Labour Market and Social Policy Review: Russian Federation Moscow, Technical Seminar, 12 December 2011 Senior Economist- Social Policy Division Organisation for Economic Co-operation and Development

Presentation overview Background Labour market issues Social policy issues Concluding remarks

The review is part of the “Accession” process Review mission in 2008, including visits to Moscow, Kazan and Samara. Draft review was discussed at the Employment, Labour and Social Affairs Committee (ELSAC), 22 October Publication in 2011 while accession process is ongoing, similar to what happened with Chile, Estonia, Israel, and Slovenia. Further discussion in ELSAC in 2012, with final decision by Council

Labour market issues

Compared to OECD countries the crisis has had a relatively mild impact on (un)employment… Cyclical changes are calculated as deviations from the pre-crisis trend (covering 2005 Q1 to 2008Q1) over period during which output growth declined (2008 Q1 to 2009 Q3 for the Russian Federation and 2008 Q1 to 2009 Q2 for the OECD). Source: OECD Review of Labour Market and Social Policies: Russian Federation (2011)

… real wages remain the main adjustment mechanism Source: OECD Review of Labour Market and Social Policies: Russian Federation (2011) Real monthly wage growth remained high in 2008 (+10% ), but turned negative in 2009 (-1.6%), because of reduced hours of work and reduced hourly wages. When expressed relative to its pre-crisis trend, the cyclical drop in real wages was ten times as large as across the OECD avg. Expressed as cyclical changes

Employment growth has been mostly in lower quality jobs Atypical contracts have increased significantly: – Informal employment is limited – Temporary, civil and oral contracts Wide disparities persist within the group of LMEs Disparities among regions remain large (despite progress) Wage inequality remains high (although declining) A dynamic but segmented labour market

Reinforcing labour market institutions: labour law is unequally enforced, and... There seem to be significant differences of labour law enforcement across firms. Minimum wages are not always enforced With current resources, the labour inspectorate would be able to carry out a control-visit of each enterprise on average once every 20 years. Labour inspectors are poorly paid, which risks corruption Recent proposals to increase fines for infringements should be implemented.

…employment protection legislation is not very strict Source: OECD Review of Labour Market and Social Policies: Russian Federation (2011) Employment protection legislation (average scores 0-6 from lowest to highest strictness)

Collective bargaining framework is fairly developed: o Provisions in Russian law for collective bargaining rights at several levels o Relatively high trade union membership But, limited effect on wages and working conditions o Agreements set general objectives and minimum standards are low o Bargaining power of trade unions is limited, in part due to a relatively limited right to strike o New trade unions find it difficult to establish themselves Wage-setting is thus mostly in the hands of employers Collective bargaining has limited effect

Public spending on labour market policies is relatively low Source: OECD Review of Labour Market and Social Policies: Russian Federation (2011) Limited spending on “passive measures” as unemployment payments are low. Consider re-introducing UI system. Refocus from short-term work schemes into cost- effective programmes for unemployed to get back to work. Rigorous programme evaluation. Public spending on labour market policy, % GDP

Social policy issues

Absolute poverty has declined since 2000 Until the recent global crisis, Russia experienced a prolonged period of strong economic growth, and the official absolute poverty rate - measured against the federally set minimum subsistence level - dropped sharply from 29% in 2000 to 13% in Source: OECD Review of Labour Market and Social Policies: Russian Federation (2011)

Relative income poverty is above the OECD avg. Relative income poverty, measured against the standard OECD benchmark of 50% of median household income (adjusted for household size) stood at 17% in 2008, above the OECD average of 11%. Similarly, income inequalities remain very high in international comparison: the Gini coefficient on income disparities was 0.43 in 2009 compared with an OECD average of Source: OECD Review of Labour Market and Social Policies: Russian Federation (2011)

Who are the poor? Children, young people, and the working age population, have the highest proportions of people with incomes below the minimum subsistence level. Already back in 2008, there were relative to other age- groups there were relatively few pensioners with incomes below the minimum subsistence level. Source: OECD Review of Labour Market and Social Policies: Russian Federation (2011)

