Structural Adjustment without Mass Unemployment?
Lessons from Russia

Russia has seen the biggest sustained collapse of national income ever recorded in peacetime. Yet registered unemployment remains very low. Simon Clarke's case study research, with Russian collaborators, focuses on the processes of employment restructuring to assess the character and significance of labour market flexibility. The research concludes that excessive labour market flexibility imposes substantial human costs and presents serious obstacles to structural adjustment.

Policy Relevant Findings


Abstract

THE RESTRUCTURING OF EMPLOYMENT AND THE DEVELOPMENT
OF THE LABOUR MARKET IN RUSSIA

Russia has experienced an enormous decline in production but continues to have a low level of reported unemployment. Some see low unemployment as a reflection of the absence of reform, some believe that the flexibility of the Russian labour market is the key to successful structural adjustment without mass unemployment. Research into the processes of labour mobility and employment restructuring in Russia leads to the conclusion that Russia suffers from excessive labour market flexibility which leads to excessively low wages, inequality, labour mobility and job insecurity. This in turn undermines labour motivation, de-skills the labour force and erodes employers' incentives to invest. The conclusion is that a flexible labour market may have a role to play in sustaining a boom, but strong and effective labour market regulation and job creation policies are essential in recession.

Keywords: Structural adjustment; labour market; flexibility; unemployment; Russia; transition


Summary

Structural adjustment and unemployment

The removal of barriers to labour mobility has been seen as a central part of structural adjustment. These barriers are all those institutional and normative factors that attach people to their existing jobs and which. These attachments have to be broken to persuade people to seek new jobs in new spheres. A high level of transitional unemployment is therefore accepted as a feature of structural adjustment.

Industrial production in Russia has fallen by over half and GDP by over a third, yet registered unemployment stands at only three per cent. Some researchers have argued that Russia has low unemployment because structural adjustment in Russia has not got off the ground. Others argue that Russia has been able to achieve substantial structural adjustment without mass unemployment because of its extremely flexible labour market. Finally, there are those who argue that Russia does have high unemployment; that this has been concealed by the extremely low wages which are an essential feature of a flexible labour market.

These three interpretations of the Russian experience have very different policy implications for all those countries that have sought to pursue flexible labour market policies. There has been little research on the processes of labour mobility and employment restructuring in Russia on the basis of which to evaluate these contending interpretations. It is this gap that the project reported here was designed to fill.

Low unemployment: a failure of reform?

The proponents of the orthodox structural adjustment strategy have argued that employment restructuring in Russia has been blocked by 'labour hoarding', which has been sustained by state subsidies and soft budget constraints (Commander, McHale and Yemtsov, 1995). The policy implication is that budget constraints should be hardened, bankruptcy effectively enforced, the employment service strengthened and a social safety net provided in preparation for mass unemployment.

Detailed examination of the employment strategies of industrial enterprises does not support this argument. Enterprises do not receive significant state subsidies and, in the absence of working capital or credit, face very hard budget constraints. Employment reductions have been very substantial, although lagging behind the fall in production. Employers face no effective limitations on their ability to reduce the labour force, and are not obviously constrained by 'paternalistic' concerns for the welfare of their employees. The very high rates of labour turnover mean that enterprises are not hoarding labour, but continue hiring to replace those who have left. Labour retention is a rational attempt to preserve production capacity which is sustained not by state subsidies but by low and unpaid wages. It is the willingness of workers to accept low or no wages, the classic indicator of labour market flexibility, which explains the scale of underemployment in former state enterprises.

Structural adjustment without mass unemployment?

In stark contrast to the orthodox view, others have proposed that Russia is an exemplary case demonstrating the advantages of labour market flexibility (Layard and Richter, 1995). Layard and Richter argue that wage flexibility gives every employee the choice of retaining an existing job at a low wage or taking a better-paid job in the expanding private sector. Unemployment is precluded as an option by the very low rates of unemployment benefit. Old state enterprises provide a very efficient form of workfare, avoiding the debilitating and demoralising consequences of unemployment. The only disadvantage is that the presence of surplus labour impedes the restructuring of production, so Layard and Richter favour temporary lay-offs ('administrative leave') for those surplus to current requirements.

The policy implication is that flexible labour markets work, that a low level of benefits reduces the incentive to leave work for unemployment, and that support needs to be for job-to-job transitions, primarily by providing training and housing, rather than for unemployment, which the benefit system should be designed to discourage.

Labour market flexibility and the degradation of labour

Our research undermines this benign view of labour market flexibility. Employers do not offer employees a choice between job security with a low wage and mobility in search of a high wage. All employers try to recruit and retain younger, skilled, male employees by paying them good and secure wages, and to force out older, unskilled and undisciplined employees by paying them low wages or no wages. The relatively more prosperous enterprises are able to upgrade their labour force, while the less prosperous are unable to hold on to their existing employees and have to be less selective in their recruitment. Labour market flexibility leads to a polarisation between 'good' and 'bad' enterprises and a segmentation of the labour force, with skilled, younger male workers in well-paid secure jobs, while the less desirable young, elderly, unskilled and undisciplined are squeezed out of the labour market into the twilight world of subsistence agriculture, petty crime, street trade and casual employment.

While most people shuffle between existing jobs in former state enterprises, the scale and significance of the new private sector as a source of employment has been considerably exaggerated. Most jobs in the new private sector are casual and are not legally formalised. Most people regard work in the private sector as undesirable because of its instability and the absence of social protection, looking to it only for casual earnings. Opportunities in the private sector are narrowing as it becomes more professionalised.

