MAKING DO IN UKRAINE

Making Do In Ukraine

By Volodymyr Zviglyanich

In the process of Ukraine’s transition to a market economy, macroeconomicindices such as employment and unemployment are manifesting dramaticchanges.

Official statistical data show that current unemployment in Ukraineis first and foremost that of white-collar workers with a universityor high school education. This kind of unemployment reflects alack of the necessary connection between the system of educationand the rapidly changing demands of industry. Ukrainian unemploymentis of the young: 80.7 percent of those unemployed are between20 and 30 years. Among those 18-20 years old, 19.3 percent arejob seekers.

The data on unemployment dynamics in Ukraine shows that the countryfaces the problem of chronic underemployment of the most activeand skilled members of society, who potentially could be the bestproponents of the on-going reforms. However, the official unemploymentrate remains remarkably low — 0.36-0.41 percent in 1994-95. Evenafter doubling in 1995 (1.5 percent}, it is still much less thanthe 10-22 percent base in Western Europe and the 5.5-5.8 percentof the US. This would imply a slow development of the transformationprocesses in the Ukrainian economy.

The official statistics for 1994 show that nearly 26 percent ofthose who were laid off retired and thus moved out of the laborforce. There are currently almost 12 million retired people inUkraine: one worker supports 1.36 dependents. With the liberalizationof employment policies this figure will increase. More than 17percent of the workers laid off went to the private sector. However,most of those laid off (especially in the rural areas) did notfind a full-time job, but remained at home cultivating their ownplots of land. The numbers of these people have been growing since1990, at an annual increase of 500,000 workers, in this specificallyUkrainian (as well as Russian) type of occupation that so markedlydiffers from traditional farming in developed countries. (1) However,it is impossible to register the number of workers in this sectorsince they do not show up at employment offices and thereforedisappear from the sight of Ukrainian labor statistics. Specialistsconsider this group to be one of the largest potential sourcesof unemployment.

Why does the liberalization of the Ukrainian labor force not leadto mass unemployment? First, more than 15 percent of the employedin 1994 had at least two jobs (in both the official, and/or informalsectors, with the latter being the main source of income). (2)Therefore, the loss of one job does not make those workers fully"unemployed." (3) The survey conducted in Ukraine in1994 by a team of American and Ukrainian researchers discoveredthat at least 70 percent of Ukrainian workers used some form ofsecondary "survival strategy" in l994. (4) Earningsin these secondary activities were, on average, higher than theofficially reported salaries ($29.3 per month in secondary activitiesversus $15.9 in primary official employment) and often providedthe primary means of survival, although women and pensioners seemedto be less able to cope.

This leads one to conclude that there is a greater labor marketflexibility and a stronger basis for genuine private sector developmentin Ukraine than is usually supposed by state officials. The "survivalstrategy" usually embraces six types of activities: "anotherjob," use of a "dacha" (a country house normallywithout utilities) or a plot of land to grow produce; work tosome extent as a private taxi driver; renting out an apartment,shopping trips abroad (so-called "shuttles"); and rentingout a garage.

Most people can more than compensate for their low salaries. Thishas two macroeconomic impacts: on one hand, it eventually leadsto the development of labor market freedoms and the functioningof a real private sector in Ukraine. However, this type of activityalso leads to tax evasion at a time when tax income is supposedto make up at least 40-50 percent of the government’s budget revenues.(5)

Furthermore, the liberalization of the labor force does not leadto mass unemployment because the administration of state enterprisesis likely to avoid direct layoffs by giving unpaid "vacationson the initiative of administration."(6)

Western assessments show that part-time employment in Ukrainein May 1995 reached 40-50 percent, the highest in Eastern Europe.(7) It is remarkable that any connection with age, sex, education,qualification, or regional characteristics is absent. Involuntarypart-time employment can affect either all personnel of an enterpriseor staffers of some departments inside an enterprise. The mainreasons for such a phenomenon are: decline in production, energyand raw materials shortages, cash shortages, and drops in sales.

Why are both employees (despite wage deferments or underpayment)and the administration not turning to layoffs? The answer is thatthis approach is economically disadvantageous, provided the presentcontinuing devaluation of labor. By July 1, 1994, an average salaryin Ukraine increased 4,500 times from the level of 1990, whereasthe consumer prices increased l8,000 times. This has caused afour-fold decrease in a salary’s purchasing power. The real valueof a nominal average wage in July 1994 constituted 62 rubles in1990 prices, when an average salary was 240 rubles. (8)

Taking into account that 70 percent of Ukraine’s population liveson an official salaries received from state organizations andthat others, even those involved in additional "survivalstrategies," are still not positive about the sustainabilityof the non-state sector of economy, it is quite understandablethat workers prefer to cling to their present state-sector jobs.(9) Besides, they get their pensions, benefits, and medical insuranceonly from state enterprises.

