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9
Social Policy and the Labor Market in Russia During Transition

Alastair McAuley

INTRODUCTION

The introduction of market relations, or transition as it has become known, was intended to improve the efficiency with which resources were allocated, revive economic growth, and thus ensure for the populations of the countries of the former Soviet Union a level of prosperity closer to that enjoyed in Western Europe. Change of any kind involves costs, and it was always expected that there would be costs associated with the transition to a market economy. But it was (and is) believed that ultimately, the reform would be effective: those who gained would be able to compensate those who lost and still remain better off; all would benefit. In this context, an appropriate structure of social policy can contribute to greater labor market flexibility and efficiency, whereas inappropriate policies can result in rigidity and inefficiency. Appropriate social policy can also ensure that the full burden of the transition does not fall upon the shoulders of the most vulnerable groups. Moreover, the costs of transition have been much more substantial and long-lasting than most observers (and the advocates of reform themselves) anticipated, and this has increased the importance of social policy.

The argument of this chapter may be summarized as follows. The labor market in Soviet-type economies was designed to fit in with the other components of the planned economy. As a result, it differed from the labor market in modern industrial economies in a number of significant ways. Chief among these was the fact that the economy was characterized by full and substantial security of employment; indeed, many workers expected to be able to retain



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Transforming Post-Communist Political Economies 9 Social Policy and the Labor Market in Russia During Transition Alastair McAuley INTRODUCTION The introduction of market relations, or transition as it has become known, was intended to improve the efficiency with which resources were allocated, revive economic growth, and thus ensure for the populations of the countries of the former Soviet Union a level of prosperity closer to that enjoyed in Western Europe. Change of any kind involves costs, and it was always expected that there would be costs associated with the transition to a market economy. But it was (and is) believed that ultimately, the reform would be effective: those who gained would be able to compensate those who lost and still remain better off; all would benefit. In this context, an appropriate structure of social policy can contribute to greater labor market flexibility and efficiency, whereas inappropriate policies can result in rigidity and inefficiency. Appropriate social policy can also ensure that the full burden of the transition does not fall upon the shoulders of the most vulnerable groups. Moreover, the costs of transition have been much more substantial and long-lasting than most observers (and the advocates of reform themselves) anticipated, and this has increased the importance of social policy. The argument of this chapter may be summarized as follows. The labor market in Soviet-type economies was designed to fit in with the other components of the planned economy. As a result, it differed from the labor market in modern industrial economies in a number of significant ways. Chief among these was the fact that the economy was characterized by full and substantial security of employment; indeed, many workers expected to be able to retain

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Transforming Post-Communist Political Economies their present jobs (at their present places of work) indefinitely. For those who wished to change enterprises, there was usually no difficulty in finding alternative employment. This situation was more a consequence of the choice of overambitious macroeconomic targets by planners than a result of specific policies in the labor market. But it meant that the authorities could use records of employment rather than contributions as the basis for entitlement to social insurance benefits. They could also use the enterprise (or its trade union organization) as a major vehicle for the provision of social benefits. Finally, since substantial social benefits were provided through the state or state enterprises, wages were relatively low. Differentials were also small and failed to reflect either differences in the scale of investment in human capital or the risk to which different occupations were exposed. This meant that the labor market was both inefficient and inflexible: it took a long time to reallocate labor, and hence new industries found it difficult to expand rapidly. It also meant that the labor process itself was inefficient: productivity was low, and the structure of employment appeared ''old-fashioned" by comparison with that found in Western Europe. The Russian government has attempted to reconstitute the framework of social protection and to reform labor market institutions to bring them more into line with the structures found in advanced industrial economies. The breakup of the Soviet Union itself and the subsequent opening up of the domestic product market have been important, as have the abandonment of central planning and the consequent changes to the structure of demand. As a result of the changes induced by these various pressures, the labor market has apparently become surprisingly flexible. There has been considerable adjustment in the structure of both employment and earnings without high levels of unemployment. But the system still contains rigidities, and these contribute to the fact that productivity remains low. The opening up of former planned economies means that their labor markets are now exposed to pressures from the global economy from which socialism offered some protection. Most if not all advanced industrial economies have experienced increased competition from so-called emerging market economies in the last 10 to 15 years. Increased competition in traditional industrial sectors has undermined the security of both earnings and employment enjoyed by workers in such sectors as engineering and light industry. As a result, employees, especially skilled industrial workers, have experienced a deterioration in their relative economic status in most industrial market economies. How to respond to this development constitutes perhaps the major social challenge facing Europe and North America at the end of the twentieth century.1 Transition economies face a similar challenge. It is not clear how far this has been realized by policymakers in Russia-—or, indeed, in the rest of the region. 1   This issue is discussed at greater length in World Bank (1995).

