Russia’s Labor Market Distortions – 8/10/16

Russia’s labor market is struggling with distortions as policymakers put short term stability ahead of long-term growth by ignoring demographic and productivity issues.

A S&P Global Ratings report released last month revealed a deep concern about population aging in Russia. It forecasts the country’s population will fall from 143.5 million to 128.6 million in the next 35 years, with age-related spending increasing from 13.1% to 19.1% of GDP compared to the current median of 7.8% in emerging economies.

Officials now publicly say the pension age will be raised to 65 from 55 for women and 60 for men. The average life expectancy in Russia is around 65 for men and 77 for women reflecting a health system poorly ranked by the World Health Organization. Pensions for those who are still working will also be eliminated.

The raising of the pension age will keep many in a workforce already overburdened with unnecessary workers. Thanks to government pressure on businesses to avoid any job cuts there have been almost a million job gains during Russia’s latest oil glut induced recession. As a result, many held onto their jobs only to see their salaries plunge or go unpaid entirely. Unemployment in Russia is expected to hold at less than half the rate of the euro region at the cost of productivity and economic flexibility.

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While it still existed, the Soviet Union kept unemployment numbers artificially low by controlling all firing decisions, making registration as unemployed pointless and costly, and starting witch hunts against “idlers”. Today, Russia still has some of Europe’s most restrictive rules against firings according to the OECD. Employers are all but forced to keep unproductive, unprofitable plants running resulting in widespread use of salary cuts and unpaid vacations to keep costs down. The salary cuts in turn create a feedback loop of decreased consumer demand causing demand for workers to drop causing more salary cuts, all because Putin is forcing businesses to make decisions favoring political stability over efficiency.

In Russia, real disposable incomes have fallen 6%, retail sales are down 9.8% and wages adjusted for inflation have plunged 7.5% between July 2015 and July 2016, according to Bloomberg.

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