The Economy Is Plunging into Labor Market Abyss


In recent years and in many countries, the labor market has faced a series of shocks that have added to long-term transformations. The combination of these shocks changes the relationship between the employee and the employer. These changes, the spreading of non-standard forms of employment, the situation on the Russian job market, the gap between labor supply and demand, and the causes and consequences of the increasing number of job openings and low unemployment were discussed at the NES Educational Days by NES Professor Irina Denisova, economist Vladimir Gimpelson, and HeadHunter CEO Dmitry Sergienkov. GURU summarizes below the main points of their public talk, which was moderated by NES Rector Anton Suvorov.


Global Labor Market Shocks

Irina Denisova: The labor market is a very important transmission mechanism through which shocks affect the economy. Of the recent global shocks, I consider the one related to technological development to be the most significant. We are witnessing a transition from robotics, automation, the use of computer and information technologies to artificial intelligence. The achievements of this revolution open up new opportunities and, at the same time, create new challenges. On the one hand, we expect that smart programs and AI will replace human workers, and unemployment will increase. On the other hand, this will free up more time for us. But this is all a matter of the distant future; whereas today, the technological revolution is changing the structure of jobs and increasing competition between people.

Another close trend is the consumer revolution. Back in 1965, the future winner of the Nobel Prize in economics Gary Becker drew attention to the fact that any consumption requires time as a resource. And the revolution in consumer technologies is changing the consumption bundle in favor of those goods and services that require more time.

Vladimir Gimpelson: Irina has already noted the impact of technologies on the labor market, so I will talk about another global trend affecting the supply of labor. It is the change in the demographic structure of the population, the aging of the population. 

Even calculations made in the pre-covid times showed that in Russia by the early 2030s, the number of workers aged 20-40 will decrease by 25% compared to the pre-covid period. And this forecast took into consideration a large influx of migrants, which, in fact, decreased. Without migrants, the situation will be even more dramatic.

Another global trend is the de-standardization of employment. The industrial economy required a mass of workers who were mostly employed in a standard mode: full-time, almost indefinite employment, indoor work, whether in a workshop or an office. Gradually, with the development of the service sector and women beginning to enter the labor market, people's preferences changed. And since the last third of the 20th century, there has been a rapid de-standardization of employment. It has become more diverse, termed, shorter in time, largely project-based; freelance has been expanding. In recent years and largely due to Covid-19, distance employment has become very widespread. There are calls to switch to a four-day work week. This de-standardization of employment reflects changes in both the labor supply and demand.

Dmitry Sergienkov: The main general trend is the deepening gap between supply and demand for labor both in Russia and the world, except Africa. This shortage of workers increasingly determines the form of employee-employer interaction. There are quite serious country specifics in this trend, and Russia is now at the most acute point of this gap, so we should not expect a massive democratization of working hours, including the transition to a four-day working week. In some cases such offers are used by the employer as self-promotion, some companies are just experimenting, but we do not see mass de-standardization.


Where Has the Workforce Gone

Vladimir Gimpelson: The labor market has changed. The changes began even before Covid-19, but the pandemic made them very clear. What happened? Almost all companies froze hiring. In Europe, almost nobody was laid off. There were layoffs in the US. These people, however, quickly returned to their workplaces, but new hiring was frozen. As economies emerged from the pandemic, firms tried to hire new employees, and then it turned out that the situation had changed. Usually, when an economy gets out of crisis, there are available labor resources on the market, since recessions cause an increase in unemployment. But it happened that there was no free labor: most developed countries entered the epidemic with low unemployment and high employment. When there are no available candidates, firms try to poach people from other companies by offering higher salaries. What happens to the number of unfilled jobs in this case? It increases, because job openings appear in companies from which employees were lured. Meanwhile, many businesses, for which high employee turnover is common, announce job vacancies in advance, expecting that their staff will be lured away any day soon. Thus, an interesting phenomenon occurs: it is not the number of unfilled jobs that spurs salary growth, but salary growth generates additional job openings. 

This dependence can be described by a Beveridge curve. It shows the relationship between job vacancy rate and unemployment: the more unfilled jobs, the lower unemployment. If in a Beveridge curve we substitute the unemployed with those who move to another job, we will see that the dependence will change: the more unfilled jobs there are, the more people changing jobs there will be. This suggests that salary increases alone will only multiply job openings and widen the gap between the demand for labor and its supply.

Dmitry Sergienkov: Russia is a country with a high employee turnover. In the past, we have often explained this, among other things, by low salaries and very low wage differentiation between blue- and white-collar workers, highly skilled and low-skilled workers. Such a high rate of migration between these categories is not typical for other countries. But now we do not see a strong increase in employee turnover compared to the usual level.

In general, I agree with Vladimir: during Covid-19, hiring was frozen, then suddenly everyone showed high demand for staff, and salaries began to rise. This could encourage people to change jobs, and there appeared a vicious spiral: if you raise salaries for new employees, then you need to do the same for existing ones, which increases the burden on the business. 

