High wages threaten the Russian economy: risks identified

“People will work massively worse for more money”

The Central Bank expressed concern about the gap in the dynamics of household incomes and labor productivity. The regulator pointed out the risks of its further increase associated with a new round of wage growth for public sector employees. According to experts, in the context of sanctions, an acute shortage of personnel, investments, and the latest technologies and equipment, the Russian economy is doomed to simplification. For such an extensive, labor-intensive economic model, the task of increasing labor productivity is of little relevance.

“After some stabilization in past months, tensions in the labor market have intensified again. Unemployment has reached a historic low. The growth of labor shortages has resumed in many industries,” says the summary of the March meeting of the Central Bank’s board of directors on monetary policy.

According to the regulator, the measures laid down in the President’s February message “to increase wages in the public sector may further stimulate wage growth in other sectors of the economy due to competition for labor resources.” As a result, “improvement in labor productivity may lag further behind wage growth.”

In Russian statistics, the labor productivity index is calculated by dividing the physical volume of GDP by an indicator reflecting total labor costs (taking into account the number of jobs and hours worked). Simply put, it is profit divided by the number of hours worked. How exactly should labor productivity be increased? Each company answers this question differently. As follows from the February monitoring of enterprises conducted by the Central Bank, 45% of employers expect to optimize production processes (primarily, to reduce personnel), 27% – to modernize equipment, 11% – to increase the workload of employees, and only 7% – to increase personnel qualifications.

According to Rosstat for the period from 2018 to 2022 (there are no more recent figures), labor productivity in the country increased by about 5%. The maximum growth – immediately by 3.7% – was achieved in 2021, after the lifting of covid restrictions. The next year there was a sharp (3.6%) reduction due to sanctions that hit trade, logistics, and raw materials production. As for real wages, in 2022 they decreased by 1%, and in 2023 they surged up by a five-year record 7.8%, mainly due to powerful budget injections into the military-industrial complex.

“The situation we have is absolutely classic,” says Alexey Vedev, director of structural research at RANEPA. – Around the world, the normal unemployment rate is 6%. With our 3.2% at the end of 2023, we never even dreamed of this. The labor market is experiencing a shortage of workers, in pursuit of which employers are forced to increase wages. Rising costs for enterprises lead to the economy as a whole becoming less and less efficient. Our labor costs today exceed 50%, and this is a clear harbinger of a recession.”

How to be? According to Vedev, the state should pursue incentive policies in relation to categories such as working pensioners and migrants (with an emphasis on Russian speakers). The first payments are practically not indexed, which forces them to retire. The latter began to leave Russia more often in search of better conditions, and this outflow is associated primarily with the devaluation of the ruble, which foreign workers convert into convertible currency.

“The growth of real wages leads to an increase in consumer demand, which, in turn, accelerates inflation. This is where the real risk lies, says Igor Nikolaev, chief researcher at the Institute of Economics of the Russian Academy of Sciences. – The Central Bank talks about the lag between labor productivity and income. Of course, wages must rise, but at the same time they must be balanced by countermeasures that would suppress inflation. Meanwhile, our economy is under sanctions, and in order to survive, it has to be simplified. This is not her fault, but a misfortune: GDP growth of 3.6% last year was achieved at the expense of the military-industrial complex and should not mislead anyone. Any modern economy develops through investment, through increasing complexity of technological processes and increasing competitiveness. And the Russian one, becoming more and more labor-intensive, does not, in fact, need to increase labor productivity.”

It is clear, argues the head of the analytical department of Amarkets Artem Deev, that if people work massively worse for more money, this will have a bad effect on the quality of the products or services provided. At the same time, funds from the treasury, since we are talking about state employees, will be spent much faster. Which will lead to a government deficit and increased inflation. In Deev’s opinion, labor productivity in this area of ​​the economy can be increased in the only way: by reducing the administrative burden. Doctors and teachers will work much more efficiently if they spend most of their time performing direct duties rather than filling out reports.