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Russians only live well thanks to ‘grey’ incomes

The widespread belief that wage increases in Russia outstrip growth in productivity is no more than a myth, Deputy Director of the HSE Centre for Labour Market Studies, Rostislav Kapelyushnikov claims in an article ‘Productivity and wages: a little simple arithmetic’. Besides, in recent years we have seen a fall in the cost of labour, particularly in industry

It’s a commonly held view that wages are growing faster than productivity in Russia, which reduces competitiveness for individual companies and for the economy overall. At the end of 2013 Russia’s leaders began to talk about ‘living beyond our means’ and a dangerous escalation of wages in spite of dispiritingly low levels of productivity 

The Minister of Economic Development, Alexei Ulyukayev declared, ‘An increase in productivity is the only way we can create economic growth and improve our country’s competitiveness’. Today with the economy being in a worse situation, low productivity is being blamed for all our woes. 

In his article in the journal Voprosi economiki (Economic Issues) Proizvoditel’nost i oplata truda: nyemnogo prostoi arifmetiki, (Productivity and wages: a little simple arithmetic) Rostislav Kapelyushnikov shows that the conventional wisdom that wage increases are outstripping productivity growth has little in common with what is going on in reality in the Russian economy today. Over the last fifteen years, wages and productivity have been relatively in balance. While there has been a predominant tendency towards lowering wages in some sectors. 

Kapelyushnikov claims that this misapprehension of wages outweighing productivity came from data being presented incorrectly. 

The real size of wages and the gross added value can be measured using various price indexes: the index of consumer prices in the first instance and the GDP price deflator in the second. The GDP deflator is a price index created to measure general price levels for goods and services (the shopping basket) over a fixed period in the economy. ‘However, when we are interested not in the consumer power of wages from the point of view of a worker, but the expense of labour from the point of view of an enterprise (in other words, not consumer but producer wages) deflation in both instances must come from using one or other of the price indicators and chiefly the GDP deflator’, explained Kapelyushnikov. Using statistical data in that way changes how we perceive the real situation.  

Business economizes on workers 

Kapelyushnikov concludes from his accounts that overall, the growth in wages and productivity in the last fifteen years was not equal. For six out of the fifteen years productivity grew faster. At its peak it reached 17.6% in 1999. For the other nine years productivity grew more slowly than wages. The biggest lag of 10.3% was in 2009.  

Throughout the period industrial business managed successfully to save money on wages. 

Recently owners of companies (relatively speaking) have paid about one and a half times less for labour (if you don’t include hidden payments) than in 1997 or 2003. From every rouble of added value created in industry in these years, a little more than 20 kopeks have gone toward paying official wages and together with contributions into social funds – slightly more than 25 kopeks.     

‘Russian industry has never had it so good in this respect’, Kapelyushnikov concludes.  

He also underlines that between 2003 and 2012, productivity in manufacturing grew faster than wages for six out of ten years. For two other years these indicators were on a par. 

Over the last 15 years, labour costs in manufacturing have gone down by a quarter. Primarily at the cost of production of charcoal and oil products (labour costs fell by almost five times in 2003-2012), also in the textile industry (a reduction of more than a third), shoe production (almost two times), also car and toolmaking ( reduced by 20%). While wages for workers in energy distribution, heating and water for those same six out of ten years grew faster than productivity. This could be one of the reasons for the rapid increase in utilities prices. 

The author describes the scale of the fall in the cost of manpower in the mining sector as ‘fantastical’: more than 2.5 times – from 37.5% in 2002 to
14.3% in 2012. The amount paid to social insurance schemes for them fell to a
third from 9.4% in 2002 to 3.2% in 2011.

Periods of cheapening labour are connected to the financial crisis of 1998 and with 2004-2005 when a tax reform was superimposed on the sharp rise in the cost of raw materials exports which included a significant fall in insurance payment rates.     

Kapelyushnikov emphasizes, ‘The tendency towards cheapening of manpower was not limited to some comparatively small number of areas of production. It was effectively universal and gripped the majority of various sectors of Russian industry’.  

At the same time, the amount of wages in the GDP remained the same as at the end of the 1990s – around 50%.  

‘Grey’ wages increase citizens’ well-being 

The opinion that productivity isn’t keeping up with wage increases exists alongside the seemingly opposite belief that wages in Russia are some of the lowest in the world. The paradox doesn’t make people question their views but Kapelushnikov explodes this myth as well. 

Russia’s position in inter-country ratings depends on whether or not hidden wages are taken into account. If they are, Russia lands somewhere in the middle of the list of economically developed countries. Its share of wages in GDP is higher than in Poland, Slovakia, Norway, South Korea and similar to that of Hungary, Finland, Spain or Austria. 

If we only take official wages and don’t mention the hidden payments, Russia tumbles to the bottom of the list. Only Mexico and Chile have a lower share of wages in GDP. 

‘As far as the structure of distributing primary incomes goes’, explains Kapelyushnikov, ‘Russia looks like a normal country with a medium, by world standards, share of recompense for work in the GDP. If we do have some peculiarities it is not in the low share of wages in the GDP so much as in the high share of hidden wages’.    

At the same time, he emphasizes, the spending on wages can vary between countries depending on how their economies are structured - some have more labour intensive economic activity than others. In this respect Russian indicators of the share of wages in GDP (about 40% for industry and above 50% for manufacturing) hardly differ from those of most post-socialist countries.

November 05, 2014