Negative Employment: low labour mobility is hampering the structural transformation of the economy and fueling inflation

Despite the challenging circumstances of war and sanctions, the Russian government frequently boasts about Russia’s record-low unemployment rates, touting this as a sign of a healthy economy. However, experts from the Bank of Russia caution that this is not necessarily a sign of overall economic well-being, but rather a reflection of wider issues within the country’s labour market. In the latest edition of their ‘What the Trends Say’ report, experts from the Bank of Russia have noted that workers tend to prefer part-time employment at idle enterprises over a change in profession or relocation to another region. To cope with the current labour shortage, businesses have been forced to increase wages at a pace that outstrips productivity growth. The most significant wage increases have occurred in the manufacturing (including the military-industrial complex), mining, and transportation sectors. This has led to an uptick in inflation. The Bank of Russia suggests that in order to address these challenges, efforts should be made to promote opportunities for retraining, as well as the development of the rental market to boost labour mobility. Artificial boosts to employment figures from stagnant industries should be eliminated. Nevertheless, the experts caution that these measures are unlikely to result in any quick fixes.

The authors of the upcoming edition of the ‘What the Trends Say’ survey, published by the Research and Forecasting Department of the Bank of Russia, have issued a warning that the labour market crisis in Russia cannot be resolved quickly. Despite the contraction of the economy as a result of the war and sanctions, the country is experiencing a shortage of personnel (Re: Russia has previously reported on this unusual situation here). The experts from the Bank of Russia have analysed data from Rosstat and the HeadHunter service, identified the root causes of this situation, and put forth proposals to address it.

The situation varies widely sector by sector. Industries such as aviation, which have been hit particularly hard, have witnessed a surge in downtime, as well as in the number of part-time employees. The trade sector, as well as certain manufacturing industries that rely on imported components and raw materials, and/or have a high proportion of foreign ownership, are experiencing similar issues. At the same time, certain industries like transportation, mining, and construction have seen a substantial decrease in part-time employment, which can be attributed to the changing dynamics of their supply chains. Despite this, the flow of labour from idle industries to developing ones has been slow.

According to the report, the Russian labour market has historically been characterised by low intersectoral and interregional mobility. However, during previous economic crises, this was not a critical issue, as sectoral dynamics performed relatively uniformly. In contrast, the current crisis — as previously outlined by Re: Russia — has been characterised by multidirectional sectoral dynamics. As a consequence, the number of employees in certain industries has stayed the same or even increased despite a significant fall in output. The same is true when regions are examined in terms of their industry profile. A lack of labour migration has led to intense competition for personnel, and as a result, wages have grown at a faster rate than productivity. At the end of 2022, construction, mining, and processing were the leaders in wage growth. According to the experts from the Bank of Russia, this pro-inflationary factor has hindered the structural transformation of the economy.

The bank’s experts also warn that Russia’s ageing population poses additional risks to the economy. They predict that the share of the country’s population over the age of 40 will increase to 63% by 2030. According to Rosstat data analysed by Finexpertiza, at the end of 2022, the number of young workers in Russia had hit a historic low. The number of employees under 35 years of age declined by 1.33 million (or 5.8%) from December 2021, dropping to 21.5 million people, which is less than 30% of all those employed. The number of workers under 30 decreased by 802,000 or 6.9% to 10.8 million, which is less than 15% of all those employed. The number of employees aged 25 to 29 has decreased especially dramatically — by 724 thousand, to 7.2 million. ‘This category of young professionals is important for the economy as they have already gained professional experience and also have high labour mobility,’ the authors of the research note. The study also draws attention to the ‘exodus’ of young people from the Moscow metropolitan area and also St. Petersburg, although workers from other regions should be attracted to these areas. This situation is likely due to the departure of young specialists as a result of the war.

The Bank of Russia experts propose a set of measures to address Russia’s labour market crisis:

• Abandon the artificial maintenance of employment in industries that are experiencing a structural decline in demand for their products.

• Create incentives and opportunities for retraining and acquiring new skills.

• Develop the rental market, as difficulties finding housing are often a barrier to relocation for workers seeking better employment opportunities.

However, even if these measures are adopted quickly, they will not provide immediate results. ‘The situation on the labour market will continue to curb the speed of the structural transformation of the Russian economy for quite some time to come,’ the experts from the Bank of Russia conclude.