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Transforming Post-Communist Political Economies The remainder of the chapter is divided into five sections. The next section sets forth briefly the key characteristics of the labor market and social policy in a planned economy. The third section outlines the reconstitution of social policy that has occurred and examines developments in employment policy. The fourth section assesses the impact of these innovations on the operation of the labor market. The final section presents a summary of the discussion and draws conclusions about the effectiveness and flexibility of labor markets in transition economies. TRANSITION AND THE SOCIALIST LABOR MARKET The labor market and the labor process in the Soviet Union differed from what was to be found in industrial market economies. This was a consequence of the institutions of a planned economy and the policies pursued by Gosplan. It was also due to the fact that the socialist economy was partially insulated from global economic forces and that the level and structure of output were determined by planners' preferences rather than by consumer demand. Since the demand for labor is derived from the demand for output, planners' preferences determined the demand for labor and hence the structure of employment. As a result, a higher proportion of the labor force was engaged in manufacturing than would have been expected given the level of development in the region (as measured, for example, by gross domestic product [GDP] per capita). On the other hand, employment in the service sector was lower than expected. Planners' preferences or the exigencies of control were also responsible for the fact that average establishment size was very much larger than in a market economy in all sectors of the economy. Socialist economies were characterized by full—indeed over-full—employment. Full employment and endemic labor shortages can be seen as the counterpart of excess demand in product markets, rather than the result of specific employment policies. Although full employment was proclaimed as a major achievement of socialism, one could suggest that it contributed to the economic crisis that resulted in the collapse of the planned economy Full employment and the growth of labor hoarding made the socialist labor market rather rigid. It was difficult to develop new industries quickly, and it was difficult to introduce new forms of labor contract (Nuti, 1996a; Marnie, 1992; see also Granick, 1987). This in turn compounded difficulties in the innovation process and contributed to the problems experienced by the socialist system in adopting new technologies. This situation was reinforced by the structure of incentives. Wage differentials were small and largely failed to reflect the productivity-enhancing effects of investment in human capital. These labor market institutions, however, constituted an important part of the socialist social security system. This system was based on three pillars:

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Transforming Post-Communist Political Economies price control, extensive social consumption, and the right to work.2 The right to work—and, more particularly, full employment—ensured that all families had access to income, either from their earnings or from social insurance benefits linked to previous employment. It also meant that enterprises could be used as a channel for the distribution of certain benefits or social services. Wages may have been low, but price controls and subsidies to producers ensured that necessities remained affordable for the bulk of the population. Finally, the state provided health care, education, and certain other services free of charge at the point of consumption. This system was already under strain in the 1980s; indeed, one could argue that it contributed substantially to the social and economic crisis that resulted in the collapse of the communist system. Such a system is clearly incompatible with a market economy. Reconstitution of the social security system has been a necessary precondition for transition and for the emergence of more flexible labor markets. The performance of the Russian labor market has been affected by a number of factors apart from the employment policies of the Russian government and its reform of social policy. The most important of these are the collapse of central planning and the Soviet state, general economic reform, and stabilization policy. The economic and social crisis of the 1980s and the political response it evoked have resulted in a fundamental change in the economic and political environment of Central and Eastern Europe and the New Independent States (NIS). The combination of lax macroeconomic policies and more or less extensive price control had resulted in significant suppressed inflation in all socialist economies in the 1980s. In the Soviet Union, this took the form of a "monetary overhang," which by the early 1990s had undermined all the government's attempts to establish (or reestablish) equilibrium in the market for consumer goods.3 In January 1992, in an attempt to eliminate "excess" money balances and revive the distributive role of the price system, formal control over most retail prices was abandoned. This led to a sharp jump in prices and initiated a period characterized by much higher inflation rates than in the late 1980s. Inflationary pressure was increased by an ill-thought-out attempt to maintain a common currency throughout the NIS and by errors in stabilization policy. 2   For a more extended discussion of this issue, see Center for Cooperation with Economies in Transition (1996a: 120-122). 3   It is important to remember just how far out of equilibrium the markets for consumer goods were in Russia in 1991. In the last quarter of the year, most stores were empty most of the time, despite sharp increases in the prices of many foodstuffs and some luxuries earlier in the year. Coupled with the virtual confiscation of a large volume of savings through the device of declaring the 100-ruble note no longer acceptable as "legal tender," this resulted in the nominal value of money wages in 1991, greatly exaggerating the volume of goods and services that could be purchased with them. Therefore, conventional calculations of real wages and real incomes over the period 1990-1992 substantially overstate the decline in living standards that occurred in Russia (see Gavrilenkov and Koen, 1994).

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Transforming Post-Communist Political Economies The very high rates of inflation experienced by all transition economies—and especially by those in the NIS—have placed additional demands on the new social policy system and have had an impact on the operation of the labor market. Inflation has wiped out the savings of most Russian households—all the more so since, under socialism, most people were forced to hold their accumulated wealth in the form of cash or deposits in the state savings bank. At the same time, however, inflation has probably made it easier to adjust differentials. Finally, the functioning of the labor market in Russia—and in most of the other transition economies—has been affected by the evolution of the tax system. The concept of taxation was not fully developed under socialism, and none of the countries of Central and Eastern Europe or the NIS (with the possible exception of Hungary) had developed effective tax-collection systems. This has affected the ability of successor governments to develop adequate social safety nets, or even to undertake routine government activity without incurring budget deficits, thus contributing additional inflationary pressure. In such circumstances, the Russian government has succumbed to an understandable if regrettable tendency to impose a tax on anything it thinks will contribute to state revenue, irrespective of the impact of such taxes on the efficiency of resource allocation or the equity of income distribution.4 As a result, the Russian tax system has become both complex and, in principle, rather distortionary. Tax collection, however, is still inadequate, with many enterprises and individuals evading taxes and others delaying payment for as long as possible. There are three sources of distortion that affect the operation of the labor market and thus deserve to be mentioned here. First, the bulk of the resources used to provide social insurance benefits5 are raised by means of payroll taxes.6 As a result, these taxes amount to some 40 percent of the wage bill.7 However, there is a considerable shortfall in the amount of revenue collected 4   And where the federal authorities restrain themselves, individual republics, krai, and oblasti have a tendency to step in. 5   By social insurance benefit I mean a benefit in cash or kind paid to an individual as a result of (1) the prior payment of a contribution and (2) the occurrence of a specific event. For more discussion of this classification see Barr (1996). 6   There are in fact four separate funds, each responsible for a particular type of social insurance benefit and for the collection of its own "contributions." It should be pointed out, however, that this apparently inefficient system of earmarked taxation dates back to the end of the Soviet period. It was not adopted as a result of the budgetary crisis experienced in transition economies. Rather, it was a response to the widespread belief that planners undervalued social services and hence were always prepared to reallocate resources out of such sectors as health care in order to achieve plan targets in the productive sphere. 7   In most Central and Eastern European states, they are even higher, ranging from 41 to 53 percent of the wage fund (see Rutkowski, [1996]).