During Covid-19, we have also witnessed a huge growth in online services. It took two years for the events that could have taken 5-7 years. This forced firms to reconsider how they interact with the workforce: back then, about 25% of jobs were remote, companies had to develop distance hiring, and establish interaction with remote employees. Now, we see some throwback in the use of non-standard forms of employment. In the future, this adaptation is likely to have a positive impact on performance. 

These processes have led to the blurring of the regional boundaries of the labor market. The interregional mobility of the labor force should grow, the job market becomes nationwide and more efficient due to access to a larger number of candidates. 

How can the development of remote forms of employment affect salaries? It is quite obvious that firms can pay less to remote employees, simply because the cost of living in the regions is lower than in the capital. But this runs into the problem of a shortage of labor and competition for it. Thus, so far, wages are steadily growing instead of falling.

Irina Denisova: In conditions of labor shortage and employers competing for candidates, the labor market should work as follows: firms should poach staff by raising salaries. On the one hand, it is a challenge for employers, and on the other hand, it opens opportunities and incentives to invest in labor-saving technologies. But these investments run into problems of institutional nature and the investment climate. In addition, market efficiency drops due to the need to compete with inefficient enterprises that should have left the market long ago, but stay afloat and attract labor.

As for Covid-19, it came as a strong shock coinciding with a significant technological shock. This stimulated companies to experiment with forms of employment, using the emerging technological opportunities. At the same time, for all their advantages, remote work lacks the benefits of working together in the same office when people can easily share ideas, talk and discuss things. Therefore, firms are trying to bring employees back to the office by offering, for example, hybrid forms of work. 


What Does Low Unemployment Stand for?

Vladimir Gimpelson: Unemployment in Russia has always been low. This is largely due to institutional factors, and demographic trends enhance their effect.

But one should not think that low unemployment is a symbol of great happiness. To understand its causes, we should not only look at the ratio of labor supply and demand, but into the employment structure. How can an unemployed person be characterized? It is a person who does not have a job and is looking for one. And what does it mean to have a job? The International Labour Organization (ILO) says that a person is no longer unemployed if he or she has worked at least one hour in the previous week (before the survey was held). 

At the same time, the ILO says in one of its resolutions that the generally accepted statistical definition of unemployment is not really applicable for countries with weak social protection for the unemployed. If, having lost my job, I cannot receive decent unemployment benefits, I have no savings, and no income to live on, I will have to accept any job – formal or informal, good or bad, high-paid or low-paid. Therefore, low unemployment is not surprising for such economies. And Russia, with its low unemployment benefits and high proportion of low-paid workers, is among such countries.


Who Has Heated Up the Demand for Labor in Russia

The Russian Central Bank chair, Elvira Nabiullina, called the labor shortage the main problem of the economy: "The situation with human resources is very acute, especially in those industries that have already exceeded the pre-crisis levels. For example, mechanical engineering and the chemical industry." Unemployment in Russia in November 2023 was at a historic low of 2.9%. According to the Central Bank surveys, 60% of firms complain about a shortage of workers, most of them lack qualified specialists. At least 75% of firms have raised salaries to retain employees; 80% report issues like the discrepancy in the qualifications level and inflated salary expectations. 

Dmitry Sergienkov: There are micro-markets in Russia where the unemployment rate is even lower than in the country as a whole, and in some places there is no unemployment at all, for example in Moscow and the Moscow region. But low unemployment often does not correlate with business activity indicators.

Despite the shortage of labor in Russia, there is a huge potential for more efficient and flexible use of existing human resources. However, national legislation is quite rigid: it is often easier for firms to pay little or to cut salaries, which happens in a crisis, than to lay off an employee who could move to another area where his or her skills are needed. 

Vladimir Gimpelson: The budget stimulus and the bail-out financing for many industries, including those related to import substitution or the defense sector, heated up the demand for labor. If a country starts import substitution, it needs a lot of people who will do it. 

But the state puts demand on certain types of products, gives money for their production and generates demand for labor in those particular sectors. Firms that are trying to meet this demand raise salaries and, since there is no free labor, lure people away from other industries, which, in turn, have to look for replacements. Thus, the state creates unfilled jobs even in industries that are far from priority: people move from one place to another, and they rush to where there is money. This increased demand for labor will exist as long as there is a budget stimulus.

The best response to the shortage of workers in an economy is to increase labor productivity. But it is easy to say, and difficult to do, because improving productivity in the economy is not limited to improving the productivity of individual firms. 

Let's say a firm has carried out a modernization project, which allowed it to reduce staff. How will this affect the overall productivity in the country? It depends on where the released employees go. If they go to the informal sector, the benefits of productivity growth in the firm will be offset by a decrease in the productivity of its former employees. It turns out that productivity growth in the entire country, industry or region is the result not only of what is happening in certain firms or even industries, but also of where people relocate. 

In many countries, productivity growth and economic growth have been associated with the transition of people from less productive agriculture to manufacturing, from less productive industries to more productive ones. If people move to low-paid jobs, if such industries become a kind of swamp that absorbs excess labor, preventing unemployment from rising, if labor does not flow into sectors with high productivity, then it will not be possible to achieve overall productivity growth. 


