All work and low pay: Inside Russia's labor-starved military economy

Russia’s wartime labor market presents a paradox: despite record-low unemployment and a shortfall of nearly 2 million workers in manufacturing alone, companies are laying off staff. While some sectors have expanded on the back of defense contracts, others are starting to shrink and will require fewer employees. But this won’t resolve the labor shortage. Deeper factors — a structural deficit of skilled workers, the economy’s failure to boost productivity, and its failure to get out of the middle-income trap — mean Russia’s economic woes will not resolve themselves anytime soon. Initially, the worker shortage pushed wages up, but that effect is fading. Now, companies outside the defense sector are running out of resources.

Content

• Labor market paradoxes

• Saturation triggers layoffs

• Russia trapped in middle-income status

• Forecasts and outlook

RU

Labor market paradoxes

During the past three years of war, employment in Russia grew, and in December 2024 overall unemployment dropped to a historic low of 2.3%. “Employment began rising in manufacturing, engineering, and construction in 2023–2024 thanks to increased orders from the defense sector,” notes a VEB report on labor market trends. Employment also grew in IT and administrative services.

Yet according to regular business activity surveys published by the Higher School of Economics, a shortage of workers has been the main constraint facing employers since 2022. Businesses involved in nanotechnology, microelectronics and radioelectronics, prosthetics and orthotics manufacturing, and even physical education and sports, report severe staff shortages. A study by the recruiting platform SuperJob shows the sharpest shortfalls are in manufacturing (with 90% of companies lacking workers), transport and logistics (89%), and the service sector (88%).

From 72.3 million people in 2021 to 74.2 million people in 2024, according to Rosstat data, excluding occupied territories.

Center for Macroeconomic Analysis and Short-Term Forecasting.

Since 2022, a labor shortage has been the main challenge for businesses

According to the Ministry of Industry and Trade, manufacturing alone is short 1.9 million workers. The Ministry of Labor, for its part, estimates that the economy will need an additional 3.1 million people by 2030. “Previously, the figure was 2.4 million. To meet our priorities in the economy, social sphere, and science, we’ll need to increase the number of employed people in 37 regions of the Russian Federation. The biggest challenges lie ahead for Moscow, the Moscow Region, Stavropol Territory, Rostov Region, Krasnodar Territory, the Republic of Tatarstan, and Perm Territory,” said Minister of Labor Anton Kotyakov, who added that the most in-demand workers over the next five years will be skilled tradespeople: mechanics, vehicle repair technicians, electricians, toolmakers, construction workers, and finishers. Among university-educated professionals, demand will grow most sharply for IT specialists, doctors, engineers, architects, and designers.

From 72.3 million people in 2021 to 74.2 million people in 2024, according to Rosstat data, excluding occupied territories.

Center for Macroeconomic Analysis and Short-Term Forecasting.

At the same time, the number of workers is falling in other sectors. According to VEB, the sharpest decline has been in housing and utilities (down 40%), followed by culture, sports and leisure (9%), agriculture (8%), real estate services (8%), and public administration (7%). The reasons for these cuts are tied to the current political climate: in housing and utilities, the decline is primarily driven by tighter migration policies; in real estate, by difficulties following the end of mass preferential mortgage programs; in public administration, by the digitalization of government services. As for culture, sports, and leisure, the key factor is budget cuts to these sectors.

Saturation triggers layoffs

Stagnation in civilian industries has brought hiring to a standstill. Overall demand for labor in Russia dropped sharply in early 2025, reports the TsMAKP. To increase output, new factories must be built or existing ones thoroughly modernized — something that takes time and money, both of which are in short supply due to the Central Bank’s high interest rate, which primarily affects non-military sectors, according to the report.

Each sector faces its own set of specific factors driving down labor demand. For instance, under the conditions of “reverse industrialization” (a euphemism for reverting to outdated technologies) that took hold after 2022, demand for highly skilled IT workers has fallen. According to SuperJob, as of early 2025 the IT sector is still experiencing a significant staff shortage (87% of companies need workers), yet at the same time, widespread layoffs are underway. These are expected to affect 15–20% of personnel, primarily junior developers and specialists in foreign systems.

From 72.3 million people in 2021 to 74.2 million people in 2024, according to Rosstat data, excluding occupied territories.

Center for Macroeconomic Analysis and Short-Term Forecasting.

Deputy Labor Minister Dmitry Platygin is predicting layoffs in retail and public service, citing digitalization as the main cause. Mass job cuts are also expected in construction, where a collapse is looming in the housing sector. Even agriculture, a traditionally labor-intensive industry, is seeing a drop in employment: farmers are finding it unprofitable to operate due to high loan rates, the rollback of subsidy programs, and soaring equipment costs. Economist Igor Lipsits warns that some regions may soon face persistent unemployment. Among them could be Kuzbass, where the coal industry is in deep crisis, and the northwestern regions, where the timber industry is struggling.

Russia trapped in middle-income status

Beyond short-term fluctuations, Russia’s labor market is being shaped by deeper, long-term problems that have intensified under wartime conditions. Business leaders have been warning about a shortage of skilled workers since at least the mid-2000s. The situation has now worsened due to mobilization, emigration, and rising wages in the defense sector, compounding already negative demographic trends, Davis Center researcher at Harvard University Andrei Yakovlev told The Insider.

The fact is that, thanks to high oil prices and rapid economic growth, Russia fell into the so-called “middle-income trap” back in the mid-2000s. Before that, it belonged to the group of low-income countries that could integrate into global markets by offering cheap labor, low taxes, and lax environmental regulations. Since the 1980s, Western manufacturers whose operations didn’t require skilled labor began moving production to such countries. It was a win-win: companies cut labor costs, and workers in poorer countries earned wages that were high by local standards.

