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As famous writer Fedor Tutchev said, we couldn’t understand Russia by mind and common yardstick to measure not.
These lines very clearly reflect the specifics of many processes in Russia. The process of labor market formation isn’t an exception. A unique “Russian” way of labor restructuring emerged, as soon as market reforms started in Russia. To a large extent this was due to the fact that labor relationships were most tightly regulated segment of the planned economy.
Ministry of Education and Science of the Russian Federation
Federal Agency
for Education
State Educational Institution of Higher Education
“Khabarovsk
State Academy of Economics and Law”
Faculty of International
Economic Relations
Department of
Foreign Languages and Intercultural Business Communication
TERM PAPER
on: Labor market
in the national economy
Рынок труда
в российской экономике
Student _IE-81______ _______ ___________ N.N. Grigorovitch
№ of group date sign
Advisor: Candidate of Pedagogy assistant, Professor N.A. Petrova
Khabarovsk 2011
Content
INTRODUCTION
As famous writer Fedor Tutchev said, we couldn’t understand Russia by mind and common yardstick to measure not.
These lines very clearly reflect the specifics of many processes in Russia. The process of labor market formation isn’t an exception. A unique “Russian” way of labor restructuring emerged, as soon as market reforms started in Russia. To a large extent this was due to the fact that labor relationships were most tightly regulated segment of the planned economy.
Roughly, the formation of current Russia’s labor market began since late 1980’s to early 1990’s. It is logical to identify this particular period as a beginning of current Russia’s labor market formation, because exactly at this time radical economic change in all spheres of the Russia’s economy began. In Soviet times government acted as a single employer and entirely controlled situation on the labor market. Even separate market elements of socio-labor relationships (freedom to choose areas to apply working skills, independence in employment and dismissal of employees, monetary form of compensation) were under the tight administrative control.
Today the situation on the labor market of the Russian Federation is totally different. Government doesn’t act as single employer and workers have a lot of options for work.
But how did Russia’s labor market go through the hardest periods of transition? And what are the peculiarities of labor market model evolving in Russia? What was the reaction of Russia’s labor market to financial crisis? What are the characteristics of today’s Russia’s labor market?
Answers to these questions will be found through analyzing the main features of national labor market during 1991-2008 and the impact of financial crisis on labor market during 2008-2010. Besides, there will be emphasized the tendencies of today’s Russia’s labor market.
1 The features of development of Russia’s labor market during 1991-2008
1.1 The characteristic processes in Russia’s labor market during 1991-2008
The actual formation of the labor market subjects (economically separate and independent owners of labor, employers and government) started since the late 80's and early 90's. Additionally awareness, formulation and implementation of self-behavioral strategies came at the same time. Adoption and entry into force of the laws as: "On Cooperation in the USSR" by (26/05/1998), "On Enterprises and entrepreneurial activity (from 12.25 in 1990)," Employment in the USSR "(from 04/19/1992), meant legalization of labor market and creation of preconditions for the formation and its development. [3]
Three main stages in the evolution of Russian labor market can be distinguished. The first is from 1991 to 1998 and this period became a reflection of deep transformational recession. The second is from 1999 up to early 2008 and this period can be considered as post-recession recovery period. And the third is a period from the second half of 2008 till the present days, which covers world financial crisis and its impact on Russian labor market and its consequences.
At
the start of systemic transition, both government experts and independent
analysts provided negative forecast of an explosive rise of unemployment
to a level comparable with that in the US during the Great Depression
(approximately 25%). However, these forecasts were wrong and no catastrophe
occurred to the Russian labor market. Instead, unlike the labor markets
of most Central Eastern Europe (CEE) countries, it demonstrated a surprisingly
high level of mobility and flexibility. Gradually, it became evident
that the Russian labor market is conductive to the proliferation of
various “non-standard” behavioral patterns that either do not exist
in other economies or play a minor role. One thing that should be clarified
is that Russian labor market pattern wasn’t formed by premeditated
scheme and such spontaneously developed adjustment mechanisms as administrative
leave, involuntary work on shortened hours, widespread multiple job-holding,
massive wage arrears, and “shadow” labor compensation proved to
be a really unusual for those who expected that the Russian labor market
would respond in a “standard” way to the shocks of systemic transition.
[2]
The first characteristic phenomenon of Russia’s labor market is a stable employment and low unemployment.
