Staffing Gaps: war and sanctions have led to a worker shortage in Russia despite record low unemployment

Unemployment in Russia is at a record low of just 3.6% (seasonally adjusted). Although, typically, during times of crisis unemployment increases, the country has witnessed a decline in unemployment rates. This has been brought on by a number of factors such as high levels of emigration, an ageing and naturally declining population, ‘partial mobilisation’, a reduction in production output and the withdrawal of large Western businesses from the Russian market. According to statistics from Russia’s central bank, one in two businesses is currently facing staff shortages. In an effort to resolve this issue, some businesses have been increasing their wages in the hope of attracting skilled workers (in the event that they can afford such measures). The largest wage increase has thus far been observed in the manufacturing industry, which includes the military-industrial complex.

Russia’s labour shortage caught most economists by surprise in 2022. In December, the unemployment rate plummeted to a historic low of 3.6% (seasonally adjusted). Early on in the crisis, most experts could not have foreseen such a development in the labour market. In April, analysts polled by Bloomberg predicted a rise in unemployment of between 4% to 9%. To compare, at the height of the 2020 COVID pandemic, the unemployment rate climbed to a high of 6.5%. In his article for Re:Russia, UCLA professor Oleg Itskhoki characterised the situation currently unfolding in the Russian labour market as an anomaly, one of several that have been observed during the sanctions-induced crisis.

In their January issue of ‘Regional Economy’, analysts from the Bank of Russia singled out the issue of unemployment and its impact on 2023’s economic dynamics. As a result of a decline in aggregate output (the country's GDP declined by 1.6% over the course of nine months), employers' need for workers decreased by 17.8% by the end of 2022, compared to 2021. However, this did not result in an increase in unemployment, because the reduction in output was accompanied by a mass exodus of workers, coupled with a natural decline in the population, ‘partial mobilisation’ and an increase in the median working age. It should be noted, however, that according to a flash business survey conducted by the central bank, only 6% of businesses identified mobilisation as the reason for their staff shortage.

Another factor which has contributed to this situation in the labour market is the use of various part-time employment schemes. However, according to the central bank’s survey, there was a decline in the number of businesses that wanted to introduce these measures throughout the year, falling from 4.5% in April to 1% in December. In other words, by the end of 2022, this phenomenon had only a limited effect on the overall situation. Finally, unemployment benefits in Russia are generally too low (the maximum allowance in 2022 was 12,792 rubles) for people to remain unemployed for very long. During the pandemic, however, the number of those registered as unemployed was almost twice as high as it is now.

Across most sectors of industry, many businesses are currently experiencing labour shortages. According to a survey conducted by the central bank, in December, nearly every second enterprise (or 45%) faced this problem. A third also noted a lack of qualified specialists. In addition, one in two companies complained of under qualified candidates with elevated salary expectations. Another issue compounding problems within the labour market, according to the central bank analysts, was the noticeable influx of labour migrants (in the first 11 months of 2022, their number increased by 30%). While, the number of highly qualified foreign specialists arriving in the country decreased by 29%.

According to the Bank of Russia, mechanical engineering, metallurgy, construction and the transport industry are currently facing the largest worker deficits. IT specialists left the country en masse due to the war, mobilisation and the disruption to both financial and technological communication channels with developed economies. Conversely, the defence industry expanded its workforce to accommodate its increased growth in production output. Businesses within Russia’s military-industrial complex began actively hiring manual workers (locksmiths, welders, assemblers, machine operators and drivers) as well as engineering and technical personnel. According to the central bank’s experts, this led to increased tension in the labour market: ‘In order to attract workers, these enterprises began offering increased wages, and as a result, manufacturers of commercial products faced an outflow of labour.’

Taking into account the variation in the labour market across the country’s regions, a few cases particularly stand out. The Far East is currently experiencing a shortage of transport workers, despite the fact that it has become the country’s main export-import hub. Indeed, there is a shortage of electric train drivers due to the growth of freight traffic in the Eastern Polygon of the Trans-Siberian rail line. The southern regions are facing an exodus of skilled construction workers, drivers and power engineers to the Ukrainian regions annexed by Russia where there are ‘higher wages on offer.’

Some enterprises surveyed by the Bank of Russia stated that automation has helped them to partially resolve their staffing issues. Some have introduced referral programs, where employees are given incentives to invite their acquaintances to work. Moreover, vacancies within ‘traditionally male’ occupations are now being offered to women, as well as older and younger men (including minors). However, wage increases have undoubtedly played the most significant role in preventing an unemployment crisis. According to the survey, 82% of businesses were forced to implement wage increases throughout 2022. 74% of respondents also plan to raise their workers’ salaries in 2023. The maximum increase in nominal wages has been +17% year-on-year. This was observed in November in the manufacturing sector.

‘The increased inflexibility of the labour market has led to wages growing regardless of workplace results,’ analysts from the central bank have warned. ‘Staff shortages may lead to a lag in structural transformation processes, while wage increases which outpace productivity growth may potentially become a source of inflation.’

In short, Russia’s labour shortage has arisen as a result of several simultaneous factors, namely: 1) an unusual outflow of workers (the total number of people who were either mobilised or left the country may be as high as 1 million people, or 1.5% of the labour force), 2) the traditional strategy Russian companies employ to retain employees in moments of crisis through various part-time employment schemes and 3) a sharp increase in the demand for workers within certain sectors of the economy. In other words, alongside the shrinking workforce, the structural reconfiguration of the country’s economy in order to adapt to the conditions of war and sanctions has significantly contributed to this phenomenon