Center for Labor Market Studies at the Higher School of Economics
In an interview with The Bell Vladimir Gimpelson analyzes the consequences of the mobilization for the Russian economy, emphasizing the long-term losses in human capital among those who fight and those who don’t. Some lose skills, while others don’t reproduce them or invest in new ones.
The original text in Russian was published by The Bell and republished here with their permission.
Mobilized Russian men, Sevastopol, September 2022. Source: Wiki Commons
Since the end of September, the mobilization announced shortly after the serious defeat of Russian forces in Kharkov Region has been underway. According to the authorities, 300,000 “reservists” are to be called up, though numerous accounts indicate that draft notices are often handed out to men who have never held a weapon before. This caused a panic, with hundreds of thousands of swiftly fleeing Russia. What will be thecost for the Russian economy? What will happen to unemployment? What long-term consequences will mobilized men face? We asked Vladimir Gimpelson, director of the Center for Labor Market Studies at the Higher School of Economics.

It’s impossible to estimate how many people will eventually go to war. But if we take the 300,000 the Defense Ministry has been talking about, what would the loss of that number of men between the ages of 20 and 55 mean for the Russian labor market?

To answer the question, we must start with demographics. They are very problematic in our country, there are huge gaps in certain age groups. It’s the overlapping echo of many dramatic events from the entire 20th century – the echo the revolution, the Great Patriotic War, the change in the system in the 1990s. So:

  • in the 20-49 group, we have about 30 million men total;
  • if we take the 20-39 group – that is, the main conscription age – there are about 20 million;
  • in the 20-29 group, there are less than 8 million. And that is a huge demographic disaster that will resonate into the future, as in a few years people from this group will move into the 30-39 group and so on.
So the most able-bodied group is the most disastrous in terms of numbers. And all the misfortunes are concentrated on them: dead and wounded at the front since February, mobilization with the attendantconsequences and emigration. There are no exact figures on how many people have fled yet, but it’s clear that men in the most productive ages predominate.

It's is a serious shock for our demographics, our labor market. If we take just the figure of 300,000 mobilized, then it’s loss of about 0.5% of all employed. It may seem insignificant, but if we proceed from the premise that the contribution of everyone employed to GDP throughout the year is approximately the same, then it’s a loss of 0.5% of GDP.

Of course, that’s a strong supposition, as the contribution to GDP of people employed in the production and processing of oil and gas, or in finance, is much greater than that of the rest. Still, even if we assume that the contribution to GDP of mobilized men is lower than average, we still get a significant 0.3-0.4% loss in annual GDP.

Of course, we don't know how long this will last. But the problem is not just the mobilization, but also the emigration of many young people, the loss of life that has already occurred before the mobilization, the extreme uncertainty that everyone is facing. People stop working, everyone gets nervous, they think about what might happen to them tomorrow. And that concerns both mobilized men and also their families, wives and parents. Altogether, the impact is much bigger than just temporarily pulling a hypothetical 300,000 people out of the economy.

These are all short-term effects. But the impact of this whole situation is very multifaceted. There are many facets: economic, demographic, technological, political, social, psychological, health. And there’s not only short-term effects, but also medium-term and very long-term ones. It’s extremely difficult to analyzeeverything together. I don't think there is a person or team that is able at the current time to give a complete picture, though the general direction is clear.

And if more people are mobilized? For example, the million that the media has been writing about? In that case, we should multiply all the effects, roughly speaking, by three?

Yes, we should multiply them. But the coefficient could be higher, as the more men are mobilized and sentto the front, the greater the losses, including wounded. The latter means long-term burdens on the healthcaresystem, which, if it starts to care for these people, will stop taking care of others. We already encountered that during the pandemic, when the redirection of healthcare resources to combat Covid led to less attention being paid to oncology and cardiology, for example.

Speaking of forecasts, we don’t even have to talk about the mobilization. Just recall Rosstat’s pre-Coviddemographic forecasts, based on which simple math shows that by the beginning of the 2030s, the number of employed people aged 20-39 should decrease by about a quarter compared to 2017-19. That would be a colossal contraction in the labor force, a major shock to the economy. And it's not just about it shrinking.

Labor productivity varies by age group: it rises until about 40, after which it flattens out for some and decreases for many. The events that we’re talking about in fact affect this youngest group, whose productivity has room to rise. This means that they won’t reach their peak productivity, which will weigh onaggregate productivity and accordingly GDP.

What will happen to the demand for labor? Now employers understand the risk that their male employees could be drafted at any time. Will only women be hired instead?

First, I expect a drop in hiring. It’s always the first and quickest reaction to a crisis. Layoffs are muchslower, as workers are protected in one way or another – by labor laws or their skills. But to stop hiring, get rid of all vacancies, is a matter of a minute. This is exactly what happened in 2020, when in the second quarter layoffs didn’t increase, but rather decreased versus previous years. The contraction in employment occurred just due to a drop in hiring.
Second, if we had a huge number of unemployed women, the available vacancies could be filled by them. However, they too have a very high employment rate currently, i.e. there aren’t so many unemployed women looking for work. In addition, a lot of common jobs have hitherto been predominantly filled by men. For example, taxi drivers. Of course, there are women too, but very rarely. But if we take dump truck drivers, crane operators, welders and so on, then these professions can become “female” only to a limited extent.