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Transforming Post-Communist Political Economies through these taxes.8 This puts some strain on the funds responsible for providing particular forms of support, or rather on the state budget, since it has a residual responsibility to ensure that particular programs are funded. Second, in the early transition period, many if not most governments introduced tax-based income policies in an attempt to restrain wage inflation, especially in the state sector. Both payroll taxes and the so-called excess-wage tax introduce a wedge between take-home pay and the gross cost of labor to the enterprise. This in turn reduces the demand for labor, and thus contributes to unemployment (Nuti, 1996a:51). Third, in Russia as in many market economies, there is evidence to suggest that the small-business sector has proven to be a particularly strong source of demand for labor. As part of its policy to encourage this sector—and hence to increase the demand for labor—the Russian government has introduced a simplified system of taxation for small businesses. There are, however, continual complaints in the press from small-business leaders that such a regime is not working and that their members are faced with increasingly burdensome demands from the tax police. SOCIAL AND EMPLOYMENT POLICY Innovations in social and employment policy and in institutions have changed the way the market for labor operates in Russia. Some observers argue that the market has become more flexible and efficient; others claim that it is still rigid and that greater differentials should not be taken as unambiguous evidence of greater flexibility. This section describes the reconstitution of social policy that has occurred since 1991 and outlines developments in employment policy. The effects of these changes on the functioning of the labor market are analyzed in the next section. The social security system that developed in the Soviet period was well suited to the structure of the labor market under economic planning; it was inappropriate for the very different circumstances to be found in a market economy (see Nelson, Kornai, and Ferge, in this volume). The Russian government has embarked on a program designed to reconstitute the country's social security system. This program comprises three elements. First, since a market economy cannot and does not guarantee full employment, the system can no longer rely on employment to ensure a minimal level of social security. Second, in the context of widespread private ownership—and the harder budget constraints that the market entails—the state can no longer rely upon enterprises to act as the major channel through which social security and services are provided. Third, the authorities have embarked on a review of the system of subsidies that, together with the system 8   See Organization for Economic Cooperation and Development (1995:127) and Goskomstat Rossiia (1996:277-78).

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Transforming Post-Communist Political Economies of price controls, played an important role in determining the real incomes of the poor. The decision to abandon the so-called socialist economic system has had implications for both labor market institutions and employment policy. It is often difficult to disentangle changes in these areas from the reform of social policy and social security institutions. For example, abandonment of the so-called guarantee of the right to work and of the commitment to full employment has led to the introduction of unemployment benefits and the adoption of a range of active labor market policies.9 Likewise, privatization has resulted in a partial withdrawal of the state from the direct determination of wages and salaries and the adoption of tax-based income policies instead. Both of these developments have had implications for the flexibility with which the Russian labor market operates. So, too, have changes in the legal framework governing employment and the labor contract. The transition to a market economy has meant the abandonment of a commitment to guaranteed employment. This change has involved acceptance of the possibility of unemployment, and the authorities have taken responsibility for providing a degree of financial support to those who lose their jobs. The real value of government support has been considerably reduced. In part this has been a consequence of general budgetary constraints. It has also been a response to the more general debate on the appropriate scope for state support. The second element in the reconstitution of the social security system in Russia relates to the role of the enterprise. In the context of state ownership of the means of production and virtual universal employment, the distinction between the enterprise and the state bureaucracy as channels for the delivery of social security was not regarded as important. In the Soviet Union, therefore, the personnel departments of state enterprises were responsible for the payment of a range of benefits. Enterprises were also responsible for providing a number of social services. Much if not all of this activity is inconsistent with the role of the enterprise in a market economy. Furthermore, fear of losing access to particular social services may deter workers from changing jobs, thus reducing economic flexibility. These concerns have led the Russian government to relieve enterprises of formal responsibility for the payment of many social insurance benefits. More important, perhaps, they have resulted in a determined campaign to persuade enterprises to divest themselves of their social assets. The third element of the reconstitution of social security in Russia is a review of the level and distribution of consumer subsidies. In the planned 9   In fact, unemployment benefits—and hence, implicitly, abandonment of the right to work—were introduced by the Soviet government in 1990. They thus predate the formal decision to abandon socialism.

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Transforming Post-Communist Political Economies economy, where prices played at best a marginal role in the allocation of resources, the government relied on price controls and subsidies to producers to ensure that low-paid workers could afford to purchase a minimum basket of consumer goods. A range of goods and services was also provided free at the point of consumption. In a market economy, such a policy approach is associated with significant distortions and considerable inefficiency. The Russian government has moved quickly to eliminate price controls on a broad range of foodstuffs and many other consumer goods. It has also increased the price of energy and attempted to reduce the implicit subsidies incorporated in the prices paid for utilities. This new policy has had a number of consequences. It has led to an end of apparent shortages, as well as the widespread queuing and black markets with which they were associated. It has also resulted in increases in the supply of some goods, through either more production or increased imports; for example, there has been a sharp increase in the stock of both cars and telephones in private hands. This is an example of the supply response that the market was intended to engender. On the other hand, the new policy has resulted in a significant change in the structure of relative prices. In conjunction with the high rate of inflation, it has led to a significant increase in the cost of living—particularly for poor households. The impact of the above changes in the structure of social protection on the level and composition of support provided by the authorities in Russia is shown in Table 9-1. The table reveals that there has been a very substantial decline in the real value of consumer subsidies and that this decline has not been fully compensated by increases in the value of cash benefits paid out. The new policy on consumer subsidies has met with opposition from at least three groups. Consumers, and particularly those who claim to speak for the poor, have argued that the policy has resulted in significant impoverishment.10 Second, domestic producers and those who claim to speak for them have argued that in the absence of either a degree of tariff protection or a measure of subsidization, they are unable to compete with the flood of foreign imports (from both the so-called near and far abroad). The government has shown itself to be responsive to such arguments; in any event, it has continued to provide significant subsidies to industry. Finally, local political leaders have also expressed opposition. For some, the new policy has represented too radical a break with the past; for others, it has threatened the industrial base upon which their power and prosperity depended. The fact that goods markets in Russia are now more or less in equilibrium means that access to particular goods and services is rationed by price—and by the availability of money income. This has forced the authorities to reconsider both the level of social guarantees the state was able (or willing) to give and the social risks against which it was prepared to insure the population. 10   For further discussion of this view, see Cornia et al. (1996).

