Mar 29, 2023
Putin’s War Is Intensifying Labor Shortages in Russia’s Economy
(Bloomberg) -- President Vladimir Putin’s drive to expand Russia’s armed forces is adding to labor shortages as his war in Ukraine draws hundreds of thousands of workers into the military from other sectors of the economy.
Federal Statistics Service data suggest a net increase in the military last year of approximately 400,000 amid already record-low unemployment, Bloomberg Economics estimates, after Putin ordered the call-up of 300,000 reservists in the country’s first partial mobilization since World War II.
The total number taken into service is likely to have exceeded half a million, according to Bloomberg’s Russia economist Alexander Isakov. That’s because the data obscure new hiring to fill gaps left by troops who’ve been discharged since the start of the invasion and don’t account for recruitment by private military companies such as the notorious Wagner mercenary group.
The Kremlin is now seeking 400,000 more contract recruits this year to fight in Ukraine as Putin digs in for a long fight, according to people familiar with the plan. Putin has approved a goal to increase the size of Russia’s military to 1.5 million from 1.15 million, which may take until 2026 to achieve.
Hundreds of thousands of draft-age Russians also fled the country after Putin announced the mobilization in September, adding to a demographic decline that indicates the working-age population may shrink by 6.5% over the next decade. The Bank of Russia warned in December that “the capacity to expand production in the Russian economy is largely limited by the labor market conditions.”
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Putin urged ministers to focus on improving labor productivity at a government meeting Wednesday, as he warned that manufacturing in Russia remained weak and below the level of last year. Low unemployment “doesn’t mean that every problem in the labor market has already been resolved,” he said.
“There are questions about the quality of job opportunities,” Putin said. “In some regions and localities, the unemployment rate is still much higher than the national average,” and workers aren’t fully productive at factories where output has decreased, he said.
Around a third of the economic sectors tracked by the statistics service showed a decline in employment last year, but military recruitment offset almost all the negative impact on the overall number. Moreover, conscription and the recruitment of contractors, compounded by the exodus of Russians from the country, led to a decrease in the male labor pool and a shortage in many industries.
Policymakers in Moscow have repeatedly pointed to concerns that deepening labor shortages are hampering Russia’s economy as businesses and sectors seek to adjust to unprecedented international sanctions imposed over the war.
While unemployment increased on average by 2.4 percentage points during Russia’s three most recent recessions, the annual jobless rate reached its lowest in 2022 and keeps declining, according to Isakov.
Unemployment in Russia fell to a new low of 3.5% in February, while real wages increased in January for the fourth month in a row amid a dearth of personnel, data published Wednesday by the statistics service showed.
What Bloomberg Economics Says...
There are three reasons for this. First, a surge in public spending last year has extended most sectors to their capacities – notable gains in defense-related manufacturing, construction are all examples of public spending stimulus. Second, employment losses in highly cyclical sectors, such as retail, have largely been offset by an increase in military and public sector employment. Third, a drastic decline in imports, especially in initial phases of the crisis, meant that profit margins of domestic producers have increased, and incentives to keep staff remained in place.
—Alexander Isakov, Russia economist.
Natalia Danina, head of the analytical department at HeadHunter, a recruitment company in Russia, said a monthly increase in vacancies surpassed the rise in resumes it received in February for the first time in the last 12 months. Labor supply indicators may be returning to a level seen after the Covid-19 pandemic in Russia in 2021 “when the personnel shortage was in full force,” she said.
“Low unemployment, combined with a shortage of personnel, is hampering processes for the economy’s structural transformation,” Danina said. “Either there are no people or they are not seeking to change jobs amid difficult external circumstances.”
(Updates with unemployment data in 11th paragraph)
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