Today, wages make up 7-10 percent of production costs in the Ukrainianeconomy, 5.5 percent in industry, and in some branches of industryare only 1.5-2 percent. (10) In developed countries, this indexis at least 40-60 percent. (11) At the same time, the share ofall production costs (including wages) in retail prices constitutesno more than 40 percent. In this situation, personnel layoffs(and the subsequent replacement of "live" labor withmachines) becomes economically inexpedient. Additionally, systemicwage deferments in Ukraine has now given the state enterprises’administration a means of obtaining extra profits by holding moneyin commercial banks. Layoffs would deprive it of this opportunity.Therefore, the enterprises’ administration tries to keep stafferson in hope for better times as well as to save money on the obligatorylayoff payments.

On the other hand, the compulsory unpaid vacations initiatedby the administration and a reduction of the work day or weekinstead of layoffs was economically profitable for the same employeesbecause it does not require job hunting, requalification, etc.They can more than make up for lost wages when they have the freetime to involve themselves in different "survival strategies."This kind of economic activity is usually referred to as a "gray"or "shadow" economy, and involves both legal (but notproperly registered) and illegal (criminal) sectors. The latter,according to Col. Hryhory Omelchenko, head of a commission onorganized crime in the Ukrainian parliament who spoke in Washingtonin March, 1995, constitutes some 45 percent of the value of the"official" economy, i.e., of the properly registeredstate, private, and public enterprises.

It should be noted, however, that the "shadow" economyin most cases emerged due to the efforts of administration, thelack of sound laws, and a chaotic transition to the market, ratherthan because of "evil activity" by individuals (as oftenstated by numerous anti-crime commissions established by the authorities).Moreover, it often involves highly qualified labor that is ratherunproductive but nevertheless time consuming (e.g., a former scholarworking as a cab driver, or a so-called "shuttle").In this situation, by having more money "on the side"rather than on an official payroll, an employee loses his/herjob skills and plays an old Soviet game: "They pretend theypay us and we pretend we work."

A policy of compulsory part-time employment is also advantageousfor local employment and social security offices which also benefitfrom the situation because underemployed workers are not registeredand do not need job counseling and help.

This policy benefits the central and local authorities who avoidthe more serious problems caused by mass unemployment throughthe creation of partial unemployment, thus reducing the probabilityof social crises at the regional and central levels. The rapidincrease of unemployment rates due to massive layoffs (a measurequite compatible with the real market development), in the specificconditions of Ukraine’s post-Soviet economy could worsen the psychologicaland social-political situation in the country, and perhaps leadto the rejection of the very concept of reforms, and mass socialupheavals.

The slow path of’ privatization, the unfavorable investment climate,uncertainty in the business environment, and bureaucratic barriersall threaten to block the development of new enterprises and therestructuring of the old ones. The result is that the Ukrainianeconomy will not be able to create enough new jobs for the millionsof workers laid off. (12) It could also lead to social consequencessuch as the dramatic drop in living standards, an increase ininfant mortality, a decrease in male and female life expectancy,and an increasing gap between rich and poor. (13)

The desire to keep existing working collectives intact is typicalfor both the employees and the administration of collective formsof property (state, cooperative, shareholders, etc.). The questionsof employment and layoffs are decided by the general meeting ofworkers’ collectives. The old team, afraid of losing its profits,the increasing influence of the newcomers on collective decisions,and the new members’ access to property management, resists hiringnew members. Employees are resisting layoffs both because of thesense of solidarity and fear that they may one day be in the samesituation, and prefer temporary wage reductions to personnel reductions.Therefore, market principles of employment regulation are notso far working in Ukraine. In a market economy, bankruptcies area classic source of layoffs and unemployment. However, in Ukraine,despite the fact that laws governing them were adopted two yearsago, bankruptcies are quite rare. For example, the courts in Ukraineconsidered 144 cases of bankruptcies in 1993, and only nine privateestablishments and a single state enterprise were declared bankrupt.The government tries at any price to avoid bankruptcies of stateenterprises despite the fact that they constitute the lion’s shareof unprofitable enterprises.

The bankruptcy procedure in Ukraine is rather complex and time-consuming.Layoffs are based on the "Code of Laws on Labor" ofUkraine, whereas the issues of employment are decided accordingto a quite different law "On the Employment of Population."The laid-off employees officially keep their benefits and compensations,which makes the layoff process too expensive for both the bankruptenterprise and the Ukrainian government. Those who were laid offare theoretically guaranteed unemployment benefits of up to 75percent of their recent salary, as well as many other benefits.In practice, however, the government is constantly reducing thesebenefits. Now the latter are provided according to the physiologicalsubsistence level in the sum of 1,450 million karbovantsi(or near $10) monthly. So far, the maximum length of time to receiveunemployment benefits ($l20 annually) is three years. It is supposedto be reduced to two years, but calculations show that even withthis cut-back, neither local social security offices or the stateenterprises which are chronically out of cash, will be able topay unemployment benefits.

The lack of a formulated government strategy on unemployment challengesthe implementation of the reform program of Leonid Kuchma’s teamand the creation of a social safety net. Volodymyr Yerasov, thedirector of the Ukrainian Republican Employment Center, stressedin the article mentioned above that by the end of 1995 some 400,000officially unemployed and 1.65 million job-seekers were expectedin Ukraine. The labor market could be effectively managed onlywhen the restructuring of industry begins, an effective taxationsystem is created, the reform of the wage system is underway,and the social safety net is functioning.

