Colloquium 1996 Panel II : Living Standards, Social Welfare and the Labour Market

Is Employment In Russia Restructured? Vladimir Gimpelson Head of Department Institute of World Economy and International Relations, Moscow Summary The restructuring of employment poses one of the biggest challenges for economies in transition. It means huge reallocation of labor from military production, heavy industry and other stagnating old jobs to new ones, largely in the emerging private sector. This process is expected to be accompanied by rather high unemployment, which is proved by the experience of most East European countries except the Czech Republic and Russia. High unemployment is usually considered a major burden imposed by transition on the population. This can stimulate anti-reformist actions blocking transition. At the same time the unemployment is expected to play an anti-inflationary role, containing wages, and to affect positively private sector development. This presentation looks at the current changes in the Russian labor market, focusing on three components of employment restructuring. First, the rise in unemployment and its features in Russia. Second, the fate of "old" jobs in the segment of traditional large and medium-sized enterprises. Finally, a brief overview of the development and employment practices in the private sector which generates a bulk of "new" jobs. Old jobs should be restructured and downsized. The labor force that left these jobs is expected to flow to new jobs directly or through the pool of unemployed (1). Note: Tables will open up in a new browser window

Unemployment During the 90s unemployment in Russia (measured according to the ILO definition) grew from almost zero to 8.2% of the economically active population, reaching over 6 million unemployed by the end of 1995 (see the Table 1). This rate is still very low compared to other countries in transition (except the Czech Republic). Against the background of the GDP having dropped by two times it would be logical to expect much more joblessness. The gap between the extraordinary loss in GDP and only a slight decline in total employment (which fell by 6% only) seems surprising. This can be explained either by a steep increase in labor hoarding or by reallocation of employment to the new private sector and to informal activity not covered by official statistics. Actually, both developments seem to be taking place. The unemployment reported by the Federal Employment Service is even lower, reaching only 3.2% by the end of 1995. This makes about 40% of all unemployed "captured" by the Labor Force Survey. Although the registered share of unemployment has been rising (in 1992 only 17% of the surveyed unemployed were officially registered by the Federal Employment Service) there exist a number of factors that hardly stimulate jobless people to apply for the FES assistance. Among these are the following: very low level of unemployment benefits, various bureaucratic requirements, lack of trust in governmental institutions, widespread belief that the FES has no vacancies which could fit a job-seeker's need, bad outreach to parts of the population by the FES offices, etc. The rates of both annual inflow into unemployment and outflow from the pool of unemployed are kept at a level much lower than in other Eastern European countries, though they grew notably in 1995. The current intensity of separations suggests that in the labor market job-to-job movements dominate. However, since 1994 the gap between inflow and outflow has started growing, and that directly affects duration of unemployment. Accumulation of long-term unemployment would be particularly detrimental. Being economically, politically and socially very costly it does not prevent inflationary pressure on wages and does not stimulate job creation in the private sector. Until recently the pool of long-term unemployed has not been so numerous, but now it clearly shows a tendency to grow. This is illustrated by an increase of the average duration of job search, as well as by growth of the share of long-term unemployed. If in 1992 an average job search took 4.4 months, in 1994 6.7 months were needed and in 1995, 7.6 months. Similarly, the share of those out of work over one year increased from 0.2% (of all registered unemployed) to 13.2% in 1995. So far these figures do not indicate forthcoming catastrophe but, nevertheless, they suggest that the labor market situation may deteriorate. Starting in 1992 unemployment affected mostly women with higher education living in large cities. This was due to the fact that the first mass layoffs were in the R&D sector and governmental agencies. This almost did not concern blue collar workers. Moreover, women in age group 40-55, with higher education and working previously as professionals or clerks for the federal and local governments, faced the most serious difficulties in re-employment. This created an image of unemployment as largely female and white collar unemployment. In 1992 this