How much unemployment is needed for restructuring? The Russian experience

Open unemployment in Russia has been growing very slowly - by only about 1 percentage point a year. This is mainly because of a degree of wage flexibility unknown in the West. Comparing industries over a two year period we find that, if relative employment fell by 10%, relative wages fell by 24%. Redundancies have been very low - only 1.5% of the work force in 1993. There has, however been a substantial redeployment of labour job to job movement - with a hiring rate of 21% of the workforce in 1993. The paper then discusses the reasons for this wage flexibility - in terms of the unemployment aversion of workers and the financial and other incentives facing managers. Finally, it appraises the ''Russian way'' and argues that it is better than having large-scale open unemployment, provided the under-employed workers kept in enterprises do not impede the internal restructuring of the enterprises.