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The effectiveness of local government active labor programs: the case of benefits-to-wages program in Russia

Economists have devoted considerable attention to analyzing labor markets in Central and Eastern Europe (CEE). Topics of interest have included labor mobility, shifts in the returns to education resulting from the rationalization of the labor market during the restructuring, the efficiency of labor markets in reemploying workers unemployed in the process of economic restructuring, and the success of active labor market programs (ALPs).

While the broad pattern in the CEE region was for unemployment to surge early in the transition period, workers in the countries of the Commonwealth of Independent States (CIS) tended to cling to their jobs longer. In part this is attributable to traditional low labor mobility, especially in mono-industry towns. Workers held on even when wages were not being paid or were greatly delayed (Boeri and Terrell, 2002), in part because social benefits were associated with being officially on the rolls. Besides, being on the work rolls did not prevent participation in the informal labor market. Moreover, it was cheaper for employers to keep workers on their rolls than to release them because of the severance payment and payment of all unpaid wages mandated by the Soviet Labor Code (World Bank, 2002, Chp.3). Finally, the national government abetted labor hoarding by pressing the national gas and electric monopolies and the social funds to exercise lenient collection policies (Hough, 2000).

Hence, unemployment rates were lower in the early transition years than in the CEE region. As social functions were transferred from enterprises to municipalities, and more enterprises failed and greater numbers of workers quit enterprises who were not paying them, open unemployment rose. By 1997, the unemployment rate in Russia, for example, was running at 11-13% of the labor forceóabout the same as most countries in the CEE region. Nevertheless, overmanning and labor hoarding is still present at state enterprises (Broadman and Recanatini, 2001). Expenditures on ALPs have been modest in the CEE countries; data for three of the Vizegrad countries for 1995/1996 suggest around 0.5% of GDP. In contrast to the CEE nations, expenditures on ALPs in the CIS appear to have been sharply lower. This has clearly been the case in Russia. In 1999, spending on all employment programs was only 0.21% of GDP; of this merely 18% went for ALPs (World Bank, 2002). Even unemployment benefits were nugatory and often months late in being paid. At the Federation level, ALPs are the responsibility of the Ministry of Labor and Social Development (MSLD); in the Subjects of the Federation (provinces) they are developed by MSLD regional employment agencies and the executive authority of the Subjects. The costs of ALPs are in principle shared between the Federation and Subject governments.

But sharing isnot by a formula and the initiative clearly rests with the regions. The small programs funded have strongly favored job creation/preservation and vocational training programs; job creation/preservation accounted for the greater majority of spending in the early transition period and the two enjoyed about the same support at the end of the decade (World Bank, 2002, Chp. 4). The combination of low funding levels for ALPs from higher level governments and local governmentsí strong interest for economic development has spurred local governments to action in the employment area. Recently some have begun implementing active labor programs of their own to hurry the process of reemployment for who have been made jobless during bouts of economic instability.

The effectiveness of local government active labor programs: the case of benefits-to-wages program in Russia (.pdf, 212Kb)