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Labour Law: A Barrier to Both Hiring and Laying Off

Compared with large companies, small and medium-sized businesses in Russia find it easier to avoid complying with the country’s strict labor legislation because they are able to skirt its regulations. Meanwhile, large companies, which ensure they abide by the law, offset their extra costs by paying lower wages. Here are some findings from “Employment Legislation as a Factor of Employer Behaviour”, a research paper by Olga Mironenko

The Labour Code as an Obstacle to Economic Growth

The economic crisis has brought labour legislation into sharp focus globally. Governments struggle to find the right balance between protecting employees and allowing employers to optimise their operations and cut costs.

In 2008, Russia ranked 8 out of 40 countries on the OECD employment protection index with regard to strictness of employment protection for regular job contracts. In fact, Russian employees on regular contracts may be even better protected, since OECD estimates do not account for regional differences across the country (iehigher job security in the Far North).

Russian businessman Mikhail Prokhorov was the first to initiate the public debate on labour law in Russia. In 2010, he said that ‘the existing labor legislation is a barrier to the innovation-driven development of the country’ and that it failed to promote labour productivity (which is 4 to 6 times lower in Russia than in developed countries). According to Prokhorov, the current Labour Code is not beneficial for businesses since it prevents employers from managing their operations effectively. In 2012, the Russian Chamber of Commerce and Industry Committee for the Labour Market and Human Resources chaired by Prokhorov came up with a new version of the Labour Code designed to improve the situation for employers by reducing the required employment safeguards (making it easier to fire and lay off workers, etc.).

Employment Protection: The Most Sensitive Aspect of the Labour Law

Employment protection is clearly the most sensitive aspect of the labour law, determining in many respects whether or not employers will continue to operate legally, hire more people, upgrade their production facilities, etc.

Russian employers are likely to see the employment protection legislation as an increasingly tough limitation with a consequence of less hiring as well as less firing and letting go.

In her paper Employment Protection Legislation as a Factor of Employer Behavior: What the Microdata Suggests, Olga Mironenko, a researcher at the HSE Laboratory for Labour Market Studies (LIRT), looks at ways businesses adapt to the strict Labour Code, whether compliance correlates with employee pay levels, and how common less than full complianceis.

‘For firms, compliance with this legislation comes at a cost – and the higher the cost, the more expensive it is for employers to terminate standard (time-unlimited) labour contracts with employees made them redundant due to economic, organisational or technological changes, and the lesser their ability to hire new employees under time-limited contracts. And, depending on the probability and number of penalties for noncompliance, employers will decide to what extent they will comply with the employment protection law and how they will adapt to it,’ explains Mironenko.

Strictness Is Offset by Noncompliance

In 2009, LIRT surveyed 1,108 Russian enterprises across industries of various sizes, types of ownership, and geographic regions to assess the impact of employment protection legislation on businesses. The respondents, company CEOs or their deputies as well as heads of HR, were asked to assess the strictness of the legislation with regards to hiring and firing (or laying off) employees on a scale from 1 to 10, where 1 being fairly liberal and 10 being very strict.

Mironenko says that the year 2009 was not a random choice. One of the survey objectives was to collect data on the behavior of enterprises during the 2009 crisis. ‘This aspect is important for the study, since the impact of labour legislation is particularly prominent during periods of economic fluctuations when employers are forced to adjust the number of their employees,' she explains.

Empirical research reveals that the employment protection legislation is seen as more liberal by employers in the sectors of commerce, finance, and services, by firms without public [government] ownership, by those who did not receive crisis relief subsidies from the government in 2009, and also by those who have added employees.

Bigger companies – those with a longer history of operation, those related to the industrial sector of the economy, those partially owned by the government, and those that faced a drop in the average number of employees between 2008 and 2009 – perceive the new labour legislation as strict.

For example, 73.1% of small businesses rated the labor legislation as very liberal and more or less liberal, while only 58.2% of the executives of bigger companies were similarly happy with the Labour Code. In the services sector (commerce and maintenance), 76.9% of respondents described the LabourCode as liberal, compared to 61.8% in the industrial sector.

In interpreting the findings, Mironenko refers to the fact that some companies, but not others, can avoid strict compliance with the Labour Code. ‘On average, [Labour Code] enforcement is weaker with regard to private enterprises in the spheres of commerce, finance or services – compared to public enterprises and industrial companies; therefore, the former can adapt to the strict legislation through evasion or violation of its provisions. In contrast, crisis relief received from the government is associated with increased enforcement and, therefore, increases the likelihood that companies will perceive the law as strict. An increase in the number of employees is associated with seeing the law as more liberal, indicating that Russian employers are not concerned about the cost of compliance at the moment of hiring, and, therefore, the legislation does not influence how many workers will be hired,’ concludes Mironenko.

More Protection, Less Money

Regression analysis also showed that employers who perceive employment protection legislation as very strict tend to pay lower wages to offset the cost of compliance. ‘However, as the perceived level of strictness approaches its maximum, this cost-recovery mechanism stops working. Perhaps this is due to the fact that the group of employers who perceive the labour legislation as having the highest level of strictness also have a strict wages policy (so wages cannot be lowered). These companies are the most likely to be negatively affected by the employment protection legislation in terms of the number of people they hire and let go,’ says Mironenko.

She also notes that employers who cannot, for whatever reason, pay lower wages to employees in starting positions within an organisation may instead change the amounts of wage increases awarded to employees as they get promoted, ie recover the cost of employment protection gradually over the course of the employee's employment with the company, rather than at the time of hiring. A similar situation occurs when a worker's pay has a large variable component (ie bonuses or informal payments) that is subject to the employer's discretion more than a basic rate of pay would be.

No Hire, No Laying Off

The frequent statements by representatives of Russia's big businesses concerning the need to liberalise the country's labour legislation indirectly support the survey finding that some Russian companies cannot fully offset the cost of employment protection, which limits their ability to manage their workforce.

Since the trend towards stronger enforcement of the labour legislation in Russia first emerged even before the economic crisis, we can expect Russian employers to regard the employment protection legislation as an increasingly tough restriction which, unless formal rules and other market institutions change, will reduce the likelihood and scale of hiring as well as firing (or laying off), concludes Mironenko.

 

February 07, 2013