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Transforming Post-Communist Political Economies TABLE 9-1 Social Protection Expenditures: Russia, 1992-1994 (public expenditure on health care and social security as a percent of GDP) Social Protection Expenditures 1992 1993 1994 Consumer subsidies 14.0 7.0 7.0 Pensions 4.0 5.9 5.4 Health care 2.6 3.3 3.1 Unemployment benefits 0.0 0.0 0.6 Family allowances 1.1 1.1 1.0 Social assistance 0.4 0.6 0.5 Total 22.1 17.9 17.6   SOURCE: Organization for Economic Cooperation and Development (1995:126). This is a political process fraught with conflict, and consensus is still a long way off. The debate has also been carried on against a background of budgetary stringency that has resulted in the adoption of modest levels of social guarantees. There has also been some attempt to review both the range of universal and insurance benefits provided and the terms upon which they are payable. This process was initiated before the collapse of communism, but the Russian authorities were forced to review the system adopted in 1990 because rapid inflation soon made existing levels of support obsolete. Yet despite considerable discussion, the authorities have made few changes to the complex and somewhat ad hoc system of allowances they inherited from the Soviet government.11 Russia has not yet introduced a means-tested social assistance benefit available to all who could demonstrate need. In consequence, Russia's social safety net contains significant holes, and many families fall through them.12 Labor law plays a more important role in personnel management in Russia than it does in Britain or, I believe, in other countries in the common-law tradition. For this reason it is worth noting changes to the code of labor law that have recently been adopted by the Duma. Even though Western labor economists do not believe the guarantees contained in the Soviet Labor Code constituted a serious restriction of managers' ability to dismiss workers, the recent revision of the code eliminates many of those guarantees. It also confers some additional rights on management. It formally eliminates the concept of the right to work and substantially reduces the rights of consultation previously enjoyed by trade unions with regard to safety, conditions of employment, and compensation. 11   For more details see Goskomstat Rossiia (1996:139-143). 12   The social assistance programs referred to in Table 9-1 relate to expenditures undertaken by oblast and republican governments largely out of their own resources. For the most part this assistance is given in kind rather than in cash.

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Transforming Post-Communist Political Economies The authorities—and more particularly the Ministry of Labor—have retained responsibility for setting the minimum wage and determining the structure of wages and salaries paid in the budget sector.13 The ministry did not seek to determine the level and structure of wages paid in state or privatized enterprises directly. Rather, it sought to contain wage inflation indirectly through a tax-based income policy—now abandoned. It was clear to the architects of perestroika in the second half of the 1980s that there was scope for improving the flexibility of the labor market in the Soviet Union. At the very end of the decade, the precursor of the Federal Employment Service (FES), Federativnaia sluzhba zaniatosti, was set up to this end. The Russian section of this all-union organization was transformed into the FES in 1992. The FES has set up a network of employment offices in all major cities, and in many smaller ones, which provide the unemployed with information about vacancies. These offices are also responsible for maintaining a register of the unemployed, and thus determining who is entitled to receive unemployment benefits. In addition, the FES and its local branches are responsible for the organization of active labor market policies. The FES provides retraining, or more often pays other organizations to provide such programs. It also organizes programs of public works. It does not, however, provide employment subsidies-or does not do so on a large scale. In sum, the transition to a market economy has been accompanied by a reconstitution of the social security system in Russia and by more or less significant changes in both labor market institutions and employment policy. There has been a fundamental shift in the philosophy underlying the Russian approach to welfare: the state no longer seeks to provide support for its citizens "from cradle to grave." Rather, it assumes that individuals will take on far more responsibility for their own lives. In practical terms, this has resulted in reductions in the subsidies provided for a range of goods and services and an attempt to ensure that prices correspond more closely to marginal costs. Unemployment compensation has been introduced, and there have been some changes to the terms by which other social insurance or social security benefits are paid. But there is still no social assistance program. The state has largely abdicated responsibility for determining the level and structure of wages. It has attempted to strengthen the formal rights enjoyed by management with regard to both hiring decisions and the labor process. Finally, it has reconstituted the agencies responsible for the implementation of active labor market policies. In the next section, an attempt is made to assess the extent to which these changes have resulted in increased labor market flexibility. 13   The budget sector refers to the bureaucracy and those sectors that are directly funded by the budget-educational establishments, medical institutions, and so on.