The significance of secondary employment has also been exaggerated. Only a minority has access to secondary employment, which provides additional opportunities for the privileged rather than a means of support for the disadvantaged. Most secondary employment is not in the new private sector, but takes the traditional forms of additional jobs at the main place of work or `individual labour activity' providing goods and services. Casual employment is typically not secondary employment, but the only source of income for those who are laid-off or unemployed.

Labour mobility for most people is a crisis phenomenon. Most people are driven by the need to survive in the face of low pay and the non-payment of wages, not by the attraction of a new job, a new life, or even a higher income. Although the young are highly mobile, most people retain the traditional values of hard work and are committed to their workplace and workmates. When such workers leave, the home enterprise loses the irreplaceable benefit of his or her skill and experience, while the worker usually moves to a job that requires significantly less skill. Mobility therefore leads to the `degradation' of the labour collective and of the skills and morale of individual workers.

The principal and most desirable channels of mobility for both employers and employees are personal connections. This leads to a further segmentation of labour markets as enterprises close their doors to `outsiders'. It also reinforces the marginalisation and the poor image of the employment service, which employers and employees use only as a last resort.

Low wages: the price of flexibility

The price of labour market flexibility in the Layard/Richter model is low wages. Of course a job is better than no job, and low wages are better than no wages. However, low wages tend to be self-reproducing, for well-known reasons: workers on low wages have little incentive to work and rapidly become demoralised, while low wage costs give employers little incentive to raise labour productivity. Low wages in Russia are very low and in many cases employers do not pay for months on end. Labour market flexibility also implies growing income inequality, which doubled between 1988 and 1993. Between one quarter and one third of the population live below the minimum poverty line. Guy Standing has argued that low wages conceal hidden unemployment, which he estimates at over 28% of the industrial labour force. He concludes that employers should be compelled to pay a living wage, and to pay it on time, by strengthening collective bargaining institutions. This would then force unemployment out into the open, where the problem could be addressed by appropriate active and passive labour market policies (Standing, 1996).

Our own research casts doubt on these conclusions, Lay-offs indicate instability rather than hidden unemployment. Economic instability implies sharp fluctuations in production so that most industrial enterprises have cut the direct labour force back to the minimum necessary at periods of peak demand but stave off bankruptcy only by the non-payment of wages. The polarisation of enterprises means that those most likely to close are those with a disproportionately elderly, undisciplined, unskilled and female labour force, those categories of people least likely to be able to find any other work. To force unemployment into the open would, therefore, be to swamp the labour market with the least employable.

A policy dilemma

Our research concludes with a policy dilemma. It is clear that the Russian labour market is excessively flexible, leading to excessively low wages and excessively high labour turnover. This is eroding the traditional highly developed work ethic and removing the incentive for employers to raise productivity. However, raising wages on its own is more likely to push employers into declaring mass redundancies and closures than it is to spur them to labour-saving investment. Russia certainly needs effective collective bargaining institutions, a minimum wage which at least approaches the physiological subsistence minimum, and the enforcement of elementary labour rights. But Russia needs such policies within the wider framework of a programme that can stimulate the economic recovery which the market has so signally failed to initiate.

This research reinforces the argument that there is a fundamental difference between structural adjustment based on a booming export sector and structural adjustment based on a shrinking non-tradeables sector. A flexible labour market has a role to play in sustaining a boom, but strong and effective labour market regulation and job creation policies are essential in recession.

About this study

The Research

Simon Clarke conducted this research in collaboration with colleagues from the Institute for Comparative Labour Relations Research (ISITO), Moscow. The focus of the research was the restructuring of employment and labour mobility within and between industrial enterprises in particular local labour markets. The research also investigated the collection and reporting of enterprise employment statistics.

The fieldwork was conducted by the Moscow, Samara and Kemerovo branches of ISITO between September 1995 and June 1996 in Samara and Kemerovo regions, both of which have below average registered unemployment but major restructuring.

The first stage of the research involved the collection and systematic analysis of statistical data and personnel records, and extensive interviews with managers, specialists and workers in six industrial enterprises in each region. Research focused on management at the enterprise level with more intensive research at shop-floor level in each enterprise. This was followed by semi-structured work history interviews with a total of 260 employees drawn from the shops which were the focus of the case study. At the same time we carried out a review of the local labour market in Kemerovo and Samara, focusing on the role of the state and private employment services.

Draft research reports were discussed with enterprise managers and specialists and with representatives of the local employment services and local administration. Reports were circulated between the research teams, which met to review the research every three months. The first Russian version of the project report was presented to a seminar sponsored by the Ford Foundation, held in Moscow in July 1996 to bring together Russian researchers and policy makers. The English version of the project report was prepared over the summer and presented at a workshop held at the University of Warwick in September 1996.

Related Reading

Commander, S., J. McHale and R. Yemtsov (1995). Russia. in Unemployment, Restructuring and the Labor Market in Eastern Europe and Russia. S. Commander and F. Coricelli, eds. Washington DC, The World Bank: 147-191.

Layard, R. and A. Richter (1995). "How much unemployment is needed for restructuring." Economics of Transition 3 (1): 39-58.

Standing, G. (1996). The "shake-out" in Russian factories: The RLFS fifth round, 1995. Geneva, ILO Employment Department.

The results of the research have been published in English and Russian as:

Structural Adjustment without Mass Unemployment? Lessons from Russia. 256 pp. CCLS, University of Warwick and ISITO, Moscow. November 1996.

Restrukturirovanie zanyatosti i razvitie rynkov truda v Rossii, 217 pp. ISITO. Moscow. November 1996.

Available from the Centre for Comparative Labour Studies or from our World Wide Web site, which also provides access to the full enterprise reports and other research materials (in Russian).