In figure 1 (Annex), it can be seen that employment remained stable and steady to the economic shocks (either negative or positive). The connection between the employment dynamics and GDP dynamics was visibly weak: despite the fluctuations in GDP dynamics, number of employees almost didn’t change. During the transformational recession period GDP shrunk by 39-40% from 1991-1998 and employment fell by less than 15%. In other words, each percentage point output decreasing was followed by approximately 0, 3-0, 35% of employment reduction. (In most CEE countries employment dynamics followed output closely, in fact f 25-30% fall in GDP brought a 10-30% fall in employment.) The Similar asymmetry was seen in the economic recovery period, when GDP growth was for 8,5% and employment growth was for 7-8%. As a result, employment to population ratio has remained unexpectedly high. Initially, it decreased from 71.8% to 58.4% but then – during the recovery period - reached 69%. This puts the Russian employment level significantly above the average for other post-socialist countries. [4]
According to relatively stable employment, it is reasonably to notice that unemployment tends to be the same (almost stable). (Figure 2, Annex) Unemployment was changing in Russia in a rather atypical way. The trajectory of unemployment changed gradually and slow and only on the seventh year of market reforms the rate of general unemployment passed the 10% level. The highest level was reached in 1998 on the point of 13,3 %. Bearing in mind the depth of transformation crisis, unemployment rate was disproportionately low in comparison to post-socialist countries. (Figure 3, 4, Annex)
Nevertheless, recession was deeper and protracted in Russia; unemployment had never reached peaks, which were characteristic for other reformed economies as it can be seen from the graphs.
As
for registered unemployment it was atypically low. During 1992-2008
it fluctuated from 1,4 to 3,6 % and in the first half of 2008 remained
at point of 2%. (Figure 2, Annex) None of the CEE countries could
maintain the same low registered unemployment. (Figure 4, Annex). One
more thing about unemployment in Russia is that, as it’s shown on
the figure 2 (Annex), there was a great gap between general and registered
unemployment. General unemployment exceeded registered 3-7 times. The
huge gap between registered and general unemployment rates in Russia
signaled that the majority of jobless people believed that the benefits
of official registration didn’t outweigh the costs. Thus, they prefer
autonomous job seeking. The proportion of long-term unemployed also
remained rather moderate in Russia. The share of this group among surveyed
unemployed amounted to 41% in 1998 and among registered unemployed,
just 19%. In most transition economies, 40-60% of all unemployed have
been seeking jobs for longer than one year.[2]
1.1.2 Workforce mobility
In order to explain such employment and unemployment indicators, it is reasonable to suggest that it is connected with the intensity of workforce mobility. In other words, such characteristics of employment and unemployment could take place if it is inactivity from the both sides. Employers didn’t dismiss workers and workers didn’t quit. Assumption that intensity of workforce mobility in 1990s should be low (because it seemed natural that Russian employees would be afraid to enter the open labor market and lose their jobs, even if this job wasn’t attractive for them, and on the other hand, employers would do as much as it is possible in order not to dismiss workers no matter how poor their economic position was) proved to be wrong.
The gross worker reallocation rate defined as the sum of the accession rate and the separation rate across all firms reached 43-62% for the whole economy and 45-65% in the industrial sector. Monthly approximately 1 million of workers accessions occurred and 1 million of workers left their jobs. Such activity of Russian companies in hiring was a paradoxical. (Figure 5, Annex) This data shows that, compared to employees in CEE countries, Russians were less attached to their jobs and each year a larger part of them became unemployed. Thereafter, they more easily and quickly found new jobs, thereby moving quite rapidly from the labor force to inactivity and vice versa.
It’s worth mentioning, the rates of dismissals on the initiative of employers were not spread. Resignations were predominant and averaged 16-25% of payroll staff or 65-80% of the total number of separations.
As it was said
assumption that stability of employment was provided by low worker turnover
was not right, because empirical facts didn’t prove it. Therefore
some other factors should be at work here. Two other interconnected
factors are flexible working time and flexible wages. [4]
1.1.3 Flexible working time and flexible wages
As it is illustrated on the figure 6 (Annex), indicators of working time fluctuated in a wide range. For the first 5 years of the transition, annual duration of working hours in the Russia’s economy was shortened by 12% and by 15% in the industrial sector. Further, duration of working time grew rapidly and increased by 6% in the whole economy and by 16% in the industry by 2008. This distinguished Russia from other post-socialist countries, where working hours remained virtually unchanged. Cutting hours was one of the cheapest ways to adjust labor costs.
Compression of working hours was carried out in two main forms:
A peak of these two forms implementation fell on the middle of 1990s, when annually 6-15% of workers experienced short- time work and 8-15% were in involuntary administrative leaves. (Proliferation of involuntary administrative leaves was stimulated by obligations to compensate violation for workers which were in leaves. It made possible to reduce costs for this form of part-time employment approximately till zero.) Two to three millions were engaged in part-time employment and involuntary administrative leaves monthly. But in 2007 the situation changed in a positive way and 0,2 millions worked on shortened schedule and 0,4 millions were in administrative leaves. These figures were equivalent to 0,5-1% of all workers employed in Russia’s firms. (Figure 7, Annex) Fast recovery in working hours and the wide use of overtime work limited employment growth in the boom period. As labor costs were reduced by shorter hours, GDP fall was accommodated by wage flexibility.