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Transforming Post-Communist Political Economies THE OPERATION OF THE LABOR MARKET There are no clear and simple indicators of either labor market flexibility or the efficiency with which the market allocates and reallocates labor. Consequently, the same statistical record may be interpreted differently by different economists—and this has certainly happened in Russia. For example, despite rising unemployment, there continue to be substantial levels of new hires in many sectors. Layard (1995a) and others have interpreted this as a sign of increased flexibility; Nuti (1996a) has dismissed it as no more than "churning" (see also Layard and Richter, 1995). It is my view that the figures cited below show the Russian economy has been exposed to a series of significant shocks. While the labor market has demonstrated substantial flexibility in the way it has absorbed these shocks, it still suffers from rigidities. Also, the institutional framework and the policies of the government continue to impose considerable hardships on individual families. Changes in the composition of the labor force in Russia are reported in Table 9-2. The table shows that the economically active population has declined by about 2.5 million since the collapse of the Soviet Union. About a fifth of this decline can be attributed to a reduction in the total population; the remainder is due to changes in the population of working age and to the withdrawal of those who either do not wish to work or have become discouraged in the search for employment. Over the same period, employment has fallen by about 5 million, and unemployment (based on International Labor Organization [ILO] definitions) has risen by about 2.5 million. In 1995, the unemployment rate in Russia was 8.2 percent. Given the scale of the collapse in aggregate output and the extent of the shocks to which the economy had been exposed in the preceding 5 years, this rate is quite modest.14 Table 9-2 also contains an estimate of unemployment in March 1996, which suggests that the increase in unemployment has leveled off, at least for the moment. Finally, Table 9-2 shows that, based on ILO definitions, women account for some 45 percent of total unemployment (it should be noted that they never accounted for more than half of total employment). Table 9-2 also provides information on registered unemployment and on the numbers receiving unemployment benefits. These figures show that in 1992, the register contained approximately a one-seventh of total unemployment; by 1996, coverage had improved substantially, but the register still contained only about two-fifths of those classified as unemployed according to ILO definitions. In 1992, about two-thirds of the registered unemployed were in receipt of unemployment benefits. In 1995, the proportion had risen to almost 90 percent. Table 9-2 provides some further information on the composition of registered unemployment. 14   Unemployment remains relatively modest even when some allowance is made for those workers who are on enforced and unpaid leave. For more details, see Nuti (1996a:45).

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Transforming Post-Communist Political Economies TABLE 9-2 Employment and Unemployment: Russia, 1992-1995 (thousands) Employment and Unemployment 1992 1993 1994 1995 Total population 148,326 148,295 147,997 147,938 Economically active population 75,665 75,012 73,962 73,140 Employed population 72,071 70,852 68,484 67,100 Unemployed population 3,594 4,160 5,470 6,040 Registered unemployed 578 836 1,637 2,327 In receipt of benefit 371 550 1,395 2,026 Economically inactive population 72,661 73,283 74,039 74,798   SOURCES: Goskomstat Rossii (1995:16, 54); Goskomstat Rossii (1996:21). The apparent failure of the FES may help explain why so large a proportion of the unemployed is found to be in poverty, a statistic that casts doubt on the effectiveness of this component of the social safety net.15 Doubt must also be expressed about the contribution made by active labor market policies to any increase in the effectiveness with which the labor market reallocates labor. There are more women than men registered with the FES. This may reflect the fact, or the perception, that the sorts of vacancies of which the FES is notified are more suitable for women than for men, or it may be a consequence of men's greater proclivity to find unregistered work in the so-called second economy.16 Youth account for some 36 percent of registered unemployment; this is only slightly less than the 41 percent reported in the 1995 Russian Labor Force Survey.17 Thus, the young do not appear to be shunning the FES in substantial numbers (or at least not disproportionately). In 1995, the average duration of unemployment was approximately 6 months. This is quite a short time, and if not a statistical artifact is evidence that the labor market is making significant numbers of matches.18 As the level of unemploy- 15   Furthermore, since the FES's active labor market measures are focused primarily on those who are registered as unemployed, the figures in Table 9-2 also call into question the effectiveness of the service. These reservations are reinforced by estimates of the structure of FES expenditures. In 1994, the FES spent some 2407md (milliard, equal to an American billion) rubles. This amount was allocated as follows (in percent): administration—27, benefits—38, active policies—5, other—30. (See Goskomstat Rossiia, 1995:278.) 16   For a more extended discussion of the problems faced by women in the post-Soviet labor market, see Lakunina (1995:21-30), Nuti (1996b:Ch. 10), and Goskomstat Rossiia (1996:25). 17   See Goskomstat Rossia (1997:94), which shows that some 10 percent of the unemployed are aged 16-19, 18 percent are aged 20-24, and 13 percent are aged 25-29. Further, in the youngest age group, only 8 percent of males are unemployed, but 12.5 percent of females. This probably reflects the fact that boys aged 18 are liable for conscription (see also Goskomstat Rossiia, 1996:25). 18   According to law, the registered unemployed are entitled to unemployment benefits for no more than 12 months. This could mean that the maximum duration on the register—and hence

