BOFIT Weekly Review 2015/22
Russia’s low unemployment partly reflects a shift of dismissed workers to the shadow economy
Based on ILO methodology, Russia’s unemployment rate was 5.8 % in April. The unemployment rate has climbed gradually since last summer after hitting a post-Soviet record low of 4.9 %. In light of Russia’s deteriorating economic conditions, the relatively modest increase in unemployment is striking.
A low unemployment rate may not so much reflect a robust labour market as the special characteristics of the Russian economy, particularly low labour productivity. Furthermore, wages are flexible, but jobs tend to be more or less permanent. As much as half of a worker’s wage package in Russia can consist of various bonuses that the employer finds easier to adjust than wages. Workers, in turn, tend to stick with their employer even after a wage cut due to the modest size of unemployment benefits.
A part of the workforce is employed in the shadow economy, where taxes and social security contributions are not paid. As redundancies in the formal economy increase and unemployment benefits are small, workers move to the shadow economy, even to take jobs unrelated to their skill-sets. The social affairs ministry reports the number of the people working in the shadow economy increased by 5 % in 1Q15.
Russia’s low unemployment rate is also a manifestation of its shrinking labour pool. The latest cohorts of people reaching working age are smaller than before. This demographic trend is set to continue, restricting the growth possibilities of the economy also over the long run.
The government decided in March to finance work projects in localities threatened with rising unemployment. The regions getting the most support feature large or regionally important companies such as Tatarstan and Samara, home to Russia’s car industry. Observers have criticised the plan for directing support to large, established enterprises, which have significant influence on social conditions in their regions. Such support, they note, does not promote the structural change needed to grow the economy and reinforces old structures.