Russia’s Labor Productivity Trap

Abstract

This chapter evaluates some of the consequences of Russia's model of labor market, namely low wages and struggling industrial enterprises, and especially low labor productivity, a crucial factor impinging on economic growth. Yet instead of tackling that problem head-on, the government has pursued industrial policies that reinforce it by maintaining employment. These include bailouts and subsidies to industry, protectionist measures, efforts to create an industrial policy through import substitution, and support for and expansion of state-owned enterprises, in particular those in military industries and the automobile sector. While there is little doubt that the expansion of state-owned enterprises was driven by politically powerful and well-connected individuals seeking to profit financially, another factor cannot be excluded: the perceived importance of avoiding mass layoffs so as to prevent potentially destabilizing labor protest. While critics claim that the Russian economy props up inefficient enterprises in paternalist fashion for the sake of employment, the issue of jobs is a core political concern for leaders like Vladimir Putin.