Profiling skills in Russia
It continues to be widely believed that Russia has a relative abundance of skills and a high quality of education, at least when compared with other leading emerging markets. On closer examination, this assumption is not entirely warranted. Not only has the educational and skills legacy been less positive than imagined, but the consequences of policies pursued over the past twenty years have also contributed to eroding any advantage. More generally, economies with relatively undiversified and unsophisticated product mixes – such as Russia – appear to have under-performed in terms of their educational outcomes. This suggests that there is a feedback process between the product and trade mix and the level of investment and returns to investment in the core skills and abilities generated through education.
These failings have serious implications both for Russia’s ability to grow as well as diversify1. Not only does good education support and enhance innovation, but a higher average level of education helps the successful imitation and faster adaptation of existing modern technologies. Imitation and adaptation will be particularly important for a country, such as Russia, which lags substantially in productivity when compared with leading economies. Information for 50 countries over the period 1960-2000 has found that countries with better education have significantly higher annual growth rates in GDP per capita. An increase in educational test scores by one standard deviation was associated with an increase in annual growth rates of 1.3 to 2 percentage points. Consequently, an improvement in students’
outcomes by just half that amount over a period of 20 years would, on average, increase GDP by around 5 percent and over a period of 75 years by as much as 36 per cent.2
Aside from affecting productivity and growth directly, the skills profile is a significant factor in conditioning the ability to diversify. That is because diversification necessarily implies the accumulation of new capabilities or skills. This will be particularly important if diversification involves moving into economic activities that do not rely on the same sets of inputs and knowledge that current activities largely use. Central to this is inevitably the quality of education, as without appropriate human capital it will be difficult – if not impossible – for an economy to shift into new activities. One way of representing this problem is to think of the skills present in an economy being summarised in the products and services that it generates. Reliance on natural resources tends to imply that the skills required for those activities are rather specialized and hence are not easily redeployed to new activities. For example, the skills required for the oil or gas industry will be very different from those required by a knowledge intensive activity, such as software.
1 Benhabib and Spiegel (1994), drawing on seminal work by Nelson and Phelps (1966).
2 Hanushek and Woessmann (2009). The long-term effects are based on simulations.
In the Russian case, the skills problem might have been partly mitigated by the fact that pre-1992 there was a significantly more diversified economy than the current one with skills and education being, as a consequence, less narrow. However, much of that diversified structure subsequently collapsed as it was uncompetitive. Further, many of the skills and the educational system behind those skills proved also to be fairly specific and non-fungible.
Testimony to this has been the effective collapse of much of the Russian vocational education system over the past 20 years.
Evidence from surveys suggests that Russian firms face problems in finding workers with the appropriate skill profile. The 2009 round of EBRD’s Business Environment and Enterprise Performance Survey (BEEPS) found that around over 45% of expanding firms thought that skill shortages were a constraint to growth. Other evidence indicates that firms find difficulty in hiring managers and professionals, although the most acute shortages appear to be for skilled workers. And while this may be the situation for existing firms, it seems likely that potential entrants to new, diversified activities may, if anything, face even steeper constraints.
As part of this project, for the first time we looked at the perceived supply of different skills facing Russian firms. We also looked at whether skills constraints and gaps were being addressed through migration3. For those purposes, a survey of the leading recruitment firms in Russia was launched at the end of 2010. Face-to-face interviews were conducted in 270 recruitment firms across 23 locations in Russia, including Moscow and St. Petersburg. To try and understand whether skill gaps might be most significant for activities that were innovative, we also conducted a small experiment with firms in three domains; energy-conserving LED lighting, engineering services for the electricity sector and web technology aimed at social networking and marketing4. The aim was to see whether innovative activities faced more binding constraints when trying to hire.
