International sanctions have accelerated the transformation of the labour market which started during the pandemic. The market has moved from limited demand to limited supply, and this situation will persist for a long time, labor market expert Rostislav Kapeliushnikov says.
  |   Yekaterina Kravchenko Econs

The forecasts of rising unemployment caused by the withdrawal of foreign business and the transformation of Russia’s economy in response to international sanctions have not come true: the labour market began to adapt to the new conditions the same as it had done during previous crises, that is, without plummeting employment and surging unemployment. However, several labour market indicators signal the existence of differences from previous crises and an ongoing transformation of the labour market which may be of rather large scale.

One of Russia’s leading experts on the labour market Rostislav Kapeliushnikov, Corresponding Member of the Russian Academy of Sciences (RAS), Chief Researcher at the Institute of World Economy and International Relations (IMEMO, RAS), Deputy Director of the Centre for Labour Market Studies at HSE University, has shared with Econs his observations on the current situation in the Russian labour market.

Unemployment squeeze

‘Russia’s economic adaptation to the 2022 sanctions caused a massive adjustment in the labour market. At the highest point preceding the slump, companies adjusted to negative shocks the same as they had in past crises: they cut wages and reduced working hours. However, these ‘traditional’ changes were limited and short-lived, which indicates that this crisis is not a standard one,’ remarks Kapeliushnikov, ‘indeed, rather than moving upwards, overall unemployment declined persistently, dropping to an all-time low of 3.7% (link in Russian) by the end of 2022 and reaching the extremely low level of 3.2% (link in Russian) in May 2023.’

In addition to the fact that this trend looks quite out of place during a time of economic recession, it may also lead to longer-term consequences. In recent years, employment in Russia has remained fairly stable by consistently drawing the unemployed into employment. However, now that unemployment has been squeezed to a minimum, it can no longer be the source of new labour it used to be.

A number of statistical indicators suggest the existence of considerable imbalances in the Russian labour market. That said, the historically low measures of general and registered unemployment are accompanied by a record number of vacancies in the register of the Federal Service for Labour and Employment: in 2022, there were three registered vacancies per registered unemployed person. During the coronavirus pandemic, there were fewer than 0.5 vacancies per registered unemployed person. The number of vacancies should inevitably start to decline amid an economic crisis. Nothing of the sort has happened, however, which points to the existence of considerable unsatisfied labour demand.

Similar conclusions can be drawn from the vacancy rate, an alternative indicator reported by businesses. Historically, it has fluctuated around 2.5%, and it overshot 6% in 2023. At present, the ratio between general unemployment and the vacancy rate reported by businesses stands at about 1:2, which is an absolute record in the entire history of the Russian labour market.

However, it should be noted that this shift emerged not in 2022, but earlier, during the coronavirus pandemic. Last year, the vacancy rate was up by 0.5 percentage points, with the major breakthrough registered in 2020–2021. Notably, the coronacrisis induced a similar shift in the labour markets of many other economies, including in the US, Germany, and other EU countries. Unemployment in these countries is also approaching historic lows, while vacancy rates are at their highest levels. Russia’s specificity consists in the fact that the second sanctions crisis has worsened this non-standard situation.

It is evident that in 2022, the economy’s transition to operation in a semi-military mode has drastically changed the structure of labour demand. The shock faced by companies and even whole industries has been very uneven: new opportunities have emerged for certain players, while others have found themselves in quite difficult situations. Companies and industries have begun a ‘tug of war’ trying to attract labour from a limited pool: the economy has split into two parts, with one part opening vacancies trying to win over the required staff and the other forced to open vacancies to compensate for the loss of employees. As not all companies were ready to offer high wages, many of their vacancies have remained unfilled for a long time.

In theory, any sharp increase in competition among companies for labour inevitably pushes up real wage growth. As strange as it may seem, we have not witnessed anything of the kind until recently.

According to official data (link in Russian) real wages had decreased by 1.1% in 2022. According to our estimates, in the absence of the 2022 shock associated with the sanctions crisis, real wages would have been 5% higher than the actual level, that is, they decreased by about 6% over the year.

Interestingly, a comparable slump was also observed during the coronacrisis. The analysis of real wage dynamics over longer periods brings us to the following conclusions: the average annual growth of wages was 13.7% in 2005–2008, 3.5% in 2009–2013, and 1.5% in 2014–2022.

It seems that many companies continue to be guided by old wage expectations, which prevents them from promptly filling vacancies. Taking the above into account, on the one hand, the most acute labour deficit should be expected in the sectors where the developments of 2022 opened up new opportunities to expand output and, on the other hand, in the sectors lagging behind in the wage competition, such as in light industry or food production.

Labour force turnover and statistics issues

‘The second sanctions crisis reproduced the situation experienced during the pandemic, when one part of the economy was severely hit by the closure of enterprises and disruptions in the supply of components, while the other benefited tremendously, as was the case in the delivery services segment, where headcounts surged,’ continues Kapeliushnikov.

One of the central events of the previous year was the withdrawal of many Western companies from Russia. However, this did not have a serious effect on the situation in the labour market, as many foreign players simply maintained employment while activity was suspended, and they finally just sold their assets to Russian businesses. Moreover, the proportion of those employed by businesses partially owned by foreign residents was small initially, representing about 4% of total employment.