was partially true, but then the demographic and occupational profile of unemployment began to change. The share of male workers in the pool of unemployed has been growing. In 1995 women made up about 45% of all surveyed unemployed. Over one fifth of the pool lived in rural localities and half of all unemployed are in age group 30-49. Another dimension of heterogeneity in the employment/unemployment development is a regional one. The high unemployment is concentrated in a few regions with prevailing import-substituting orientation. They have a largely monoproduction economic structure, dominated by military production (e.g., Vladimir and Kirov oblast, Mordovia, Udmurtia, Chuvashia republics) and light industry (e.g., Ivanovo, Kostroma, Pskov, Vladimir). These regions have an unemployment rate over 10%. However, the regions with the highest unemployment (Dagestan - 18.6% and Kalmykia - 13.3%) are mainly agriculturally oriented and the unemployment there is caused by under-industrialization and by underdevelopment, rather than by any other reasons. At the same time all these regions show relatively slow private sector growth. Another group of regions - with unemployment rates lower than average - includes territories with export oriented economies (like oil and gas) and those with large urban areas. One of the ways of keeping unemployment at a low level is a wide use of part-time work or unpaid leaves. Applying these options, firms (and governmental organizations as well) avoid mass layoffs and try to lower labor costs. Since the labor market in Russia is significantly deregulated, and trade unions' voice is particularly weak, the practice of part-time work or unpaid leave has become not only feasible but widespread. It can be considered one of the key features of the labor market flexibility in Russia. Table 3 sheds some light on the scale of this pattern. The groups in columns 2 and 3 may overlap, providing double-counting of the same people. Nevertheless, even without double-counting we get about 5-6% of the total labor force affected. This is quite a lot, but added to total unemployment figures it still gives less unemployed than other economies in transition. The overwhelming majority of those with unpaid leave have spells of joblessness too short to be counted as unemployed. The same applies to shortened working hours. At the same time we note that the part-time work and unpaid leave figures in Table 3 show not those experiencing this at a given moment but all employees having any spell of part-time work (and unpaid leave) during the reported period. According to a survey conducted by Dr.S.Smirnov from the Higher School of Economics in Moscow, all underemployed employees (those working part-time or having unpaid leave) compose different groups. Two thirds of them have second jobs or alternative income sources, and only one third have few chances for re-employment in the case of lay-offs or plant closures. The latter group embraces about 1.2 millions or less than 1.5% of the labor force, which may correspond to the likely contribution of under-employment to unemployment (2). Would it be correct to say that the widespread diffusion of these patterns just hides actual unemployment and delays labor market collapse? I guess this question remains without a final answer. This development is caused by a set of various macro- and microfactors like financial arrears, poor contract enforcement, bad collection of taxes, extraordinary governmental spending (e.g. the Chechen war or the pre-election promises), among others. All these factors affect labor market performance differently. Adjustment of Old Jobs As "old jobs" I mean jobs in those continuing establishments which are state-run or have been privatized in the 90s (compared to "new jobs" generated by firms entering business). The available data do not separate old and new firms and, therefore, they do not display a precise picture. We have, however, data related only to large and medium sized enterprises and these statistics can be used as a proxy in discussing a restructuring of "old" jobs (3). This segment of enterprises and establishments has been adjusting to the new economic rules in two major ways. First, there is total downsizing in employment. Second, there is increased flexibility in the utilisation of labor. During 1992-95, large and medium sized establishments in the economy lost overall about 18% of total employment which reflects a significant cross-industry variation. Industrial production downsized by over 35%, the R&D sector by 40%, construction lost almost 30%, while the financial sector (4) grew by 40% and public administration expanded employment by about 30%. For industry, a one percent decline in output corresponds to about 0.6% decline in employment, a quite sensible response. The downsizing involved about 11 million employees moving to new jobs, entering the pool of unemployed or leaving the labor force. The flows in the industry during 1992-95 amounted to 6 million employees. This