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Transforming Post-Communist Political Economies TABLE 9-3 The Sectoral Composition of Employment: Russia, 1990-1995 (percent) Employment by Sector 1990 1992 1995 Total employment  100.0 100.0 100.0 State and municipal enterprises, etc. 82.6 68.9 37.6 Private enterprises 12.5 18.3 36.4 Social organizations, funds 0.8 0.8 0.7 Joint ventures 0.1 0.1 0.4 Mixed ownership 4.0 11.7 24.9   SOURCES: Goskomstat Rossii (1995:57); Goskomstat Rossii (1996:23). ment rises, however, it is to be expected that the average duration of unemployment spells will lengthen. The nature and scale of the reallocation that has occurred are depicted in Table 9-3. Table 9-3 records the dramatic decrease in state employment. More than a third of the labor force is now employed in private enterprises and another quarter in so-called mixed enterprises. Part of this change is the automatic consequence of privatization; the workers involved have not changed their places of work. But part of it reflects real structural change: new enterprises have been established and existing ones broken up into components whose structure is more suited to the imperatives of the market. These changes also underlie the changes that have taken place in the sectoral composition of employment in Russia. This reflects not only the switch from plan to market determination of demand, but also in part the collapse in output that followed the breakup of the Soviet Union (see Goskomstat Rossiia, 1996:23). A characteristic feature of all planned economies was the large average size of enterprises. This was due primarily to the absence of those very small firms that are characteristic of a market economy. It has been argued that this feature of the planned economies was a source of rigidity (Nove, 1977). I have not been able to locate detailed figures on changes in the size distribution of enterprises in the economy as a whole since the beginning of the transition, but available data show that the number of enterprises in industry rose from 26,900 to 138,000 between 1990 and 1994; the average number of employees in industrial enterprises fell from 781 to 126 over the same period (see Goskomstat Rossiia, 1995:310). It also was reported by Goskomstat Rossiia (1996:690) that on January 1, 1995, there were some 896,900 small enterprises (i.e., those with up to 50 employees) employing some 8.9 million persons.     as a registered unemployed person-is only a year. But since some 14 percent of persons are reported as having been unemployed for more than 12 months, I do not believe the estimates are affected by this type of censoring bias (see also Goskomstat Rossiia, 1996:25).

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Transforming Post-Communist Political Economies Taken at face value, these figures suggest that there has been a substantial increase in small enterprises, but that the extent of restructuring elsewhere in industry at least remains limited. On further reflection, however, the above figures must come as something of a disappointment to reformers. They suggest that in Russia, some 4 years after the beginning of transition, there were fewer than 900,000 small businesses, while in Poland (an economy perhaps one-fifth the size of Russia's), there are more than 2 million small and medium enterprises (Åslund, 1997). Furthermore, figures not cited here suggest that the registration of new enterprises in Russia has slowed considerably since 1995. One explanation for this trend is that with the economy in deep recession, the time is not auspicious for the creation of new businesses; an alternative is that the burdens of both taxation and bureaucratic regulation have driven new entrepreneurs underground, as it were, and into the informal economy. There is probably an element of truth in both assertions. In short, not only has there been considerable structural change in the Russian economy, but there also has been a substantial movement of employees out of those sectors which traditionally employed the bulk of Soviet workers. At the same time, there has been an increase in employment in trade and catering, in other services, and especially in the financial and information technology sectors (see Goskomstat Rossiia, 1996:23). This change has been associated with privatization, or at least the creation of so-called joint-stock companies. It also has been accompanied by the creation of substantial numbers of small enterprises. Structural change has not been accompanied by either high levels or (as far as we can tell) long durations of unemployment. There has, however, been substantial turnover in the labor market. The figures in Table 9-4 show that in 1993, new hires in the economy as a whole amounted to about one-fifth of the workforce, while separations were equal to one-quarter. This represents a significant level of turnover. New hires were at approximately the same level in 1994 and separations even higher. In 1995, separations fell slightly, to 25.7 TABLE 9-4 Labor Turnover: Russia, 1993-1994 (percent of average employment in relevant sector)   1993   1994   Labor Turnover New Hires Separations New Hires Separations Economy as a whole 21.1 25.1 20.8 27.4 Industry 20.1 28.8 18.2 32.0 Agriculture 11.3 14.5 12.4 19.6 Construction 38.7 44.1 34.9 45.9 Transport 26.4 29.6 23.0 29.6 Trade and catering 22.7 27.7 25.5 33.7   SOURCE: Goskomstat Rossii (1995:61).

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Transforming Post-Communist Political Economies percent of average employment, while new hires rose to 22.6 percent. Figures for 1996 are not yet available. Given the structural changes in employment described earlier, I do not think one can dismiss these figures on turnover as simply ''churning." The increase in the difference between new hires and separations in 1994 is evidence of a softening in the labor market at that time, and is the source of the increase in unemployment recorded in Table 9-2. But this softening either ceased or moderated in 1995-1996. This is evidence that the labor market has shown itself to be quite flexible. Formally, if a market is operating efficiently, an increase in supply or a decrease in demand should result, ceteris paribus, in a fall in price. As suggested above, there has been a decline in the demand for labor in Russia. The figures given below show that there has also been a sharp decline in average wages. It is this at least as much as the persistence of soft budget constraints that has permitted employment to remain as high as it has. Real wages declined by almost three-fifths between 1990 and 1995 (see Goskomstat Rossiia, 1995:77; 1996:10). As noted earlier, the fact that markets were substantially out of equilibrium in the last years of the Soviet Union means that this decline significantly overstates the extent to which a worker's claim on resources has fallen. But there has been a more or less marked reduction in the standard of living attainable by a majority of employees in Russia, and this remains true whatever plausible allowance is made for activities in the unregistered economy. The decline in real wages has been accompanied by an increase in differentiation. On the one hand, there has been a decline in the minimum wage relative to average earnings. The ratio of minimum to average wages in the Soviet Union at the end of the 1980s was much lower than the two-thirds or so that is typical of European market economies; it was equal to approximately one-quarter. Over the last 5 years, this ratio has declined steadily, and the minimum wage is now less than 10 percent of average earnings. It is also only about one-fifth of the poverty line (see Standing and Vaughan-Whitehead, 1995:48; Goskomstat Rossiia, 1995:80, 83; 1996:48, 139). As such, the minimum wage has ceased to function as a minimum. It now operates as a unit of account for certain purposes (for example, certain fines are specified in multiples of the minimum wage) and as an anchor for the pay scale in the budget sector. In this respect, it operates as a not insignificant disincentive to government employment. It may also contribute to the petty corruption that is reputed to be widespread in Russia's regions. There have also been marked changes in the earnings of employees in different branches of the economy, and there is some reason to believe that these changes reflect differences in profitability and changes in the level of demand for sectoral output. Some of these changes in earnings are reported in Table 9-5. One way of measuring the increase in differentiation is to calculate the ratio of the average earnings of the top and bottom 10 percent of earners.

