Russia: The Consequences of a Perfectly Flexible Labour Market Professor Simon Clarke Centre for Comparative Labour Studies University of Warwick

Orthodox structural adjustment Collapse of soviet system and incorporation of Russia into world market economy demanded massive structural adjustment Standard structural adjustment package: liberalisation of prices and wages; financial stabilisation; fiscal responsibility Burden of adjustment initially placed on the labour market

Structural adjustment and the labour market Wage differentials promote flow of labour from low to high value-added companies, industrial branches and regions Presupposes labour market flexibility Market determination of wages Dismantling of barriers to mobility

A Flexible Labour Market Liberalisation of wages in October 1991 led to a doubling of wage inequality (Gini 0.24 to 0.48) and of labour turnover (hiring rate over 20%). Russia conforms better to the OECDs recommendations than any OECD country (Layard and Richter 1995: 40). Massive employment restructuring with low rates of unemployment (ILO unemployment less than 10%). Vindication of a flexible labour market?

Labour market flexibility and economic regeneration Employment restructuring did not lead to economic regeneration Longest and deepest recession in recorded world history Post-1998 recovery not result of market- stimulated restructuring but of massive devaluation and recovery of oil price. Why did a flexible labour market not achieve the desired results?

Wages and the labour market Increased wage differentials bore very little relation to labour market pressures: –Branch and regional differentials bore very little relation to rates of unemployment or changes in employment. –Wage determination is firm-specific: Largest component of differentials is within occupations within local labour markets. Employers pay what they can afford, and if they cant afford to pay, they dont pay.

Market and Institutional Determinants of Wages This is not a Russian peculiarity. Industrial relations specialists have long shown that employers do not pay market- clearing wages: motivational role of wages. It is foreign-owned companies, not paternalistic red directors, who pay the highest wages and have the best employment practices.

Labour market flexibility and unemployment Low unemployment is not a result of the creation of high value-added jobs stimulated by a flexible labour market. Job creation dominated by new private employers in trade, catering and services, predominantly with low-wages, poor employment practices, high turnover

Labour market barriers to restructuring Wage flexibility has been a barrier to restructuring not an instrument of restructuring. Low pay/no pay perpetuates inefficiency, removes incentives to renovation: cut wages rather than raise labour productivity. Little renovation in traditional enterprises: emphasis on energy-saving, not labour-saving. Ageing of industrial plant: 1999: about two-thirds installed before the start of perestroika. Even dynamic sectors (oil and gas, metallurgy) have seen a sharp fall in labour productivity.

Labour market exits and womens employment Low unemployment because of proliferation of low-wage jobs and labour market exits Soviet Union supposedly characterised by the over-employment of women It is not women, but the young and the old who have fallen out of the labour market, and prime-age men who have died

Conclusion: The Labour Market and Structural Adjustment Flexible labour markets are a very inefficient tool of restructuring Excessive wage flexibility sustains backward employers, encourages churning and removes incentives to innovate. The labour market reflects restructuring, it is a very weak instrument in facilitating it.

References Simon Clarke (ed) Structural Adjustment without Mass Unemployment? Edward Elgar, Simon Clarke: The Formation of a Labour Market in Russia, Edward Elgar, Simon Clarke: Market and Institutional Determinants of Wage Differentiation in Russia, Industrial and Labor Relations Review,