could be expected to be accompanied by rather intensive lay-offs. However, this was not the case, and the major fraction of the outflow from old jobs was induced by voluntary quits. To cut their labor force firms could just stop new hiring. If the annual rate of voluntary quitting reached 17-18% of total employment in 1994-95, the rate of lay-offs was only 2.1-1.6%. We can observe rather high buoyancy which is amazing for the allegedly depressed labor market. The overwhelming domination of quits over lay-offs under very intensive labor turnover in general may mean an active job generation process as well. The tendency of high labor turnover that keeps going on throughout the first half of the 90s contradicts a widespread opinion that labor in Russia is particularly immobile and firmly tied to traditional jobs. It also contradicts an often cited statement that employers have a special interest in hoarding labor and keeping working collectives together. Above I mentioned quits, but they form only about 60% of all separations. It is noteworthy that workers' turnover is even higher than that of all personnel. In 1994, the annual separations rate for blue collar workers in industry was 36.1%, compared to 32% for the total industrial labor force (at large and medium-sized enterprises). Moreover, in some industries (construction materials, and timber and wood industry) the rate of separations reached almost 50% per year, while the rate of lay-offs remained minimal. Generally, the remarkable contrast between quit and lay-off rates means that the outflow goes mostly spontaneously. The prevalence of voluntary separations leaves managers less discretion over the shape of the enterprise labor force. In the face of the strong pressure to downsize, managers may attempt to encourage or discourage quits (e.g. by shifting relative wages), but the influence is indirect. The absence of more direct approaches may lead to "deskilling" (in terms of the average employees' capacities) as more competitive workers exit; it also represents a loss of managerial power vis-a-vis the pool of remaining high-skill or firm-specific skill holders, upon which managers then become more dependent (5). Economic reforms have considerably deregulated the labor market and have, therefore, increased the options for adjustment available to enterprises. Managers have a range of mechanisms which allow them much greater flexibility in managing personnel at any given level of total employment. The principal mechanisms include hours flexibility, flexibility in compensation, wage arrears, and use of fixed-term contracts. I have already mentioned that policies of shortened hours or unpaid leave have become very widespread. They help firms to minimize employment reductions by instead cutting working hours for larger groups of workers. At the same time, hours reductions or wage delays stimulate voluntary quitting of the most skilled and competitive workers. All this raises the question of how workers tolerate these flexibility options which apparently may significantly compress wages. At first glance, the institutions representing employees' interests in privatized enterprises give the impression that organized labor has significant power. There is still a very high level of unionization and employees are generally shareholders. However, based on various surveys and observations, it appears that trade unions and intrafirm labor institutions offer only weak bargaining power for rank-and-file employees. Within the evolving industrial relations framework, the role of trade unions has not yet been settled. Discussing labor restructuring in Russian enterprises one cannot omit the social assets issue. The problem is that the socialist factory was always more a social institution than an economic enterprise and provided employees not only with wage labor compensation, but also with a considerable number of non-wage social benefits, generally delivered through enterprise-linked social infrastracture. These benefits, although declining marginally, have continued at relatively high levels during the early years of transition. Indeed, this notion was confirmed by S. Commander et al. in an enterprise survey conducted in 1994, which found only marginal declines. Moreover, the surveyed firms did not expect a significant decline in social provision in the future (6). During the past 1-2 years there is evidence that some enterprises have shed or restructured assets associated with social benefits. For example, a survey conducted in November 1995 revealed declines in the number of enterprise-linked social assets. The survey data highlight substantial cuts in the number of units in 1993, but with a particular drop of 12% in 1994 (7). Our research experience reveals similar trends. Employment linked to enterprise social provision declined in absolute and relative terms; the delivery of social benefits was significantly cut back. Although social assets still contribute considerably to total expenses, financially