Jobhunter Paradise in Russia Complicates Central Bank's Work

As Russian inflation hurtled toward the central bank’s target of 4 percent this year, there was one warning policy makers thought fit to mention after every meeting.

With its economic outlook turning increasingly positive, the Bank of Russia has been pointing to “signs beginning to emerge that labor shortages are finding their way into individual segments” of the jobs market, a refrain repeated in statements in February, March and April. If productivity gains don’t keep up, there’s a risk that companies will have to raise prices to cover higher labor costs, putting pressure on inflation.

“Given that unemployment is low, the recovery of economic activity will start to create inflationary pressure rather sooner than later,” said Vladimir Osakovskiy, chief economist for Russia at Bank of America Corp. in Moscow. “That may happen through an increase of labor costs or through a recovery of consumer demand amid growing wages.”

The demographic squeeze will test the limits of what monetary policy can accomplish after bringing inflation near the 4 percent target months ahead of a year-end deadline. Rate setters are doing their part with a “moderately tight” stance that’s kept the cost of money elevated even as the economy was slow to pull past its longest recession this century.

Now that inflation is under control, the Bank of Russia is focused on decreasing the impact of “non-monetary” factors, which range from the labor market and tariffs to taxation and budget policy, according to the head of its monetary policy department. For the central bank to say that its target was met, inflation needs to stay low and stable for two to three years, Governor Elvira Nabiullina said last week.

The country’s aging population is set to eclipse the importance of oil prices for Russia’s economic growth in the coming decades by straining public finances as energy output stagnates, according to the World Bank.

As a result of a “plunge” in birth rates in the 1990s, Russia’s working-age population will drop by an average of 600,000 annually over the next six years, according to Economy Minister Maxim Oreshkin. It fell to 84.2 million last year from 85.4 million in 2015. “The Russian economy faces serious demographic challenges,” Oreshkin told lawmakers in Moscow on Wednesday.

Russia suffered from a lack of workers across a range of key industries last year. That included health care, education, engineering and information technologies, the central bank’s press office said in an emailed response, citing data from the Federal Service for Labor and Employment. Demand for IT specialists will continue to grow this year and beyond, according to recruiting service SuperJob.

Confronted with the labor crunch, the authorities see a way out by creating jobs and opportunities for the younger generation, who have high levels of structural unemployment, according to Oreshkin. Another solution is to tap the pool of qualified workers willing to come to Russia from abroad, he said last week. The labor market has already absorbed millions of workers from across the former Soviet Union.

The central bank says spillovers from the labor market into prices can be contained if growth in real wages doesn’t outstrip gains in productivity. That’s a tall order for Russia, where productivity is among the lowest in Europe.

Earnings adjusted for inflation have already grown for nine months. Unemployment hasn’t risen once in 2017, falling to 5.3 percent in April. Higher wages can affect inflation directly by boosting demand for non-essential goods such as cars, according to VTB Capital economist Alexander Isakov.

The central bank couldn’t much like what it’s seeing. Last year, real wages rose 0.7 percent, while labor productivity expanded only 0.1 percent. Russia is risking a repeat of the situation in the five years after the previous economic crisis of 2008-2009, when productivity gains averaged 2.6 percent, almost half the pace of increase in real wages.

“The competition for labor resources is leading to faster and more sustained wage growth, which results in a more visible expansion in consumer demand, and that makes it difficult to meet targets for inflation,” said Oleg Kouzmin, chief economist for Russia at Renaissance Capital in Moscow. “The dynamics of earnings may require a relatively tighter monetary policy to instill a savings-oriented model of behavior.”

— With assistance by Zoya Shilova

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