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3The Russian Labour Market in Transition:
Mechanisms of Adjustment and Recent Trends
Marina Kolosnitsyna
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1Introduction
Since 1991 large-scale political and economic reforms in Russia have changed all the existing social structures in the country. This had several implications and among them was the emergence and development of a labour market. As it turned out, the Russian labour market as it has developed is characterized by many peculiar features that are not only uncommon for the developed economies but also for the other transitional economies.
To be able to interpret the Russian labour market situation and its trends it is worth looking back because many of today’s problems have been inherited from the socialist system. What were the main characteristics of labour relations before 1991? First of all, it was the high level of employment. Full (or even excessive) employment was ensured by legislation. In addition, the Soviet government often relied on forced labour, by convicts and the Army, for official communist campaigns to construct new railways, power stations and other important works. Furthermore, relatively low wages made it necessary for all adult members of a family to work. Thus, the Russian economy was characterized by an unusually high share of female labour. Before World War II women represented 35-40% of all employees in the economy, but since 1980 their share in total employment has been consistently above 50%.
Another important feature of the socialist economy was restricted labour mobility. There were institutional measures such as registration at the place of residence and obligatory assignations to a job for college graduates. Moreover, the absence of a housing market made it impossible to change region or city. And finally, a developed system of fringe benefits (housing, hospitals, resorts, kindergartens, etc.), which were very important in an economy characterized by shortages, attached workers to their enterprises, impeding mobility.
As a result of labour resources planning of this kind, the Soviet economy was characterized by the apparent absence of open unemployment. In fact, there were a few regions with excessive labour resources – such as the Central Asia, the Northern Caucasus and the Volga regions. But this problem was quite successfully solved by administrative measures. For example, new enterprises were built in these regions with the purpose of employing people, although the regional and central authorities were fully aware of the fact that they would not be profitable. At the same time, almost all the enterprises had excessive personnel, in the other words: instead of open unemployment the Soviet economy had hidden (or intrafactory) unemployment. The administration was afraid to fire a worker because in the case of an increase in production it was difficult, given the absence of open unemployment, to find new personnel.
At this stage it is necessary to mention the very specific allocation of labour resources between the different spheres of the national economy and the regions of the country. The most important branches were heavy industries, including the defence industry. The branches producing consumer goods and services especially were only of minor importance. That is why at the beginning of market reforms in 1991 Russia had an irrational structure of labour resources allocation, not only between branches of industry and services but also between the regions. Since under the Soviet system a lot of enterprises were built in the regions of new development without a proper economic base, most of them proved to be inefficient. Thus given the new market conditions after the transition a great number of workers faced decreased demand for their labour and monopsonistic power of the employer.
Perhaps the only advantage of labour resources for the new market economy was the high educational level. In the early 1990s the average number of years in formal education of the Russian population was about 11. This meant a labour force of a relatively high quality. This facilitated the future retraining and upgrading needed to adopt new technologies.
2Economic activity and employment under the new market conditions
The beginning of the transitional years was marked by a period of sharp economic decline. In such a situation one might expect a strong decrease in employment as well. In the early 1990s many Western experts and advisors of the first Russian Government predicted that a high level of open unemployment, at least 25%, would emerge within a few years. However, this failed to happen. Although the fall in output was even greater than in the CEE transitional economies, the unemployment level stayed relatively low.
Figure 1. GDP, employment and real wage dynamics, 1990-2004 (%)
Source: Russian Statistical Agency (RSA).
In spite of a GDP reduction of more than 40% during 1990-1998, the decrease in employment during this period was relatively moderate. In the worst year of 1998 unemployment was 13%, which was less than many other transitional countries in decline. Quite obviously, such a big difference between the rates of decline in output and employment imply increased labour hoarding and inefficiency in the use of labour resources. Figure 1 clearly demonstrates that Russian workers had to sacrifice their wages for employment. The specific adjustment mechanism of the Russian labour market made real wages an object of flexibility, not employment. The recovery in growth of the economy after the financial crisis of 1998 has stimulated employment and augmented real wages as well.
Trends in activity
The economic activity of the Russian population measured as the proportion of the working age population in possession of or in active search of a job (15-72 years old) has been decreasing from 1991 to 1998 (see Figure 2). That was a quite natural reaction to the dynamics of labour demand. For example, young women aged below 20 reduced their labour force participation from 29.2% in 1992 to 13.2% in 1998, while in the 20-24 age group their activity decreased from 74.6% to 61.7%. Broadly speaking, those who could replace their market employment by other forms of activity (household production, education) chose to do so. Shortly after the crisis of 1998 the economic activity of the population began its upward trend. As Figure 2 shows, it was similar to the trend in employment.
Figure2. Labour force participation, employment and unemployment rates
(% of population aged 15-72)
Source: Russian Statistical Yearbook. Russian Statistical Agency, 2005.