they are shrinking and are becoming a rather flexible component of labor costs (8). Nevertheless, it should be noted that for industry as a whole, employment in the social infrastructure remains relatively high. According to the Russian Economic Baromether, on average, 12% of all employees at enterprises still work for social facilities (9). What has a major impact on enterprises pushing them to speed up adjustment and restructuring? Our study allows one to conclude that hardening of budget constraints plays a crucial role. Only drastic compression of soft financial inflows forces firms to transform traditional practices. Although privatization of large and medium sized enterprises is expected to be a key vehicle in restructuring, its effect has been so far rather marginal. Another leverage for introducing changes is the labor market policy, but it also does not seem very effective in pushing old enterprises to radical restructuring. The overview of labor market developments concerning "old" jobs indicates that there has been considerable adjustment. Nevertheless, we have evidence that many actions in the area are based rather on on-the-spot decisions than on long-term strategy. The final results are often a contradictory mix. "New" Jobs in the Russian Economy The business environment for the new private sector in Russia is not quite friendly, and many uncertainties still exist. This concerns political, macroeconomic and legal conditions (like the threat of communist revenge, unstable legislation, flourishing corruption, prohibitive taxes, high inflation, bad access to credits, etc.) for doing business and creating jobs. Therefore, all major players are apparently interested in minimizing risks which induces a specific cross-ownership and distorts employment relations. Employment contracts become short-term, semi-formal or informal and very flexible, based on personal networks and trust, and volatile for both the employer's and employees' sides. The fact that legal rules governing these workplaces are the same as in the traditional sector does not matter too much. Labor legislation in general is enforced worse than any other segment of legislation and the new private sector remains non-unionized. All this has resulted in very poor and complicated monitoring of developments in this area. The statistics of "new" jobs is far from perfect, but they allow us, however, to make some crude estimates. According to the official statistical agency (Goskomstat of the RF), private sector employment grew from 18% (of total employment) in 1992 to 33% in 1994. In this accounting, the private sector appears to include establishments that hardly can be considered private such as kolkhozes or their successors, leased enterprises or newly privatized (former state-run) companies. We can consider this an upper line for the estimate. The data on SME development that may give a bottom line for the estimate show about 14% of total employment working in the private sector in 1994 (10). Together with the self-employed it makes up over 20%. Besides that there is 0.5% of employed by joint ventures plus those employed by new private but big firms. Unfortunately, we cannot separate the latter fraction of private sector employment which is counted jointly with old state/privatized jobs. Using these and other data one could narrow the range estimating the share of new jobs in total employment to 20-25%. This makes about 13-17 million employees having their main job at new private firms (large and medium sized privatized enterprises and transformed kolkhozes are not included) and self-employed. According to the data reported by A.Richter and M.Shaffer, the job creation rate in the new private sector was quite remarkable. It amounted to almost 25% per year versus the job destruction rate of 6.1% (for comparison, the annual job creation rate in the sector of large and medium sized state-run or privatized enterprises reached only 1.4% versus 8.2% of job destruction) (11). Thus, we see a fairly good increase (taking into account general political and economic uncertainty) in employment outside traditional large enterprises. Rather rapid SME growth in trade (mostly retail trade) and in services seems obvious. This sector has been completely underdeveloped and it was the first one affected by the economic liberalization. Very high demand and low capital intensity, weak enforcement of tax rules and good return on investments gave a strong impetus to the growth. About half of all new businesses operate in trade and 28% in industry and construction. In terms of employment, industry and construction are in the lead, having created 28% and 31% respectively of all jobs, and trade with 26% of the jobs. Primary SME employment is, however, just a little larger than the secondary one. The official publications estimate it at 6.7 million or 10% of all employed in the country. Combining jobs in both the state and private sectors provides additional income and helps in coping with hardships of the