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Transforming Post-Communist Political Economies TABLE 9-5 Sectoral Differentiation in Earnings: Russia, 1990-1995 (average monthly earnings as percent of economy-wide average) Sectoral Differentiation  in Earnings Year   1990 1993 1995 Kda Economy as a whole 100 100 100 26.4 Industry 110 108 114 20.6 Oil extraction 165 311 289   Oil refining 97 204 221 15.2 Coal mining 158 249 233   Engineering 101 82 84 16.3 Light industry 82 70 54 15.8 Agriculture 82 61 47 23.8 Construction 124 133 136 24.7 Transport 115 151 157 13.3 Trade and catering 85 80 86 17.8 Credit, finance, and banking 135 243 164 n.a. State administration 120 115 110 n.a. aKd is defined as the ratio of the earnings of the top and bottom 10 percent of employees in the relevant sector or branch. n.a. = not applicable SOURCES: Goskomstat Rossii (1995:8); Goskomstat Rossii (1996:40). Table 9-6 shows that according to this indicator, differentiation more than tripled between 1991 and 1995. The final column of Table 9-5 shows that this differentiation is made up of inter- and intra-sectoral components. It probably reflects the introduction of price signals to attract those with scarce skills to particular positions; it also surely contains some component of reward for the "risks" taken by top managers. This is suggested by a diagram reproduced in a recent United Nations Development Programme (UNDP) report (based on unpublished Goskomstat data), which implies that in March 1995, the average earnings of managers were about 650,000 rubles a month, those of skilled workers and specialists were some 300,000-325,000 rubles, and those of the unskilled only 200,000 rubles a month (Granick, 1996:24). The same source indicates that earnings in private enterprises were on average at least 700,000 rubles a month, while those in public and mixed ones were only 235,000260,000 rubles.19 Both the decline in the ratio of the minimum and average wages and increases in differentiation have resulted in substantial changes in the distribution of earnings, as Table 9-6 shows. These changes mean there is now a substantial problem of low pay in Russia. This problem is compounded by a 19   The UNDP report also contains the intriguing claim that the earnings of employees aged less than 29 were significantly higher than those of employees aged 30-49 and more than 49. The figures given are 380,000, 300,000, and 225,000 rubles per month, respectively, for the three age groups (Granick, 1996:Fig. 3.4).

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Transforming Post-Communist Political Economies TABLE 9-6 Inequality in Earnings: Russia, 1991-1995 (percent of wage fund)   Share of Wage Fund Received by Quintile of Employees 1991 1994 1995 1st (lowest) 7.7 4.1 3.9 2nd 12.6 9.1 8.6 3rd 16.9 14.7 14.2 4th 22.9 22.9 22.6 5th 39.9 49.2 50.7 Ratio of earnings of top and bottom 10 percent of earners 7.8 23.4 26.4   SOURCE: Goskomstat Rossii (1996:46). feature of the Russian experience that has not been mentioned thus far in this chapter—that of arrears. A significant number of workers, primarily those in state employment or those who work in privatized state enterprises, are not paid the wages due them on time. I have not found figures that chart the scale of this phenomenon or how it has evolved over time, but it is widely believed in Moscow that it has increased. Arrears can only compound the problem of low pay. The analysis of the Russian labor market provided in this chapter has so far not attempted to estimate the impact of the informal economy on either employment or living standards. This has been deliberate: I believe that for many if not most of the questions discussed here, the official statistics provide a reasonable picture of the actual situation in Russia. But anecdotal evidence (and some elements in the official statistical record) suggest that the so-called second economy is so large and so pervasive that some attention should be paid to possible sources of additional income and employment not recognized by the authorities.20 There are three issues that merit some discussion: the scale and nature of the so-called informal or shadow economy; its impact on recorded employment, or, more important, on unemployment statistics; and its impact on measured incomes, and hence on poverty and inequality. The informal economy in Russia as in most other countries comprises three main elements: (1) illegal activities such as the production and trade of narcotics or, possibly, prostitution; (2) activities that are not in themselves illegal, but involve attempts to avoid paying taxes or the evasion of regulations in some other way (for example, operating without a license or in contravention of health and safety regulations); and (3) activities that for one reason or another escape the statistician's measuring rod—perhaps because they are 20   These issues are discussed further in other chapters in this volume. See, in particular, the chapters by Polishchuk, Leitzel, and Johnson et al.

