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Costs of labor in the Russian economy: evolution and differentiation

2007

The goal of this study is to analyze the evolution of the wage-setting process, wage differentials and wage inequality in transitional Russia. As a part of this research, we analyze institutional and microeconomic problems of wage-setting in Russia over the period 1991-2006, identify the main stages of its evolution, trace the specifics of determining labor compensation in the Russian manufacturing and public sector and examine the level of wage differentiation. 

The empirical base of the research consists of several establishment and household surveys.

Most countries of Central and Eastern Europe (CEE) followed the same path of labor market development after the start of economic transition in the early 1990s: drop in real wages was relatively small whereas fall in employment mirrored that of GDP. The period of wage devaluation in these countries was short: economic growth resumed in two or three years after the start of market transformation facilitating rapid recovery of real wages to their pre-reform levels.

The situation in Russia (as well as in other CIS countries) was quite different: the plunge in real wages was much deeper than in CEE countries, and the fall in employment was disproportionally weak comparing to the drop in GDP. Over few years wage differentials increased dramatically as new positions in rapidly developing sectors had to coexist with low-productive and low-paid jobs in depressed obsolete sectors.

This pattern of the evolution of Russian labor market is very surprising given little initial difference from the CEE labor markets in terms of formal structure. Basic institutions such as minimum wages and unemployment benefits, wage taxes (including mandatory social tax levied on employers) and unified wage tariff system for the public sector were introduced right in the beginning of the transition period in Russia. Employers’ associations emerged, trade unions were reorganized. The tripartite commission began to work as a supreme body for reconciling interests of social partners in social and labor market spheres. Labor laws were revised to adapt to new realities of a market economy. Labor market institutions were largely built applying standard designs recommended by international economic organizations (for example, the ILO and the OECD).

The observed wage behavior may seem incredible in this institutional context. However, it cannot be treated as an aberration which emerged in the Russian labor market by pure chance. Since that this pattern has been consistently replicated and, therefore, it is clearly of a systemic nature.

The study provides an analysis of the wage-setting mechanism in Russian economy accounting for its institutional characteristics and macroeconomic background. The conclusion is that this very specific model  deeply rooted in Russian institutional reality and represents sustainable institutional balance with complementary elements. This model proved its ability to survive in different macroeconomic regimes; it lived through a prolonged transformation slowdown as well as a lengthy period of post-transformational growth. Ultimately, it has reverse flexibility as the main distinctive feature.

The analysis shows that the combination of stable employment and flexible wages has been maintained due to several basic factors.

  • Restricted reaction of employment – formally stringent labor laws coincide with extremely weak and inefficient enforcement,
  • Wage elasticity – erosion of minimum wages, lack of indexation mechanisms, and high share of variable part in total compensation resulted in close peg of wages to financial and economic performance of firms, expansion of shadow wage schemes, frequently used practice of wage arrears.

Interestingly, all of these phenomena were observed in a relatively standard – at least from a formal point of view – institutional environment. Institutions setting formal “rules of the game” in the labor market were developed in Russia on the basis of  traditional patterns common in world practice. However, being embedded into Russia’s everyday reality, they gradually lost their original stringency adapting to actual capabilities and requirements of local market agents. Optionality or selectivity of law enforcement, deliberate or accidental loopholes in the legislation, weak enforcement mechanisms, multiple possibilities for informal relations above formal responsibilities, and growth of the informal sector produced unintended excessive flexibility. Being a product of spontaneous adjustment, it has become a sustainably self-reproducing system which consists of well-fitted elements and units.

The results of the research were published in a book titled “Wages in Russia: evolution and differentiation” (Moscow: SU-HSE Publishing House, 2008).

http://www.hse.ru/news/hse_pubs/3795882.html (information about the book)


 

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