About Retraining of the Older Workers

Irina Denisova: The retirement age has been raised in Russia, which should partially compensate for the labor reduction. But as such, shifting the pension age does not mean that people close to reaching it will be able to work longer and that their skills are not too outdated. Even people who are in the middle of a career path have a hard time improving their skills to meet the requirements of modern technologies. The older you get, the more difficult it is, despite the accumulated experience. We must admit that modern technologies require more flexible brains. 

Dmitry Sergienkov: In conditions of a rather acute labor shortage, the market becomes less discriminatory. Of course, if the job involves a lot of physical activity, age remains a dropout factor. But in general, people over the age of 45 are getting hired more. The market is gradually getting rid of biases and moving towards a skill-centered approach, when it is a set of competencies that is evaluated and they are not dependent on age or gender.

Vladimir Gimpelson: In order to employ older people more widely, they need to be retrained. And the trouble with this is that the scale of retraining in Russia has always been very low. The older a person is, the less incentive the employer has to retrain them. So far, this problem is far from being solved, but it will have to be dealt with. 

I would also like to draw attention to the relationship between age and productivity, which is especially important for high-tech industries and for STEM-related professions. It is similar to sports: you can stay successful while you are young, and then the returns decline. This is shown by research in the US: salaries of young IT and STEM professionals rise sharply at the start of their careers, reach a peak quite early and then begin to decline. Meanwhile, people with education in the humanities start with low salaries, then grow gradually, and as a result they do not lose to IT and STEM people. 

The relationship between age and potential performance is nonlinear and very complex. It is not always obvious which policy to pursue, and, of course, a lot depends on the specific area or industry.


About Platform Work and Freelancing

Dmitry Sergienkov: The topics of platform employment, freelancing, and temporary employment have been discussed for a long time. Such forms of employment can distribute labor more dynamically so that limited labor resources are used more efficiently. The share of platform employment is small so far, there are obstacles to its growth, but it will grow. 

Firstly, flexible employment in Russia is hampered by very inflexible legislation. Secondly, there is a mental problem: employers are used to controlling their staff. Therefore, freelancers do not make up a significant share of corporate HR budgets yet.


About Future Jobs in Demand 

Vladimir Gimpelson: We see that blue-collar workers, engineers, and software developers are in demand now. But it is extremely difficult to predict future demand for professions. It is not necessarily true that the same situation as when kids are in school and when they graduate will remain, because the demand for any profession is associated with relative salaries, which, in turn, depend on the changing demand for products. 

There is also a problem of coordination: at some point everyone wants to become, for example, an economist or software developer, then there are too many of them, because this is a big business for educational institutions. And it is extremely difficult to say at what point you need to stop. 

Dmitry Sergienkov: Historically, the most competitive segments in Russia have always been those related to mass staffing – retail, banking, telecom operators, and now construction. Cashiers, storekeepers, blue-collar and low-skilled workers are in short supply. There still is a demand for IT specialists, but overall this sector is cooling down, the market is becoming a little more balanced. There is a demand for highly qualified specialists in more knowledge-intensive industries aimed at import substitution, but there are not so many of these specialists so the demand for them does not affect the economy.


About the Importance of Fundamental Education

Irina Denisova: The rate of change in employers' requirements shows that in the context of a technological revolution, the ability to adapt to changing conditions is highly required. Education gives people this ability: you get specific skills, and then you build them up and upgrade them. Therefore, the value of fundamental education does not change, but this does not mean that the programs that provide this fundamental education remain unchanged. The NES and HSE joint program in Economics is moving towards interdisciplinarity because more and more breakthroughs are taking place at the intersection of different disciplines: economics and sociology, economics and psychology, economics and astrophysics. 

Another important task is to take into account the influence of AI. At some point, it may begin to displace many professions or certain tasks within professions. It will be difficult to replace specialists with soft skills, interpersonal communication, and leadership skills. Rather, AI will only increase the demand for such skills, and thus, the demand for education that provides them will grow. 

Vladimir Gimpelson: I agree with what Irina has said: if we are building a house, then the foundation must be very strong. Fundamental education is the foundation on which everything else is built. Practical knowledge, applied knowledge, especially in the technological field, quickly become obsolete, while fundamental knowledge stays relevant. In addition (and Irina also mentioned it), no apps can substitute social skills, which are very important. 

As for AI, no one knows what its development will lead to. We are always waiting for the next round of technological progress to change everything, dramatically increase productivity, and kick everyone out of their professions. Technological leaps happen, many things change, but the labor market and people always adapt. I think it will be the same this time.

Dmitry Sergienkov: Indeed, fundamental education is essential. The only question is: how long should it take and at what stage should people receiving it start working and acquiring professional skills? I think that the Russian education system is not flexible enough for this. 

There is a huge gap in the country between what is taught and what employers need. Therefore, companies often create their own corporate universities and programs, for example, we have a program for software developers. This trend is going to develop, but I am not sure that this is what companies should be doing.