The accent was made on such mechanisms as: delays in wage payment, “shadow” compensations. Besides, it is necessary to emphasize the high inflation level, which undermined real wages since nominal ones were not subjected to automatic indexation. (Due to indexation wage increases on magnitude of inflation). The reduction in real wages was associated with 3 negative macroeconomic shocks, when inflation speeded up dramatically. The first shock was connected with price liberalization in 1992, the second shock was in October 1994, so called “black Tuesday” and the third was in August 1998, when default was declared in Russia. In the post-crisis period, although inflation remained high, decrease in nominal wages was outstripped. Annual growth rate was about 10-20% and during post-crisis period real wage tripled, comparing to 1999.(Figure 8, Annex)[2]
Another no less specific adjustment option could be viewed as “shadow” compensation. This does not refer to non-registered income from small businesses or illegal activities, a phenomenon well known to many economies in the world. Russia’s specifics lie in the fact that large and medium-size enterprises in the legal sector account for the major part of “shadow” compensation. They either disguised wages under other forms of remuneration, or paid them in cash on the basis of informal agreements with employees. Whereas in 1993, “shadow” wages amounted to 20% of the “shown” wages, in 1996-1998, this proportion had increased by 45-46%. Therefore, one-third of total compensation was carried out in “shadow” forms.
Delays in wage payment have been used as a unique adjustment strategy. This phenomenon is almost unknown in other market economies both mature and in transition. On average in 1996-1997, the previous month’s wages of 50% of all employees had not been paid on time. After the August 1998 financial crash, the proportion of employees with delayed wages for the previous month grew to an enormous 71%. In real terms wage arrears increased by 10 times during the crisis period. The resumption of economic growth became the turning point in the evolution of wage arrears, when all indicators got better. In the middle of 2008 arrears of wages was about 2% of mensal wages bill. (Figure 9, Annex)[4]
2 The main tendencies on Russia’s labor market during 2008-2011
2.1The reaction of Russia's labor market to the financial crisis in 2008-2009
From the end of 2008 till April of 2009 there had been a high tension in the Russia’s labor market. And the most troubling indicator was the level of general unemployment, it reached the point of 10,2 % and it was higher than 2008 about for 4 %. The adaptation of labor market to decreasing of the business activity includes 3 directions: reduction of working time and employment, decreasing of real wages. [12]
The most noticeable reaction of Russia’s labor market to the economic crisis was decreasing of employment, in contrast with the situation of 90s, when the employment remained relatively stable. Russia’s economy lost 3,4 millions of work positions which were about 5% of the total number of working positions. (Figure 10, Annex) Crisis also caused a reduction in total number of vacancies in 2009, notified in employment service office. Total number of vacancies was by 20-25% lower, comparing to 2008. If employment decreased, the growth rate of registered unemployment speeded up. (Figure 11,Annex) Primarily, it occurred, because of male unemployment decreasing, as crisis first of all affected the industry and construction, where male employment dominated. Female unemployment was also increasing, but slower. The number of unemployment people per 1 vacancy (the most informative indicator of labor market, as takes into consideration supply and demand of labor) increased and the situation in the labor market became worse (since November of 2008), through decline of demand for labor (because of elimination of jobs and a sharp increase in unemployment). (Figure 12, Annex) In contrast, again, with 90’s in 2008 (December) a burst of layoffs happened. During five months (December 2008- May 2009) employment in large and medium-sized enterprises decreased by 1,1 millions of people. (Figure 13, Annex) However the structure of the reasons for dismissal remained relatively stable. (Figure 14, Annex)
Among retired people, registered as unemployed the share of discharged from power companies and housing and communal services and public administration was decreasing. (Figure 15, Annex)
The next feature of adaptation is reduction of working time. In the 4th quarter of 2008, enterprises expended the use of models of shortening the time. The coverage of workers by various forms of forced reduction in working hours, is difficult to assess, but in this mode worked about 6% of all employed people in large and medium-sized enterprises only under the initiative of employer. (Figure 16, Annex)
The use of shortening working hours varied widely by industry, in the manufacturing, construction and mining the proportion of working part-time under the initiative of employer was greatest. (Figure 17, Annex)
With regard to the third direction of adaptation, stability and a slight amount of arrears of wages was noted. The decline in real wages was of 4% and the largest decline in real wages observed in the construction, industry and the financial sector. (Figure 18,19. Annex)
Number of employees
to whom a salary arrears, was about 1-1,5% of the total employed by
large and medium-sized enterprises. (Figure 20, Annex)[12]
2.2 Regional differentiation of labor market conditions and regional programs to reduce tension on the labor market in 2009
Regional labor markets differ greatly in degree of response to the crisis. To larger extent labor markets of economically developed regions suffered, since the crisis, first of all, affected industry, construction, financial sector and trade. Registered unemployment increased in all regions from the October 2008, at the same time Regional differentiation of the level of registered unemployment decreased. Situation in the regions with the high level of pre-crisis unemployment was more positive, than in regions with low level of pre-crisis unemployment. (Figure 21, Annex) The level of registered unemployed grew during a year (April of 2008- April-2009) in 77 regions. The largest increase was observed in Nizhni Novgorod Region (>9%), Vologda Region (>8%), Kaliningrad Region, Chelyabinsk Region and Sverdlovsk Region (>7%). [12]