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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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