Record Underemployment: Ultra-low unemployment in Russia indicates imbalances in the labour market rather than growth in employment and economic activity

Russia's unemployment rate has fallen below 3%, according to Rosstat, while the number of people employed in the economy during the war has increased by 2 million. Both, however, are statistical artefacts. The number of people employed in productive sectors of the economy, on the contrary, has decreased due to the departure of workers involved in the war and those who have died in it, as well as those who left the country. However, official statistics do not acknowledge this, and the total number of employed people is calculated on the basis of unreliable data from the last census. The labour market is experiencing 'overheating'. With employment in productive sectors declining, widespread fiscal stimulus and low interest rates in the middle of the year, many businesses are experiencing a shortage of personnel, according to market surveys and surveys of recruitment services. The consequence of this has been a salary race, with wages rising across the market as a whole. At the same time, labour productivity is in decline and will continue to decline due to lack of investment. The increase in the Central Bank’s key rate will slow down wage growth and further complicate the problem of technological re-equipment of enterprises. Thus, the current state of the labour market is characterised by the combined reduction in the number of those actually engaged in productive activities, staff starvation, wage growth and decline in labour productivity. In other words, what is happening in the labour market quite clearly reveals the paradoxes of the current situation in the Russian economy: high nominal indicators hide market imbalances leading to overall long-term losses.

Unemployment in Russia fell to 2.9% in October, according to Rosstat. This is the lowest value since 1991, i.e. in the entire history of observations. The number of citizens over 15 years of age employed in the economy reached 74.1 million, according to the calculations of the federal service — compared to 72.1 million in October 2022.

There are several reasons for the low unemployment values in Russia. First of all, in the context of low benefits, widespread underemployment and 'shadow' employment, this figure should be considered primarily as indicative. In reality, there should be many more people who cannot improve their financial situation due to the lack of decent opportunities on the job market. This, in particular, becomes the reason for signing contracts with the Ministry of Defence. At the same time, there is currently a high demand for labour (labour shortage) in a fairly wide range of industries, although it is geographically unevenly distributed. According to a study by SuperJob, more than 85% of Russian companies are experiencing staff shortages. The number of vacancies has increased by more than one and a half times over the past year. At the same time, the number of CVs has slightly decreased. As a result, the competition for a vacancy has decreased on average by a third. The most significant increase in the number of vacancies are in industry (+122% over the past year), logistics (+35%) and construction (+31%). The most in-demand positions are skilled workers, lorry drivers, heavy equipment operators, labourers and engineers.

The reasons for this are also well known. On the one hand, approximately 1 million people have dropped out of the real labour market — if we take into account those who have been mobilised, contract workers and adult who left the country because of the war and repression. Their numbers may account for as much as 1.5% of total employment. On the other hand, the extensive budgetary financing of military needs and infrastructure projects has created increased demand for labour in a number of sectors. Stimulative fiscal and monetary policies in the second half of 2022 and the first half of 2023 supported employment in cyclical sectors (construction, retail, financial sector) oriented towards the domestic market. Even when the economy was in recession, employment was maintained in the financial, retail and construction sectors, among others, which is atypical for crises, notes Alexander Isakov, Chief Economist at Bloomberg Economics. This anomaly also has an explanation. The typical Russian crisis of the past few decades is associated with a drop in export revenues and budget income, which is accompanied by capital outflows from the country. The main factor of the 2022 crisis was, on the contrary, a sharp decline in imports with extremely high export and budget revenues. This allowed for an increase in output both in non-tradable sectors and in the areas of import substitution available to the economy.

However, all of this does not follow from the optimistic conclusion that Rosstat draws when it claims that employment in the Russian economy is growing. Of course, Rosstat considers mobilised and contract workers to be employed, while the absence of those who left the country is unnoticed — they do not participate in surveys and do not apply for unemployment. Finally, another factor of statistical fiction is the base used by Rosstat. These are the results of the last census, the quality of which specialists have significant reservations about; according to a Levada Center poll, only 57% of Russians took part in it. Alexander Isakov believes that the 'census effect' could have raised the employment estimate by 1 million people.

However, the statistical fiction of increased employment leads to new distortions. According to Rosstat's estimate, labour productivity decreased by 3.6% in 2022 compared to 2021. This is the most significant decline since 2009 (-4.1%). However, to some extent, this should be considered an effect of data manipulation from the census. Nevertheless, some contribution to the decline in productivity is likely attributed to the 'structural adaptation' of the economy to sanctions due to the loss of a number of highly productive industries (for example, automotive assembly), as well as the lack of investment. The replacement of high-productivity industries with low-productivity ones is an important component of the 'technologically regressive' restructuring of the economy, which both the Central Bank and economist Branko Milanovic wrote about more than a year ago.

Such a scenario will make staff shortage a permanent problem for the economy. The consulting company Yakov and Partners (formerly part of McKinsey) forecasts that in the absence of labour productivity growth, the shortage of personnel will reach 2-4 million people by 2030. To avoid this, labour productivity must grow by 2.4% a year, twice the actual rate seen over the last five years. Billionaire Oleg Deripaska discussed this topic in an interview with the Financial Times, attributing the main reason for the labour shortage to low labour productivity due to the lack of investment in modernising production facilities rather than to the war.

Gazprombank's Economic Forecasting Centre notes that companies have recently been investing quite actively, in order to compensate for the shortage of staff with an increase in productivity. In 2023, investment activity was noticeably ahead of GDP dynamics (+13.3% year-on-year in the third quarter), but these investments were facilitated by budgetary stimulus and soft monetary policy. And, most likely, they partially offset the additional costs incurred by companies in the new environment.

With almost full employment, the near-term prospect for the labour market is the redistribution of workers between sectors. A key rate hike will hit employment in cyclical sectors (construction, retail, finance), which, in turn, will further intensify the reallocation of labour to MIC-related enterprises, Alexander Isakov of Bloomberg Economics predicts. Despite the fact that they demonstrate the highest rates of employment growth (for example, in the production of finished metal products — +13% year-on-year), the labour shortage is far from being quenched. For example, Nikolay Valuyev, Deputy Head of Rostec, recently estimated the state corporation's need for 'qualified engineering personnel' at 20,000 people.

However, another consequence of the rate hike could be the end of the wage growth cycle observed in 2023. In September, real wages (i.e. adjusted for inflation) increased by 7.2% year-on-year compared to 9.5% in August, while nominal wages increased by 13.6% compared to 15.1% a month earlier. Experts interviewed by RBC say that the wage race has begun to lose momentum and wages will now change in line with inflation. Thus, the current state of the labour market is characterised by the combined reduction in the number of people actually engaged in productive activities, staff shortages, wage growth and (likely) a decline in labour productivity. In other words, what is happening on the labour market quite vividly exposes the paradoxes of the current situation in the Russian economy: brilliant nominal indicators conceal imbalances leading to overall long-term losses.