At the same time economic activity itself changed its structure. The youngest groups of potential workers decided to prolong their education and did not hurry to begin their working careers. Thus the labour force participation of youth continued to decrease year by year until 2005. On the other hand, the economic activity of older groups shows the opposite dynamic. Figure 3 demonstrates quite clearly that the participation level of the “core” age group (25 – 45 year olds) has not changed very much whereas people younger than 20 reduced their participation level almost by half. The increased economic activity of the elderly means a large proportion of pensioners working beyond their official pension age (that is 60 years for men and 55 years for women until now). Accordingly, the Russian labour force is becoming older year by year.
During the transitional period the structure of economic activity has been changing in respect to educational level as well. The labour force in Russia is becoming more and more educated. The percentage of people with a higher professional education (university level) increased from 19 to 26% of the total labour force during the ten years from 1995 to 2004. At the same time people with a basic school education (9 years of secondary school and elementary school) accounted for 14% of the labour force in 1995 and only 7% in 2004.
Fig.3. Economic activity of the population by age groups (%)
Source: National Employment Survey. Russian Statistical Agency, November 2005.
Trends in employment
The employment level, as Figure 1 shows, did not fall significantly during the transitional period in Russia. In 1998, the year of the economic crisis, the number of employed was 85% compared to 1990. After that year recovery in growth increased employment to 88% of the 1990 level by 2004. One should also take into account the demographic trends of depopulation in Russia. The total number of Russian citizens has fell by 4 million from 1990 to 2005. On the other hand, the number of people of working age has been growing steadily from 83.7 million in 1989 to 90.2 million in 2005. Thus the dynamics of the employment rate (Figure 2) reflects both the changing number of employed persons and the increasing working age population.
Meanwhile, workers’ mobility between jobs became quite intensive during the transition. The gross coefficient of turnover (the number of hired persons plus the number of those leaving their jobs in proportion to the total number of workers) was in the range of 48 to 60% (1995-2004). As Sabirianova (2000) argued, “the destruction of existing jobs and occupations and the creation of new opportunities are important explanations for the increased occupational mobility in transitional Russia”. Kapelyushnikov (2001a) objects to this opinion, pointing out that the share of newly created jobs was relatively low compared to other transitional economies. He also notes, that the labour reallocation from state to private enterprises in Russia was overestimated because of a measurement problem. Official data state that in 1991 13% of the employed worked at private enterprises, while in 2004 this figure was already 52%. In fact, a large number of state enterprises were privatized to the workers and have not changed much. A change from state enterprise to privatized state enterprise does not imply a more effective labour allocation.
The structure of employment by branches of the economy was modified during the transitional period. This was quite predictable given the specific industrial structure of the socialist system which was characterized by a high percentage of heavy industries. In a market economy one would anticipate an increasing share of industries producing consumer goods and services.
Fig.4. Employment dynamics by branches of economy (% of total employment)
Source: Labour and Employment in Russia. Russian Statistical Agency, 2005.
Labour and Employment in Russia. Russian Statistical Agency, 2001.
According to statistical data (Figure 4), the share of manufacturing and agricultural employment has been decreasing while employment in trade and services have mainly increased. However, only the growth in trade and financial services can be attributed to the development of the new private sector of the economy. Employment growth in education, health care and especially administration represents an expansion of the quasi-market part of the economy in which mainly public employers operate. Gimpelson et al (2000) compared the employment structure in various regions of Russia and concluded that the share of the public sector in employment grew rapidly in poor regions with a higher level of unemployment and higher amounts of federal budget transfers and loans. In these regions employment in the public sector is a substitute for open unemployment, regional governors using it to buy votes for elections. Public sector workers in these regions turn out to be “hostages” for extracting new federal transfers.
Temporary employment
During the fifteen years since 1991 employment patterns in Russia have been changing substantially. In particular, we should stress the rise of temporary employment which includes fixed-term employment and contract employment. These forms of worker-employer relations have become more and more popular recently. Another form is casual employment that is characterized by very short contracts and often by informal agreements. In 2005 the share of temporary employed accounted for 8.2% of total employment, the share of casual employed – about 4% (Employment Population Survey, 2005).Though these figures seem relatively small, we should not forget that in 1992 the share of the temporary employed was only 2.6%. Moreover, during the post-crisis period of 1999-2002 the share of temporary jobs among newly created jobs was almost 25% (Gimpelson, Kapelyushnikov,2006). Temporary as well as casual employment is more typical for male workers, for people with secondary or primary education and for those living in rural areas.
An important implication of rising temporary employment is that it has created a growing labour market flexibility that has helped to prevent higher levels of open unemployment. Employment agreements of this kind have obvious advantages for entrepreneurs who are quite free to hire and fire personnel without complications. They make labour input cheaper and raise firms’ competitiveness. On the other hand, temporary arrangements make workers more vulnerable and their employment and incomes less stable.