The results of this survey are unequivocal. The picture is one of widespread skill gaps across all types of labour. For the full sample the average time it took to fill a managerial vacancy was just under 40 days, as against 14-18 days for clerks and qualified workers respectively. While there was quite large variation in the number of days taken to fill a vacancy across different regions or oblasts, a clear pattern emerged. Not only does it take firms a much longer time to fill vacancies for skilled personnel, but this was particularly the case for relatively innovative activities. Recruiting managers or high level professionals in the major Russian cities on average took 3-5 times longer for innovative activity than in the rest of the
3 Results are reported in detail in Commander and Denisova (2012). The focus on recruiters was chosen as firms tend to rely on recruiters to fill specialised and/or difficult to fill vacancies, as well as unusual hiring
requirements, such as in innovation sectors.
sample. Even in Moscow, recruiting a manager or high level professional in these innovative activities would take between 3-4 times longer and the gap was yet greater in the Urals, Siberia and the Far East.
Moreover, looking at the sorts of skills that were also lacking for each type of potential recruit (e.g., managers or high level professionals) it was also striking that recruiters reported a widespread absence of essential skills. For example lack of problem solving and management skills were overwhelmingly the most commonly cited limitations for managers, with high level professionals most commonly lacking both problem solving and practical skills. Among the consequences of these problems with skills and in filling vacancies was that firms decided to postpone launching new products and/or modernising plant.
In short, this new evidence points not only to widespread skill shortages, even with employers paying wages that are high relative to the skill-specific average of a region. It also shows clear constraints on the availability of personnel for firms wishing to establish new or relatively innovative activity. These limitations will continue to act as a major brake on diversification without changes in policy.
One of the options for a country in addressing skill shortages includes allowing migration of workers from abroad. Indeed, most of the advanced economies actively seek to attract high skill labour into their countries, using particular visa channels and/or points systems to select eligible migrants. For example, the USA used the H-2B visa programme to attract migrants to specific industries, notably the software sector. Countries like Australia and Canada operate migrant selection criteria that privilege skilled individuals. Points are accumulated using formulae that take into account characteristics such as education, occupation, language ability and age. This broad approach – with or without explicit points – has, in recent years, been increasingly adopted by countries eager to compete in the international market for talent.
The position in Russia is, however, rather different. While the share of migrants in the total population is around 8.5% and is relatively high when compared with other emerging markets, much of this is composed of relatively low skill workers from states of the Former Soviet Union. Certainly, the active attraction of talent to the country as an instrument of general, let alone migration, policy has been absent. Indeed, an assessment of Russia’s migration policy framework in 2009, along with that of 27 other countries, advanced and emerging, indicated that Russian migration policy was generally very restrictive, particularly for high skill workers. Further, the legacy of internal controls on migration has by no means disappeared. Various incarnations of the propiska system still persist, notably in the capital city.
Our survey evidence of recruiters also clearly indicates a policy regime that is generally restrictive. For high level professionals, as well as skilled workers, the predominant view was
that migration could in principle help address shortages and that simplification of procedures would be an important aid in that process. However, respondents also indicated that one of the barriers to hiring migrants for skilled work was language, as knowledge of Russian was viewed as essential. Indeed, the language barrier will likely ensure that migration from outside the immediate region will remain relatively low. However, the combination of a relatively restrictive policy regime and linguistic and other attitudinal constraints ensures that relatively few migrants enter the country, at least for professional work.
To underline how restrictive in aggregate, as also in terms of skill composition, legal migration into Russia remains, can be seen when looking at the volume and type of applications to the Federal Employment Service for permission to hire a migrant. These applications were granted in almost all cases. Further, although this information does not cover unauthorised migrants, the quantum of which is likely to be quite high, it does cover the bulk of skilled migrants for which securing permission from the FES is important. The information relates to applications in 2010 and covers 24 of the major regions of Russia, including the large cities, like Moscow, St. Petersburg, Irkutsk and Ekaterinburg. The regions that are covered also have very varying income levels and structures of output and demand.
