Wage and employment decisions in the Russian economy : an analysis of developments in 1992

The authors analyze changes in the Russian labor market in 1992. They focus on the path of wages and employment in a context of partial price liberalization and considerable ambiguity about government and central bank policy. Under the former Soviet economy, the firm was the bedrock of the centrally planned system. The relaxation of centralized controls did not result in substantial employment losses partly because of the implicit moral economy of the system and partly because of continuing constraints on wages. In 1992, the wage structure and employment levels in the economy's state sector exhibited surprising stability, reflecting the system's immense inertia. Despite announced regime changes, at the end of 1992 the number of jobseekers was no more than 1.5 percent of the labor force. But significant changes have been made: wage and employment decisions have been widely liberalized; some restraints on labor mobility have been removed; changes have also been made in ownership title; and there has been some expansion in the private sector, as yet largely concentrated in services. These substantive changes are important for future expectations about entitlements to jobs and incomes, but the changes remain restricted and the sources of these restrictions imply significant economic costs. The underpinning of the current stagflation is the inability to break the soft budget constraint on state firms and to impose realistically a systematic, transparent set of constraints on the firms'financing demands. This has combined with the firms'continuing ability to exercise market power alongside weak controls on wage claims. Employment transitions have been dominated by high levels of quits at the base of the skill structure. Involuntary separations have been limited, involving mostly women and white collar workers. Firms commonly provide de facto unemployment compensation to workers in the form of minimum wage payments with little or no work requirement. There is evidence of some increase in the proportion of laid-off workers among the unemployed, but firms seem to prefer hoarding labor in light of uncertainty about policy, firm, or product-specific market prospects. Wages have been more volatile. Wages initially bore almost all of the adjustment costs, but have shown mild recovery thereafter. Lax monetary policy and decentralized insider power, giving rise to relative employment stability and real wage rigidity, are powerful ingredients for hyperinflation.