Russia masks unemployment with Soviet-era tactics

The former USSR has one of the lowest rates of productivity in Europe, salaries are plunging and spending power grows weaker by the day - yet unemployment rates remain half those of the euro area

Russia is in the clutches of an economic crisis. Domestic demand is waning, the currency has collapsed and sanctions over Ukraine are biting hard.

Yet the jobless rate is lower than it was before the conflict erupted last year. In fact, the unemployment rate in the former Soviet Union is less than half that of the euro area.

If this seems contradictory, that's because it is. And it’s a consequence of government policy to favour jobs and social and political stability over reforms and efficiency.

Russia’s labour rules are some of Europe’s most restrictive and companies are under pressure from the Kremlin not to reduce staff headcount, making it difficult to fire people.

Instead, employers would rather cut salaries, reduce working hours and give staff unpaid holidays, reminiscient of Soviet-era tactics when unemployment was all but outlawed and masking the true state of the labour market.

This has led to one of the lowest rates of productivity in Europe, sent salaries plunging and slashed people’s spending power.

And as it slides deeper into recession, the Russian economy keeps adding jobs, in yet another sign that companies are hemmed in and left to follow irrational government policy

“Choosing between radical reforms and stability, the government will favour stability,” said Vladimir Tikhomirov, chief economist at BCS Financial Group.

“That’s a Soviet-like choice — to conserve the current system with its problems, though to provide stability.”

Rostislav Kapeliushnikov, the deputy head of the Labour Research Centre at the Higher School of Economics in Moscow, said: “By firing people, businesses are risking pressure from the government.”

Unemployment in Russia grew to 5.5pc in July, from 5.4pc in June, according to a Bloomberg survey. But official figures due to be released this week are forecast to show that unemployment is holding at less than half the rate in the euro region, which has had nine consecutive quarters of growth.

Meanwhile, the polls show that real disposable incomes fell 6pc in July from a year earlier, retail sales are down 9.8pc and wages adjusted for inflation have plunged 7.5pc — all indicating faster contractions than in June.

“There’s a problem of growing underemployment where people are being put in part time or with part-time pay or put on unpaid leave status because enterprises are trying to protect their profit margins and demand has been suppressed, so they are cutting their production,” said Charles Movit, an economist at IHS Global Insight in Washington.

“So that is going to have an additional impact on consumers.”

But gauges of social sentiment by state research company VTsIOM showed that 81pc of respondents believe the situation in the country is excellent, good or fine.

Rusian president Vladimir Putin's approval rating is hovering near a record high. But as the authorities shield the labour market, pressures on the economy continue to mount.

Demographics and low productivity are among the biggest structural constraints that are capping Russia’s potential growth rate, Alfa Bank said in a July report.

“By the end of this or the beginning of next year, we may face a shortage of employees again,” deputy finance minister Maxim Oreshkin said in an interview.

“If we don’t want that to happen, we should conduct an active policy in releasing workers from their duties, including by reducing the number of employees in the state sector.”

Original source: The Telegraph