The information also allows identification by occupation and sector. What is evident is that migrants mostly accounted for a limited share of employment, but in some locations – notably St. Petersburg, Moscow and Far East - migrants actually accounted for between 5-9% of total employment. However, regarding the skill composition of migrants, over 80% of requests were for skilled and unskilled workers; with permits for various types of skilled workers accounting for the majority. Managers and high level professionals only accounted for 14% of total applications, with mid-level professionals contributing a further 4%. Table 1 also shows that in areas that attracted a relatively high number of migrants – such as St. Petersburg – the profile was overwhelmingly dominated by skilled and unskilled workers. For higher skill migrants, Moscow – predictably - has been the main destination accounting for over 60% of total migrants in the two top skill categories. Indeed, migrant managers in Moscow in 2010 accounted for around 1% of total employment in that category in the city. These data suggest that migrants play a reasonably significant role in parts of the labour market, notably among skilled and unskilled workers, but also, at least in Moscow, in management.
Simply looking at the occupational and skill classifications, while helpful, can be more informative when complemented by information on the compensation levels offered to migrants. These are also included in the application to the FES where, for a variety of reasons, employers do not have an incentive to understate wages. Yet, relating migrants’ reported wages disaggregated by skill to average wages in the same region for the same skill, the picture
that emerges is that for the higher skill categories, migrants are mostly not offered wages that reflect a premium on average comparable wages. Further, migrants’ wages fall significantly below those reported in the survey of recruiters. This may, of course, reflect factors, such as lack of seniority. Even in Moscow migrant manager wages mostly fall below the Moscow average and significantly below the reported wage levels in the recruiter survey. However, in exploring the impact of the hiring firm’s characteristics on compensation, it is also clear that foreign firms and local affiliates offer higher compensation, as do firms that have high relative revenues per worker.
To summarise the evidence so far which has been drawn from surveys and official migration data suggests several important conclusions. First, there is evidence that many Russian firms face skill shortages that are hard to address – particularly so in innovative activity. Search time is relatively long and filling positions involves raising wage offers. Second, relatively few Russian firms are looking to fill high skill gaps through migration and those that do are mainly concentrated in Moscow. Third, most authorised migrants are actually skilled or unskilled workers, with the majority likely originating from CIS countries. High skill, talent seeking is very much a minority feature of current migration. Fourth, relying on the wage data, there is little evidence that migrants are being matched to specialist skills in a context where search, as is indicated by the recruiter survey, is clearly costly.
Putting together these findings, it is clear meant that migration is hardly being used to address Russia’s skill limitations. The inverse of this has been the apparent acceleration in the out-migration of predominantly young Russian talent. Although hard data are not available, anecdotal and other evidence indicates that such migration is occurring and may even be accelerating. Clearly the risk is that this will constitute a brain drain, rather than setting in motion other more positive facets – such as incentives for others to invest in education, remittances, investments in the country of origin and, ultimately, return migration – that might provide the basis for a ‘brain gain’5. Presently, migration abroad appears to be concentrated among highly educated, skilled and youthful workers; the very sorts of people that Russia ought to be striving to retain if diversification and innovation are among its central objectives.
References
J. Benhabib and M. Spiegel (1994), “The role of human capital in economic development:
evidence from aggregate cross-country data”, Journal of Monetary Economics, Vol. 34, No.
2, pp. 143-74.
S.Commander and I. Denisova (2012), ‘Are skills a constraint on firms? New evidence from Russia’, EBRD and CEFIR/NES, mimeo
5 See Commander et al (2004) for a discussion of the various channels
S.Commander, M. Kangasniemi and L.A. Winters, (2004), ‘The brain drain: curse or boon?’, in, R. Baldwin and L.A. Winters, ‘Challenges to Globalization: Analyzing the Economics’
NBER, University of Chicago Press, Chicago
E.A. Hanushek and L. Woessmann (2010), “The role of cognitive skills in economic development" Journal of Economic Literature.
R. Nelson and E. Phelps (1966), “Investment in humans, technological diffusion and economic growth”, American Economic Review, Vol. 56, No. 1/2, pp. 69-75.
