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Demographic decline to support labour market

The labour market in Russia differs from that in other countries. The Russian labour market does not react to decline and crisis with growing unemployment, and the market recuperates quickly. The reason for this is that employers have a great amount of flexibility; they do not fire employees, instead cutting their pay and work hours, according to the Deputy Director of HSE’s Centre for Labour Market Studies Rostislav Kapeliushnikov.

Russians’ overall welfare has improved over the last several years. Unlike western countries, there has practically never been a problem with unemployment, and wages have increased more than workforce productivity. The labour market has already felt the impact of the current economic crisis, however, and the sharp decline in the number of job vacancies serves a clear example of this. In the very worst-case scenario, there might be a large-scale spike in unemployment, and social tensions might rise. But more optimistic forecasts do exist, and unemployment might not increase at all, Rostislav Kapeliushnikov said at the Gaidar Forum.

Protection from Unemployment

According to Kapeliushnikov, Russia now has a unique labour market model. Russia’s market model differs from that in other countries in the way it functions and reacts to external shocks. Economic decline traditionally entails a rise in unemployment that is similar in scale, but in Russia, unemployment figures are not high, even during the strongest crises. ‘Absolutely apocalyptic expectations reigned at the start of market reforms in Russia. It was assumed that unemployment might soar 20%. But this didn’t happen. The Russian labour market shocked and went against everyone’s expectations – the expectations of both experts and politicians,’ Kapeliushnikov notes.

Despite the deep decline the economy experienced in the early 1990s, unemployment grew at a slow pace. When GDP fell 20%, employment was down only 15%.

The Russian labour market has adjusted to economic shocks in its own way – by lowering the amount of time spent at work and lowering real wages. In a crisis, real wages have fallen threefold, which has largely served as a social shock absorber by extinguishing negative phenomena in the social sphere, Kapeliushnikov posits.

After the end of the first crisis in the history of modern Russia, the restoration of the labour market was underway alongside overall growth, but this took place in opposite directions. Working hours and wages grew rapidly, while the unemployment rate fell gradually.

A similar picture was observed in the 2008-2009 crisis. The labour market reacted to economic decline equally with a drop in the number of employees coupled with lower work hours and wages. And this is all despite the fact that the expert community was again forecasting a sharp rise in unemployment and social fallout.

Ruble's Depreciation to Protect from Mass Layoffs

We have now reached another fork in the road, and again, it is not evident how the labour market will react to the new crisis. It is not clear if adaptation will take its previous path or chose a new one, like the rest of the world has.

Rostislav Kapeliushnikov believes that the Russian model of the labour market will likely withstand the test of today’s crisis as well. He does not believe unemployment will rise very significantly, and posits that demography will play an important role here.

Kapeliushnikov notes that the economically active population is shrinking, meaning there will not be an excess of employees. ‘The Russian economy has come very close to a deep shock in labour supply. Over last three years, the rise in the number of economically active individuals has been at the same level as the increase in the number of employed, and an influx of workers is not expected for demographic reasons. By 2030, the economically active population will total between 6 million and 9 million people,’ he warned.

In addition, the natural unemployment rate has been falling substantially due to changes in the structure of the workforce. The proportion of groups with a high risk of unemployment – youth and undereducated adults – has also been on the decline. This not only does not increase unemployment, but potentially cuts it by 1.5%. This is, however, only a measurable gain and is not real, of course.

The depreciation of the ruble will also help keep the number of layoffs down. According to Kapeliushnikov, the current situation differs from the 2008 crisis in that it will now be easier to cut people’s real wages. They will simply be eaten up by inflation. ‘By not indexing, it will be easier and simpler for companies to lower real salaries,’ he notes. Additionally, this time the government is not taking measures to complicate salary cuts. The salaries of state employees, as well as benefits and pensions, are not being raised, which was something that complicated the pricing adjustment on the labour market in 2008-2009.

In addition, a large buffer now exists on the labour market in the form of foreign (migrant) workers. Layoffs will affect this group most of all.

At the same time, a drop in trade might have a negative impact on employment. Sales workers might find themselves in the informal sector of the economy, but due to the increased number of ‘supervisors,’ moving to this sector of the market might be complicated.

 

January 26, 2015