Social spending is below OECD average. Public social expenditure (without housing) was 15% of GDP in 2009, compared with an OECD average of just over 22%. A large part of social spending is on pensions (below) and health, but income support for the unemployed and families was lower than in OECD countries. There appears to be room to refocus social spending from pensioners to the working-age population and children: social support must be aimed to support employment. Source: OECD Review of Labour Market and Social Policies: Russian Federation (2011)

Total fertility rate remains below the OECD avg. The introduction of family capital may well have contributed to the recent increase in the TFR. For family policy to be effective in this sense parents have to be confident they can reconcile work and care commitments on a long term basis. Childcare support, improving housing policies and expanding income-tested child support will reduce poverty and help young young Russians establish a family of their own. Source: ?OECD Family database

Low life expectancy limits growth of the elderly population..... Both the OECD and Russia have to deal with population ageing. Old age dependency ratios will double to over 40% in In the OECD because the proportion of elderly is increasing; in Russia because the persistently low birth rates will lead to a decline in the working age population. Relatively low life expectancy curtails growth of the elderly Russian population. If health outcomes were to improve, financial pressure on the pension system will mount. Source: Health data

The replacement rate for pensions in Russia is around the OECD average. Pension policy aims to generate a replacement rate of about 40% of earnings on retirement. It will be challenging to achieve the 40% replacement rate objective as payment and saving rates have been outpaced by rapid wage growth until 2008/09; notional pension saving is not linked to life expectancy; and, the rate of return of the funded pension component of the system has been negative since the start in Source: OECD Pensions at a Glance (2011)

Spending on pensions has recently surpassed OECD avg. Significant increases in transfer payments to pensioners helped to keep poverty in check during the economic crisis. However, this has compounded the imbalance between pension contributions and expenditure: in 2009 public pension spending equaled about 6.5% of GDP, which compares with only 2.5% of GDP in contributions. Public expenditure on pensions as a per cent of GDP, Russia and OECD countries, 2007 Source: OECD Review of Labour Market and Social Policies: Russian Federation (2011)

Reform is needed to secure the long term financial sustainability of the pension system, including: Raising low standard pensionable ages: Most OECD countries have now the same pensionable ages for men and women, usually 65, whereas in Russia these are 60 for men and 55 for women. As female life expectancies are higher, the current gender inequity in standard pensionable ages is difficult to justify. We encourage the gradual equalisation of the standard retirement ages among sexes.

Reform is needed to secure the long term financial sustainability of the pension system, including (continued) : Limit access to early pensions: Many full pensions are accessible before the already low standard pensionable ages. Often service records of 20/25 years grant entitlement to early pensions, which employees often take while also continuing to work in the same job. Early pension rights could be withdrawn gradually. Measures to raise cost-awareness should also be given prominence: shift the burden of costs away from the Pension Fund of the Russian Federation, to the employer.

Reform is needed to secure the long term financial sustainability of the pension system, including (continued) : The strongest shoulders should bear their fair share of the cost: Russia should be commended for abolishing the complicated and regressive Unified Social Tax. However, since January 2010, maximum earnings thresholds over which social contributions are due were reduced to about 1.5 times the average wage. We recommend to increase this maximum threshold to twice the average wage or higher. To further improve the redistributive power of the tax/benefit system, consideration should be given to strengthening progressivity in the personal income tax scheme which, apart from tax deductions for very low income households, is flat, at a rate of 13%.

Concluding remarks Russia needs to find a better balance between labour market flexibility and workers’ protection. This can be done by strengthening labour law enforcement and the labour inspectorate, promoting workers representation and collective bargaining, enhancing the effectiveness of active labour market programmes and by removing the possibility to use civil contracts for employment purposes. There is a need for a greater focus of social spending on the working-age population and children. Long-term financial sustainability of the pension system is key to that strategy. Russia needs to raise low standard pensionable ages, limit access to early pensions and ensure that the strongest shoulders bear their fair share of the cost.

Thank you for your attention!