No Crisis Wage Cuts in Russia
Russian firms rarely cut employees' nominal wages, even facing a decline in business turnover during crises. Instead, they tend to freeze nominal wages at a certain point, while allowing real wages to shrink due to inflation.
However, wage rigidity can adversely affect the labour market's ability to adapt to a crisis and thus may drive unemployment, notes Alexander Larin, explaining that firms "burdened by expensive employees," are unable to hire new people and otherwise adjust their workforce according to need.
Larin examined the reasons for nominal wage rigidity in Russia, the prevalence of this approach and which industries use it most often.
His empirical analysis is based on the RLMS-HSE panel survey data from 2004 to 2013 (1,530 observations). He presented his findings in the report 'Downward Nominal Wage Rigidity: Unions' Achievement or Employers' Choice?' at a joint seminar of the Laboratory for Labor Market Studies and the Centre for Labor Market Studies.
Inflation Helps Employers Save on Wages
According to Larin, both institutional and non-institutional factors can contribute to wage rigidity; the former include legally established minimum wage requirements and the union activity to protect workers' rights, while the latter are based on firms’ policies of keeping nominal wages intact to avoid greater loss. "Such policies are based on loss aversion," Larin explains. "When firms cut wages by just one thousand rubles, they can expect productivity to drop more than it would increase if wages were raised by the same amount." Thus, companies may fear a decline in employee effort and discipline, the loss of valuable employees, and the need to invest in recruiting and training new staff."
Larin's findings suggest that despite weak unions, Russia has high wage rigidity, meaning that Russian firms are more likely than employers in many other countries to freeze rather than cut wages.
According to Larin, in 65% of observed Russian firms, wages did not change during the crisis. For comparison, in western countries, Portugal has the highest rate of wage freezes at 58%, while in the U.S. and the U.K. the rates of wage freezes are far lower at 5% to 20%.
As noted above, Russian firms freeze wages voluntarily irrespective of any government pressure.
Larin explains this practice by the fact that high inflation allows firms to cut real wages and thereby reduce costs while keeping nominal wages intact and thus avoiding conflict with unions and employees.
There is an unconfirmed hypothesis that in Russia, employee performance drops more in response to wage cuts than it does in many other countries, Larin adds.
Wage Cuts Lead to Layoffs
According to Larin, the likelihood of wage rigidity is lower in larger firms, and, other things being equal, is also lower for industries with tariff agreements between employers and unions. In retail and finance – sectors with the weakest unions in Russia – wage rigidity can be even higher than in other sectors where unions are more influential. Larin explains this apparent paradox by citing a high mobility of workforce in non-unionised sectors; employers choose not to cut wages to avoid losing employees.
Similarly, high workforce turnover and lower starting wages can explain relative wage rigidity in smaller firms. According to Larin, firms with up to 10 employees have a 10% higher likelihood of wage rigidity than firms with 11 to 100 employees.
As to unions' non-interference in firms' wage policies, Larin suggests that unions seem to be more concerned about employment in general, which, in turn, is an alternative to wage cuts.