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Transforming Post-Communist Political Economies thought to be insignificant (e.g., the production of home-grown vegetables by the nonfarm population in most western industrial economies) or because the statistical authorities have proved to be incompetent or inept. It is possible that Russian households derive considerable income from outright illegal activities such as narcotics trading, but to the best of my knowledge, such activities are excluded from national income—and hence from the statistics on income—as they are in all countries using the United Nations national income accounting framework. It is also possible that, through ignorance or incompetence, the Russian statistical authorities failed to include substantial areas of private-sector activity in the first years of transition. They have made considerable efforts to close the gaps in their coverage, and they do try to estimate the value and volume of significant flows—including that of home-produced foodstuffs by the urban population. But there is still significant tax evasion, and some of it is undoubtedly associated with activities that go unrecorded in the national-income statistics.21 Nevertheless, I believe that macroeconomic statistics of economic activity give a substantially accurate account of what is happening in the economy. The only caveat I would offer here relates to Goskomstat's (1996:119) estimate of the decline in the share of wages in aggregate personal—and national—income. It appears that Goskomstat now assigns all or a considerable part of the earnings of private-sector enterprises to entrepreneurial income; individual recipients of these incomes continue to consider them wages and salaries, and that is how they would be classified in the national accounts of many countries. On the other hand, the Family Budget Survey is seriously flawed. There were always problems with the sampling frame it used, and its enumerators are now encountering an increasing reluctance to provide information, particularly about income.22 Since the Family Budget Survey is the primary source of information about the distribution of income in Russia, this weakness suggests that one should approach estimates of inequality (and perhaps poverty) with a degree of caution. However, there is reason to believe that the tendency to underreport income is greater at the upper end of the distribution; insofar as this is so, official estimates may understate as much as overstate the level of inequality. (Goskomstat itself is aware of this weakness and has tried to compensate for the missing data in various ways.) There are other indicators pointing to the fact that inequality has increased; at present, the official estimates are probably the best guide to the extent of this increase. 21   For a fuller account of the way in which Goskomstat attempts to capture the second economy, see Layard (1995b). 22   As evidence of the problems faced by this survey, it is interesting to note that average monthly income in 1995 was estimated to be 284.2 thousand rubles per capita according to the Family Budget Survey; according to the national income accounts, per capita money income was reported to be 532.9 thousand rubles (Goskomstat Rossiia, 1996:32,101).

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Transforming Post-Communist Political Economies Finally, there is the question of the impact of the unofficial economy on recorded estimates of employment and unemployment. In a sense, this is a secondary problem, since the question in Russia is why unemployment is so low rather than so high. It is worth making two comments, however. First, much of the activity possibly omitted from the statistics—such as home-grown vegetables and do-it-yourself repairs—may well take place during an employee's leisure hours rather than as the main occupation of someone registered as unemployed. Second, it is entirely possible that those recorded as unemployed by ILO definitions but not registered as such with the FES are working in the second economy, as well as looking for work. It is also possible that many of those temporarily unemployed (or, as the Russians put it, on administrative leave) are involved in some form of unofficial economic activity. If so, however, this only increases one's assessment of the degree of flexibility in the labor market.23 SUMMARY AND CONCLUSIONS The argument of this paper can be summarized as follows. The decision to abandon socialism and the planned economy in Russia required a fundamental reconstitution of the system of social protection provided by the state. The decision to give up the commitment to full employment and the right to work meant that social support could no longer be channeled through enterprises. This outcome was reinforced by the decision to privatize the bulk of industrial (and other) firms; the new owners could no longer be expected to undertake the state's social policy commitments without compensation. Transition to a market economy also required the revival of the price mechanism. On the one hand, this has involved the abandonment of price controls; on the other, it has involved an ongoing review of the state's social programs. So far, the result has been a sharp reduction in the scale of price subsidies, which has been offset only partially by increases in the range and value of cash allowances. In addition to its decision to withdraw substantially from control over the setting of the prices of both goods and labor, and thus to allow more scope for the operation of market forces, the Russian government has provided a measure of support. In setting up the FES it has provided a vehicle for the implementation of active labor market policies. The FES is also responsible for so-called passive policies and, in particular, for the payment of unemployment benefits to those who register with the service as unemployed. Although 23   One final comment is worth noting. For many casual observers, both bribery and theft constitute part of the second economy. But since, arguably, these activities do not create additional value, they are better seen as either redistributive mechanisms or asset transfers than as a component of national income. For this reason, they have been ignored in the above discussion.

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Transforming Post-Communist Political Economies I have expressed some doubts about the effectiveness of the work of the FES, its existence has probably contributed to the improved operation of the labor market. Under the Soviet system, the Russian economy was relatively protected from global pressures. This in turn meant that on the one hand, the structure of production—and hence employment—was outmoded, while on the other, workers continued to enjoy a security of employment that the system could no longer afford. Productivity was low, and so was the standard of living. The breakup of the Soviet Union and the abandonment of economic planning have opened the economy to the pressures of international competition. The labor market has had to deal in a short period of time with a succession of shocks—inflation, the collapse in output, international competition—which in different circumstances it might have taken longer to absorb. This has affected the apparent success of the transition to a market economy. The evidence presented in this chapter suggests that there has been substantial adjustment to the new structure of employment in Russia. This adjustment has occurred with lower—or perhaps not higher—levels of unemployment than those observed in other transition economies. This suggests that the labor market has shown itself to be quite flexible—because of or despite the reconstitution of social protection. A combination of the willingness of Russian workers to accept cuts in real earnings, soft budget constraints permitting enterprises to operate at a loss for considerable periods, and managerial paternalism (leading to the use of enforced leave or wage freezes rather than mass dismissals) has enabled the economy to adjust to the new economic environment. But this new environment is rather different from that which was expected at the end of the 1980s. Because of the way planners' preferences determined the pattern of output and the demand for labor, much of the human capital invested in the Russian labor force has proven to be inappropriate to the new environment. A few with scarce skills have reaped substantial rents as consumers' preferences have replaced the plan; most have seen their living standards fall. There is still more adjustment to occur: compared with the situation in other European industrialized countries, employment in manufacturing and agriculture in Russia is too high and will fall further. Earnings in these sectors are likely to remain relatively depressed until adjustment is substantially complete. The decline in real wages and the consequent collapse in Russian living standards cannot be ascribed to the failure of economic reform or to failures in the operation of the labor market. The latter has shown itself to be quite flexible. But the 1990s are a rather more hostile environment for labor than were the 1960s, as demonstrated by the experience of countries such as Britain, France, and the United States.

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