The demand for labor is also under pressure. Investments are frozen, many businesses are going under. Founders, managers, key employees go on the run or are mobilized; as a result, business finds itself in a difficult situation. And who will they hire?

Nobody.

Unemployment is seasonal: as you said in a previous interview, it’s lower in the summer, while by the fall people more actively start looking for work, which means an increase in unemployment. How might the announced mobilization affect this trend?

Mobilization can’t affect it, as now we’re observing a reduction in both supply and demand. What will prevail is hard to say. And then, the market is institutionally arranged in such a way that unemployment will always tend to go down. And if more unemployed or potentially unemployed men are mobilized, then that, on the contrary, will reduce unemployment. But we should consider what will happen to demand. If it starts to collapse, then unneeded labor could drive an increase in unemployment. However, since it is impossible to live on welfare in a state of unemployment, people immediately go into the informal sector.

IT people are in the spotlight again. They’ve already been promised partial protection from themobilization, but clearly not everyone will be safe. Specialists are leaving Russia en masse again. Could entire sectors end up suffering from a shortage of workers?

I don’t think that it’ll be entire sectors, as in key sectors employees can be protected from the mobilization, though we don’t know which employees, in which sectors and to what extent they’ll be protected.

What are our most labor-intensive sectors? It’s retail and food service, which, along with construction, account for a little less than 30% of employed people. I think people in these sectors are poorly protected from the mobilization. It means that they might take a hit. But there is a lot of turnover in these sectors.
“If there are problems with work, then people who used to freely change jobs, looking for more interesting options, stop moving around and hold on to what they have."
Mobilized Russian men in Tver Oblast, October 2022. Source: VK 
And this also makes unemployment slightly lower, as a certain share of unemployment is always frictional –someone voluntarily leaves a job and looks for another, and while he’s looking, he technically becomes unemployed. Frictional unemployment has always existed and is an important source of labor market flexibility. It’s how people flow from one sector to another, from one profession to another. But in a recession and crisis, when the value of the your current job – whatever it may be – rises, people limit their movement. This is the situation we see.

In recent years, in its economic programs the government has talked a lot about increasing entrepreneurship and developing small and medium-sized business. However, the mobilization has been a disaster for SMEs – there is no hope for protection, while the loss of just a single specialist in a small company can put an end to the whole business, as you have to spend money to train new employees, etc. Is it possible to forecast a fall in the share of SMEs in the economy at this point?

That seems completely obvious to me. But I'm not going to give any numbers, as any estimates in relation tosmall businesses are very rough. Because how do you count? There are a lot of self-employed people, both registered and unregistered. Should they be considered a small business or not? Because if you count them, then it would be a fairly large share of employment. If not, then the share of small businesses is very small.

Last week, the government officially announced the incorporation of new territories into Russia. According to Renaissance Capital analysts, that could add about 5 million people to the country's population, 3% of the population. Could these people make up for the loss of able-bodied men due to the mobilization?

Of course not. First, it’s important to understand who these people are. If it’s old people and children who couldn’t flee [the war zone], then it isn’t a boost, but an additional burden. Next, the areas that are now controlled by the Russian army are so ruined that it will take a lot of money and human resources to restore them in some way. Thus, these territories won’t “boost” the labor force of the Russian “mainland,” butrather draw labor from it. Moreover, hostilities continue in these regions, so for the time being it is impossible to talk about anything [for certain].

What will happen to the labor market in the long term? After all, sooner or later people (obviously not everyone) will return home from the front, but there’s no guarantee they’ll be able to return to their jobs. Will unemployment rise in that case?

You know, I wouldn't discuss unemployment at all. Because if we’re talking about the long-term consequences, they are very diverse. Unemployment here is at the bottom of the list.

I'm not talking about irreparable losses. It’s worth mentioning such a long-term consequence as deterioratinghealth. Some will return with injuries, some – we know from the experience of past military conflicts – with PTSD, which has a very serious effect on the psyche.
“Another long-term consequence is the loss in human capital among people who fight and people who didn’t. Because some lose skills, while others can’t reproduce them or don’t invest in new ones."
For human capital to accumulate, there must be investment in technology and investment in the skills that support the technology. And in these conditions, where is the investment? So in the long run, all this means a drop in productivity and consequently a loss in wages and income.

What do economists know about such costs?

The fine economist and Nobel laureate Joshua Angrist has a whole series of articles on this topic in relation to Vietnam War veterans. He estimates that the lifetime loss of those drafted in terms of income at about15% versus those who weren’t drafted and weren’t sent to Vietnam. The reason is roughly related to what we talked about: poor health, PTSD, loss of skills and shortcomings in them, because people dropped out of civilian life and their professions for years. And that is only individual losses, as the more people who end up in the meat grinder, the greater the cumulative losses.

Could all the trends in the labor market that we are talking about significantly affect public support for the government and its policies?

In my view, in the current situation the attitude of society toward the government doesn’t depend on the labor market largely. It depends on the extent to which people experience firsthand what is going on. After all, there are already polls showing a drop [of confidence in government]. But I don't think that the labor market will really be an important contributor here.
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