Multiple jobs and overtime working
Another feature of Russian labour market (in which Russia is similar to other transitional economies) during 1991-2005 was the fact that increasingly workers were starting to hold multiple jobs. Having a second (or even a second and a third) job became for many families the only way to compensate for decreasing incomes, to make up for delayed wages in their primary jobs and to offset government transfers (pensions, benefits) that were falling in real terms. It is difficult to estimate the scale of this phenomenon precisely as there are many different sources like the Employment Population Survey (conducted by the Russian Statistical Agency), the Russian Longitudinal Monitoring Survey and other special surveys of the labour market, all producing outcomes that differ substantially. The estimations vary from 0.7-0.8% to 16-18% of the employed for various years (Kapelyushnikov, 2001a). The average figure for 2005 that seems most plausible is the RSA estimation at 4.5-5% of total employment. Another 13% of employed were looking for a second job in 2005.
The number of hours actually worked is another good indicator of over employment. It is not necessary to look for another job if the existing one allows workers to work more for additional earnings. Many Russian workers chose such an option which employers find preferable as well (they can save on hiring and training costs, social benefits etc.). The standard working week in Russia, in accordance with labour legislation, is 40 hours for the main categories of employed. There are, of course, a number of exceptions, for example, the working week is shorter for very young workers (under 18s), or for certain professions and so on. Actually, the average number of hours worked during a week was 37.2 in 1992 and increased to 38.3 in 2005. This is quite a high figure taking into account part-time workers and those with an officially short working week. On the other hand, the share of people working more than 40 hours a week was the highest in the difficult year 1992 - 15.4% - and then decreased to 14% in 2000 and further to 8.4% in 2005. The share of workers with less than 20 hours of work increased simultaneously. Generally this last tendency could be explained by better economic dynamics. In the first part of the 1990s many employers had to send their workers on involuntary leave that reduced the number of hours actually worked. After the 1998 crisis the recovery in growth of the Russian economy gave rise to labour demand from enterprises making involuntary leave quite rare.
Pensioners’ employment
The employment of old-age pensioners was quite common in the Soviet Union. Reliance on pensioners’ employment was one of the ways of dealing with the shortage of labour in the economy. However, at the beginning of transition period decreasing overall employment did not affect pensioners. The share of pensioners in total employment has remained surprisingly high.
The important role of pensioners is by no means a specific feature of the modern Russian labour market. According to official data, in 1960, the share of pensioners in Russia represented about 12% of the total population. The figure rose to 15% in 1970, 18.5% in 1989 and 26.5% in 2004. In 2004 77% of Russian pensioners were old age pensioners (Russian Statistical Yearbook, 2005). Other categories with pensions are, for example, disabled people, children who’s parents died; retired military servants and school teachers could get pensions after 20 years of service.
To explain the high level of pensioners’ employment in the Russian economy it is worth noting, first of all, that Russian legislation allows pensioners to work and to accumulate their full pension benefits with salary. Thus additional income is the main reason for the elderly to work. Another reason that was mentioned in the literature is that pension arrears were quite common in the mid 1990s (Richter, 1998). The real pension in Russia was always very low, but the replacement rate (compared to the average wage) increased just slightly and then decreased dramatically during the transition period (see Table 1). The living standards of pensioners have declined substantially. This fall in the level of pension benefits has forced many pensioners to continue working or to look for a job again.
Table 1. Number of pensioners and pension benefits in dynamics
1990 / 1995 / 2000 / 20041 / Number of pensioners (thousands) / 32848 / 37083 / 38411 / 38184
2 / Number of old age pensioners (thousands) / 25659 / 29011 / 28813 / 29213
3 / Population (thousands) / 147665 / 148460 / 146890 / 144168
4 / Share of old age pensioners (2): (3) / 17.4 / 19.5 / 19.6 / 20.3
5 / Average old age pension benefit,
thousand roubles / 0.121 / 258.5 / 0.894 / 2.214
6 / Average monthly wage, thousand roubles / 0.311 / 528.8 / 2.736 / 7.865
7 / Replacement rate (5): (6) / 0.39 / 0.49 / 0.33 / 0.28
Source: Russian Statistical Yearbook. Russian Statistical Agency, 2005.
Moreover, in accordance with Russian legislation, women are entitled to a pension at the age of 55, men at the age of 60. That is quite generous compared to pension systems in Western and Eastern European countries. In addition there are many professions giving people the right to early retirement – for example, military service, school teaching, working with chemicals and so on. That is why the effective pension age is even lower. The facts mentioned explain the high labour supply among relatively young pensioners (see Table 2). Men over 60 and women over 55 made up to 7% of total employment in 2005.