transition. It allows one to preserve guarantees, benefits and social networks linked to traditional jobs. Finally, it gives a chance for more gradual and smooth adjustment. However, all this "provided workers with the best of both worlds and functioned as a disincentive to their moving into the private sector." (12) Available data allow us to see only a fraction of total wage remuneration really paid. A number of surveys conducted during 1993-1995 show quite consistently that the wage level in private firms was about 1.5-2.0 times higher than in state-run/privatized firms (13). Additional earnings from secondary jobs are in the same proportion and do not actually affect the income differentiation. Employees' earnings by sectors may, however, vary to a greater extent. First, evidently quite significant cash flows paid as wages are hidden from both statistics and surveying (each third contract in this sector is informal and not registered legally). Second, there is significant and still growing intra-sector wage differentiation. In 1993 the Gini coefficient for private firms was equal to 0.51 versus 0.43 for privatized and 0.39 for state-run companies (14). Most of the surveys do not reveal remuneration earned by the top group of employees. If wages for mass occupations and low skilled employees differed little from those at the traditional jobs, scarce and high skills are often rewarded, even if not as in the OECD economies, at least many times higher than in the Russian economy on average. As we know in other East European countries, the wage level in private firms can be almost the same or even lower than in state firms (15). The relatively high wage and salary level in the private sector affects traditional jobs, especially if there are cross-sectoral occupational labor markets. By pulling the best employees from old jobs, new firms not only gain human capital for themselves but they also influence restructuring in traditional companies inducing lay-offs and increasing wage flexibility (16). Noteworthy, besides wage remuneration, many new firms offer to their employees a wide range of social benefits, including not only sick pay but also financial assistance, additional medical insurance, free meals and covering transportation costs (17). Such non-wage benefits cover directly or indirectly a substantial portion of family expenses and are in fact a part of labor compensation hidden from personal income taxation. Tables: Table 1 : Unemployment Trends, 1992-1995 (end of the year) Table 2 : Annual Unemployment Flows in Russia (% to labor force) Table 3 : Part-time work and involuntary vacations in 1995, monthly Table 4 : Employment by Types of Ownership, 1992-1995 Table 5 : SME's in the Russian Economy, 1994 Footnotes: Richard Layard and Andrea Richter. Labour Market Adjustment in Russia. Russian Economic Trends, 1994. API. Informatcionno-analitichesky vestnik, 1996, N.5, April, p.15. To this category Russian statistics refer firms and establishments employing over 200 employees. This is a general criterium which, however, varies by industries. This job expansion in the financial sector has been generated largely by new private firms which create "new" jobs. V.Gimpelson and D.Lippoldt. Labour Restructuring in Russian Enterprises. A Case Study. OECD,Paris, 1996 (forthcoming). S.Commander, Une Lee with A.Tolstopiatenko. Social Benefits and the Russian Industrial Firm. A paper prepared for a joint conference of the World Bank and the Ministry of Economy of the Russian Federation, June 12-13,1995, St.Petersburg,Russia. I.Tratch, M.Rein, and A.Woergoetter. Social Services of Enterprises in Selected Russian Regions. In: "Social Benefits and the Russian Enterprise: A Time of Transition", OECD, forthcoming. V.Gimpelson and D.Lippoldt. R.Kapelyushnikov and S.Aukutcionek. Russian Industrial Enterprises on the Labor Market, Voprosy Ekonomiki, 1995,N.6,p.50. The Goskomstat of the RF, Informacionny statistichesky bulletin N9,1995,p.11. A.Richter, M.Shaffer. Growth, Investment and Newly-Established Firms in Russian Manufacturing. A paper presented to a joint conference of the World Bank and the Ministry of Economy of the Russian Federation. June 12-13, 1995, St.Petersburg, Russia", p.11,27. L.Webster and Joshua Charap. A Survey of Private Manufacturers in St.Petersburg. BERD, Working Paper No.5,1993, p.44. Various VCIOM surveys, author's estimates. S.Commander, J.McHale, and Ruslan Yemtsov. Russia. In: Unemployment, Restructuring, and the Labor Market in Eastern Europe and Russia. Ed. by S.Commander and F.Coricelli. The World Bank, Wash.D.C., 1995, p.171. O.Blanchard, S.Commander, and F.Coricelli. Unemployment and Restructuring in Eastern Europe and Russia. In: Unemployment, Restructuring, and the Labor Market in Eastern Europe and Russia. V.Gimpelson and D.Lippoldt. A.Richter, M.Shaffer. Growth, Investment and Newly-Established Firms in Russian Manufacturing, p.18; Small Business in Russia: Adjustment to Transition. Predprinimatelsrvo v Rossii, 1995, N.1,p.19.