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Source: www.asiaecon.org |

RUSSIA'S WAGE REALIGNMENT


The unprecedented wage growth through Russia is finally coming to an end as the value of the ruble comes crashing down.


The unprecedented wage growth through Russia is finally coming to an end as the value of the ruble comes crashing down. Along with the crashing ruble and earning cuts, inflation has been steadily increasing. This triple threat has caused the Central Bank to devalue the currency, bringing it to its lowest point versus the dollar since the redenomination in 1998. Furthermore, unemployment in Russia is starting to climb. Because of these factors, wages are being realigned to match output.

Although Russia has relatively strong short term macroeconomic policies, they have been particularly vulnerable to the global financial crisis. A significant problem was the fact that Russia was too heavily dependent on the export of oil. The 70% loss in value from its peak in July of 2008 was too large of a shock, no matter how strong their economic policies were.

Further problems in Russia stem from the military conflict with Georgia and concerns of the state interfering with the economy. These concerns have caused foreign investors to pull out billions of dollars from Russia.

With the devaluation of Russia’s currency, inflation for consumers has been a significant problem. Official consumer inflation for January-August of 2008 was at 14.8 percent. As of November, inflation for food has reached 15.3 percent. Although inflation in Russia has always been a concern, overall inflation now stands at 12.5 percent compared to 10.6 percent for the same period in 2007. Because of Russia’s dependence on imported goods, the effects of inflation will hit consumers hard.

The current situation is in stark contrast to the past few years. Until this point, Russia had seen an unprecedented growth in wages. In fact, real wages had been increasing at approximately double the rate of worker productivity.

This growth in wages brought in large amounts of foreign workers trying to take advantage of the higher standard of living. Now that the value of the ruble is collapsing, employers are able to readjust wages. As workers are being laid off in large numbers or offered significant salary cuts, there may be an intellectual brain drain as many foreigners return home.

For example, investment bankers accustomed to annual salary jumps of 30 percent are now being offered equivalent jobs at just 40 percent of their previous salary. In advertising, sales and marketing, employee salaries are being cut over ten percent across the board. Some employees are even being asked to either accept wage cuts or have coworkers fired.

But while taking pay cuts is a painful experience, the devaluation is just a correction of the overvalued wages. In the second quarter of 2008, wages grew 12.6 year on year, while productivity, real output per worker, increased only 5.93 percent.

Although wage cuts can hurt employees, realigning wages to match output will benefit companies and should help improve the economy in the long run. The realignment may also attract foreign companies to enter the market. Before, companies had a difficult time in finding employees for good value.

With decreased wages and growing inflation, times are certainly more difficult for the average Russian consumer. But because of Russia’s strong macroeconomic policy, the current situation could have been much worse.  In fact, Russia is not even in a recession. The government has optimistically forecasted 2009 growth at 6.7 percent. The World Bank has a more conservative estimated at 3 percent.



Source: www.AsiaEcon.org
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Source: www.asiaecon.org |


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