From 72.3 million people in 2021 to 74.2 million people in 2024, according to Rosstat data, excluding occupied territories.

Center for Macroeconomic Analysis and Short-Term Forecasting.

Peterson Institute for International Economics

The rapid income growth among low-paid groups in Asian countries between 1988 and 2008 is illustrated by the “elephant chart” of American economist Branko Milanović. The rise in incomes on the left side of the chart represents workers whose wages increased as production shifted from the U.S. and Europe to developing countries, particularly in Asia.

But as these Asian economies developed, there came a point when the wage gap with the West began to narrow. At that stage, these countries fell into the “middle-income trap” — they could no longer benefit from being low-cost labor providers, while their labor productivity remained too low to compete with that of developed economies. The same thing happened in Russia: labor stopped being cheap, but productivity never rose to Western levels. Why?

From 72.3 million people in 2021 to 74.2 million people in 2024, according to Rosstat data, excluding occupied territories.

Center for Macroeconomic Analysis and Short-Term Forecasting.

Labor in Russia is no longer cheap, but productivity still hasn’t reached Western levels

In Russia, efforts to train workers to Western standards have so far yielded little success. When Germany was faced with a similar problem, businesses agreed to refrain from poaching staff from one another, and they worked together with the state to tailor an education system capable of meeting demand for specific types of labor. It is precisely this kind of cooperation that distinguishes countries which have managed to escape the middle-income trap. Russia — where only about 16% of employees receive employer-sponsored training, compared to 48% in OECD countries — never developed such a system. As a result, wage growth has been uneven, with higher pay offered either to rare specialists or to workers in high demand.

Why hasn’t the labor shortage led to wage growth strong enough to break Russia out of the middle-income trap? Largely because Russia lacks strong labor unions, says Yakovlev. “Workers’ weak bargaining power was part of an informal deal between the state and business right up to the start of the war. This allowed all of Russian business — not just the oligarchs — to extract extra profits. But keeping labor costs artificially low also destroyed any incentive to improve productivity.”

From 72.3 million people in 2021 to 74.2 million people in 2024, according to Rosstat data, excluding occupied territories.

Center for Macroeconomic Analysis and Short-Term Forecasting.

Workers’ weak bargaining position was part of an informal deal between the state and business up until the start of the war

The main reason for low wages in Russia is the lack of capital — what economic reports refer to as “fixed assets.” This includes equipment, technologies, innovative developments, and also labor culture. The shortage of capital was already evident in the USSR, primarily due to the near-total militarization of industry. This inefficient reality continued up until the Gorbachev era, when attempts were made to adapt military technologies for civilian use.

To build capital, a country needs a machine-building industry. And for that, it needs quality metallurgy and a strong corps of engineers. The USSR never managed to bring the quality of its domestic equipment up to standard. As a result, it had to import foreign equipment using revenues from oil exports.

From 72.3 million people in 2021 to 74.2 million people in 2024, according to Rosstat data, excluding occupied territories.

Center for Macroeconomic Analysis and Short-Term Forecasting.

Back in the 1970s, the USSR bet on importing foreign equipment using oil revenues

Although modern Russia undertook a significant modernization of its metallurgical plants, the problem was never fully resolved, and upgrades continued to be made by importing foreign machinery. In this context, an expansion in output could only be achieved by hiring large numbers of cheap workers.

Another reason for stagnation is that business, especially in the industrial sector, invested very little of its profits into production. In 2020, the Central Bank named the main obstacles to industrial investment: lack of funds in company accounts, expensive loans, and high economic uncertainty. The shortage of funds is easily explained — by 2017, over $800 billion had been taken out of Russia into offshore accounts. “After the Yukos case in 2003, only an idiot didn’t realize their company was vulnerable to expropriation,” says Lipsits. Because of this threat, businesses were unwilling to invest in fixed assets or to spend on worker training. The state “supported” corporate interests by preventing workers from forming independent unions.

Forecasts and outlook

Long-term trends in Russia’s labor market remain grim. Over the next five years, the country’s labor shortage could double, predicts HeadHunter CEO Dmitry Sergienkov. He says the company sees no signs of stabilization in the job market anytime soon, as there is little hope that the million people employed in the defense sector during the war years will return to civilian industries even if the conflict ends anytime soon. After all, Russia is likely to choose to replenish its depleted stockpile of weapons, meaning jobs in the military-industrial complex will remain even in the event of a truce. Another factor is money. Oil prices are falling, the budget is under pressure, and the state has no spare funds.

From 72.3 million people in 2021 to 74.2 million people in 2024, according to Rosstat data, excluding occupied territories.

Center for Macroeconomic Analysis and Short-Term Forecasting.

Oil prices are falling, budget revenues are under threat, and the state has no free funds

In this framework, there is no room for implementing automation or robotics in production. As a result, the economy will continue to rely on cheap labor plus a small number of highly specialized workers. This scenario is bad news for the middle class, which has largely been employed in the consumer economy, where demand is expected to decline.

According to forecasts by the Ministry of Economic Development, overall unemployment will remain well below the so-called normal level of 5%, staying around 2.5% over the next three years. However, the labor market will become increasingly segmented, reflecting structural problems and a strategic choice in favor of militarization over development.

From 72.3 million people in 2021 to 74.2 million people in 2024, according to Rosstat data, excluding occupied territories.

Center for Macroeconomic Analysis and Short-Term Forecasting.

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