The shocks encountered by the economy in 2022 have not waned in 2023. In all probability, their impact will be protracted in time. It is difficult to forecast all the new challenges the economy will face, but it nonetheless becomes evident that the most serious damage was done to industries which had a considerable degree of integration into foreign economic relations and which are going through a painful transformation.

One characteristic feature of the new structure of the labour market is the sharp increase in gross labour force turnover, calculated as the sum of the recruitment and attrition rates, up to 65%. Inter-company turnover of the same high intensity was last seen in the late 1990s and the early 2000s. It is worth noting that this indicator used to decrease during previous crises, which meant that companies hired new staff less often and employees also changed jobs less often, preferring not to lose them.

In the first half of the 2000s, the annual gross labour force turnover was still at 60–65%. However, the 2008–2009 financial crisis spurred a sharp deceleration to around 55%. In 2020, the COVID year, intercompany turnover dropped more strongly, almost to 50%, a new record low. Further on, it first sped up sharply in 2021 and then continued to accelerate in 2022, which meant that employees became more inclined to change jobs and that it is becoming increasingly difficult for companies to retain them. This situation fits well into the scenario mentioned above of the existence of a considerable vacancy overhang.

The Russian labour market has the unique feature of an almost total absence of forced lay-offs (initiated by employers because of job cuts). In the 2000s, the level was about 1.5–2%, dropping to the negligible value of 0.5% in 2019–2020. In 2022, this level was unchanged, meaning that, notwithstanding the start of the recession, businesses did not begin to reduce the size of their staff.

On its face, the situation seems strange, though there is definitely a certain logic behind it. If it is clear that an under-employed worker will be needed later, his or her working hours or pay are likely to be reduced.

There are several reasons for this. First, it is difficult to find workers with the necessary skills in the market. Second, forced lay-offs are very costly for employers. Third, there may be opposition from regional or local authorities fearing growth in social tensions. As a result, in Russia, the majority of lay-offs have always been voluntary, initiated by employees themselves.

The irony of the situation is that, whereas the intensity of such lay-offs declined during previous crises, it was up during the second sanctions crisis. However, thinking about the massive overhang of unfilled vacancies formed in the Russian economy during the past two–three years, one may not be very surprised.

When analysing labour market trends, we should remember that official statistics are not currently able to give reliable answers to some important question.

The issue is that many key labour market indicators are derived from sample labour force surveys conducted by Rosstat. However, to go from sample results to a general indicator, it is necessary to know the structure of the sampling frame, which in this case is Russia’s entire adult population, i.e. its size and its structure by percentage of various social and demographic groups. Population censuses usually serve as the main source of such data. Multiplying the sample results by appropriate weighted coefficients, quantitative estimates of the total labour force, the employed, the unemployed, and so on can be obtained.

Clearly, many processes in 2022 (mobilisation, relocation, the arrival of immigrants from Ukraine) can be expected to have influenced the parameters of the sampling frame, changing both its size and structure. As a hypothetical example, let us assume that last year around one million people left Russia. Another assumption is that they were mostly young men. The size and composition of Russia’s adult population must be adjusted to account for this decline. However, it is not yet known when or how the national offices of statistics will make this recalculation. There is also a similar question about the correlation between employment in the military and civil segments of the economy. So far, it is only clear that starting from 2022, Rosstat labour force survey data should be used very carefully, and, where possible, data from other sources should be used.

New realities: universal staff shortages

‘Since 2000, the Russian economy has lived through four crises: in 2008–2009, in 2015, in 2020, and in 2022. The algorithm of the labour market response to shocks has always been almost the same: the rates of employment and unemployment either did not change or were adjusted negligibly, while working hours and wages have always been hit the hardest. However, 2022 saw the emergence of new factors associated with an increase in labour force turnover, record low unemployment, and a surge in vacancies, suggesting a large-scale transformation in the labour market to come,’ concludes Kapeliushnikov.

In all probability, this process will be lengthy because of the inertia of the adaptation of enterprises to new realities, which would require the transformation of many links in the production and technological chains. We are not insured against new shocks either this year or next year, and it is not currently clear which impulses the labour market will receive from new developments.

All this is combined with a long-term downward trend in labour supply. Analysis of the demographic situation shows that Russia’s economy is in for a faster reduction of the labour supply in the coming years. Despite the pension reform, the number of employed persons will decline by three to five million over the next 15 years. As a result, certain sectors will experience an ever-growing staff deficit.

Even though companies most frequently complain about the shortage of qualified workers and programmers, the labour force shortage is actually of a universal nature. There is hardly a single industry or profession in which the vacancy rate has not increased over the last three years, usually very drastically.

The ageing, shrinking population will continue to put pressure on labour supply, intensifying the squeeze on it. It is not clear which sources might be used to support it, as the traditional sources have almost been exhausted and there are no new ones. At the same time, it is evident, that the coronacrisis followed by the second sanctions crisis have led to considerable structural imbalances in the labour market, and the market itself has transitioned from operating in conditions of limited labour demand to conditions of limited labour supply.