Why the budget impulse is dangerous for the Russian economy
The Russian labor market entered the second half of 2024, having shown impressive growth dynamics in real disposable income and real wages in annual terms in the first half: plus 8.1% and plus 10.1%, respectively. The nuance is that these remarkable figures were the result of an acute shortage of personnel, an abnormally low unemployment rate by all standards, and an overheated economy in general. Thus, positive and negative, good and evil acted in an inseparable tandem. We discussed the situation with Oleg Buklemishev, Director of the Center for Economic Policy Research at the Faculty of Economics at Moscow State University.
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— It is worth adding that these are indicators of real incomes and wages, that is, they have already been cleared of inflation. But we must understand: we are talking about an explosive growth of wages in individual sectors, and not a frontal growth across the entire economy. Moreover, in addition to people receiving wages in market companies, there are many in Russia who live on benefits or a fixed income in the public sector. Today, the situation is dictated by the injection of budget funds through channels related to the activities of the military-industrial complex. The size of the so-called budget impulse (additional treasury expenditures above normal) over the past two and a half years has amounted to approximately 10% of GDP.
— There are actually many risks. One of them is that salaries are not very flexible in terms of decreasing. For example, the value of financial assets constantly fluctuates in both directions — it rises and falls, but nothing terrible happens. But if an employer has raised employees’ salaries once, taking advantage of some favorable economic moment, it is quite difficult to reduce them later — both in the market sector and in the public sector. This gained level may never be recouped. And this is fraught with a variety of consequences, for example, enterprises cannot continue to function in the same way when the situation changes. What will a company do if it stops receiving income in the same amount? Send people on unpaid leave?
— The Russian labor market has always experienced a shortage of good personnel — this is its historical specificity. Unemployment there, in fact, was minimal. The employer tried to retain valuable employees, no matter what happened. But I doubt that in the current conditions this mechanism functions as usual. After all, if earlier there was at least some reserve army of labor from which it was possible to draw resources, now unemployment is practically at zero. We have to recruit old people, housewives and very young people (students strive to work almost from their first year). In order to attract all these people, creating conditions for their comfortable employment, their salaries also need to be raised. And if incomes have increased in one sector of the economy, this means that others need to join this race, otherwise they will lose their labor resource. This unhealthy competition drives salaries up, and in the absence of growth in labor productivity.
— On the one hand, we can be happy for people. But in the competition between labor and capital, there are essentially two big bags of income. One is called total profit, the other is total wages. Of course, we always want wages to grow. But this automatically means that less money is spent on development, on investments, and more on labor, which is relatively unproductive in this case. In general, productivity criteria can be completely different — depending on the sphere and specialty. Let's say a mechanic stands at a machine, turning two parts per hour. Knowing their market price, you can easily calculate the productivity of this worker and its changes in rubles. For an oil rig operator, productivity will already be largely determined by prices on the world market, and not by specific actions in the workplace. Or, let's say, for me, as a person receiving a salary at a university, labor productivity should be measured by some other standards.
— The parameter is indeed somewhat tricky, difficult to measure, but generally true. After all, by and large, the employer begins to overpay just to maintain the same volumes of activity. I will give another example. After the terrorist attack in Crocus, a real war with migrants broke out in Russia: in more than 30 regions they are prohibited from engaging in certain types of activity. Since the labor market is a system of communicating vessels, prohibitions also exacerbate the problem of unjustified wage growth in the absence of competition. Resources are washed out, including from the budget sector. And as a result, the main source of wage distortions are budget payments, which are either late or cannot be indexed either by inflation or by any other parameters reflecting the real level of intersectoral competition for labor today. The budget, in principle, is not able to quickly and flexibly adapt to this state of affairs.
— There is an economic pattern called the “Phillips curve”, it shows a short-term inverse relationship between inflation and unemployment rates. It is believed that the higher the unemployment rate in a country, the more intense the wage competition in the labor market and, accordingly, the lower the inflation. Salaries are the largest total income generated in the economy; inflationary processes accelerate mainly here. The temperature of the labor market, determined by the number of jobs created, is an indicator that experts, for example, the US Federal Reserve System, give priority to when assessing inflation prospects. And when labor is washed out of the market, when labor migrants are forced abroad and into shadow employment, overheating occurs, distorting normal wage proportions. As a result, the economy will sooner or later run into a structural crisis, from which it will have to escape through a relative decline in real wages, and this is difficult both economically and socially. The problem is practically unsolvable: there is nowhere for the influx of fresh personnel to come from.
— I would say: every cloud has a silver lining. The story of rising salaries in Russia can have a positive connotation if we are talking about investments, about increasing labor productivity, about automating many types of activities, about eliminating jobs that do not create anything. We definitely need to work on this. The question is how well this works out in life, and not in words, to what extent the same result is achieved with fewer people. It is important here that simply cutting unnecessary workers is not enough: if you simply got rid of a hundred people tomorrow, you will have savings, but otherwise everything will remain the same. Many companies are thinking about this now: labor-saving technologies that should move the economy forward. To achieve new quality, we need investments, innovations, automation of production.
— In general, inequality is an irreversible category in any reality. If you have a vibrant economy, you will always have inequality. Including due to crises or, on the contrary, rapid GDP growth: somewhere there is a slowdown, somewhere — acceleration. But now in Russia this injection of budget funds where they have not been seen for many years is perceived rather as a belated triumph of justice. Big money has finally begun to be received not only by oil and gas workers, but also by people who sharpen “iron” in factory shops. That is, from the point of view of ordinary people, this inequality is rather smoothed out. But again, there are vulnerable categories in the country, we must think about the poorest. Undoubtedly, they will suffer if the state does not index their incomes in a timely manner according to increased inflation. This question is also up in the air. Here, much depends on the behavior of the public sector, how quickly it is able to respond to emerging problems.
In the private sector, it is easier for workers to move from one place to another, or even move from one region to another, especially if their skills are in demand. The fact that they do this shows that there is a vibrant labor market in Russia. The authorities simply need to react more dynamically to the changes that are taking place in it and in the economy as a whole. So that their policies do not contradict these processes, but correspond to them.
— Overheating is more of a household term. The economy begins to function at a speed that is unnatural for it, if not contraindicated. We can look at the economy as a combination of production capacity and labor that allows for the creation of a certain volume of products with given technologies. Outdated technologies are the main limiting factor: if you force personnel to work at night to increase output, there is little benefit from this — people get very tired, produce a lot of defective products. Miracles do not happen. Overheating is when you try to cheat arithmetic, which no one has yet managed to do, when you forcibly drive the economy (and it is a living organism) onto a steep cliff, on which it will not hold for long and, inevitably returning to its previous level (it is good if without injuries), will switch to its natural functioning mode.
— Let's look into the day after tomorrow. Let's say the military conflict is exhausted. The budgetary impulse that fed the military economy has ended, because sooner or later it cannot but end. Will you be able to stop military-industrial production? What will you do next with all these deployed capacities, with these people, with their incomes, with entire regions that have already become accustomed to their special status and increased salaries?
The Soviet Union once ran into this dead end: there was a large military-industrial bloc in the economy, with which, despite the unfolding crisis, nothing could be done, it steadily demanded its lion's share of resources — labor, material, financial. But for the wider economy, everything produced by this sector is costs, and you can't reduce them in any way. Of course, you can raise taxes, but this measure is not at all harmless for the rest of the economy and the well-being of people, and besides, over time it will be more and more late.