Conclusions

The emerging tendencies in the Ukrainian labor market show thatmarket processes and institutions are yet to be established. Sofar there are no market-based mechanisms of decision-making inthe sphere of employment. This is perilous for further implementationof market reforms, since a situation in which employees neitherwork nor are laid-off could lead to the chronic inability of theindustry to be modernized and produce hi-tech internationallycompetitive products.

By keeping its official unemployment rate artificially low, Ukrainediminishes its prospects for economic recovery and creates a deceptivepicture of the state of its economy. This can partially be explainedby the shortcomings of relying on registered unemployment statisticsin these countries. The Economic Bulletin for Europe gives theexample of when many Western economic advisers and governmentalofficials in Russia often quoted a 2.7 per cent unemployment rate(or 2 million registered unemployed) for mid-1995. However, accordingto the ILO definitions, i.e., including all persons not employedbut actively seeking work, this figure was 5.7 million or 7.7percent of the labor force, at the end of June 1995. (14) Onecould assume that the real unemployment rate in the CIS countries,estimated according to the ILO methodology, is much higher thanofficially declared and constitutes some 6 percent of the laborforce in June 1995, instead of the 2 percent reported on the basisof registered unemployment.

A second set of reasons for low unemployment rates in the CIScountries refers to the continuing legacy of the "company-town"principle inherited from the Soviet system, albeit to a much smallerextent. Significant overemployment (as was the case in the SovietUnion) and widespread use of involuntary temporary leave and part-timework (a tribute to the transition period) are the legacy of this.In Russia, the number of persons working part-time or on temporarylevel reached nearly 3.9 million or 5.3 per cent of the laborforce in June 1995. Some 1.9 million of these were on administrativeleave, of whom more than 40 percent did not receive any pay. Allthis undermines labor motivation and entails a sweeping loss oflabor skills, accompanied by the lack of a viable system of jobretraining programs.

In the countries of Central Europe, the level of unemploymentreached a peak in early l994 of 7.6 million people and declinedsteadily thereafter. For example, in Slovenia in 1993 it was 137,000or l5.5 percent and in 1995 it decreased to 116,000 or 13.4 percent.Slovenia is the leader of transition countries in real wages percapita (reaching some $550-600 monthly) and economic growth (near5 percent in 1994). In general, the number of unemployed in mostCentral European countries (except Romania, Macedonia and Yugoslavia)was stable or declined, thus signifying the beginning of economicrecovery. The lowest unemployment rate was in the Czech Republic(3.5 per cent in 1993 and 2.8 percent in 1995) which is explainedby active labor market policies; early retirements; favorableconditions prior to transition in the structure of employment,and abundant labor skills.

Ukrainian politicians so far consider Russia to be its major economicpartner in the region. However, the results of this analysis cannotjustify this claim. Russia can provide Ukraine with energy resourcesand raw materials. At the same time, Russia cannot provide Ukrainewith viable advice on dealing with unemployment (let alone withhi-tech production and know-how) since it faces the same problemsas Ukraine does. Therefore, the Central European countries andparticularly those of the Visegrad Group could serve as the "rolemodels" of economic transformations for Ukraine.

NOTES:

1.) Pratsya ta zarplata, 1994 – #7

2.) As a popular anecdote from Ukraine goes (summer 1994): Yuri:"Where are you working now?" Andrei: "In Bolshevik"(a state sector enterprise). Yuri: "And where do you earnmoney?"

3.) Tendentsii ukrainskoii ekonomiky (Misyachnyi buleten’)Traven’, 1995; Evropeiskyi Tsentr Makroekonomichno AnalizuUkrainy, Kyiv-Brussels, 1995, p. 15

4.) Simon Johnson, Daniel Kaufman, and Oleg Ustenko: HouseholdSurvival Strategies. Paper prepared for "Economic Reformin Ukraine: Progress and Prospects" September 29, 1995,Meridian House, Washington DC.

5.) Kuchma, Leonid. "Shlyakhom radykalnykh ekonomichnykhreform." Holos Ukrainy, October 13, 1994

6.) On the whole, the incomplete working day/week employment reached6.5 million workers, or 29 percent of the employed populationin February 1995. This was shown in the investigation into Ukraine’shousehold employment conducted for the World Bank by the KyivInstitute of Sociology which covered the 5 largest Ukrainian cities:Kyiv, Kharkiv, Lviv, Odesa, and Dnipropetrovsk. (Tendentsiiukrainskoii ekonomiky, p. 15).

7.) EIU, Country Report, May 18, 1995. Geneva, EIU Press, 1995,p. 36

8.) Pratsya ta zarplata, 1994 – #19. In the first quarterof 1995, it decreased by an additional 6.4 percent and in March1995 reached $35, two thirds of which (74 percent) have been spenton purchasing foods and vitally important services. (Zinchenko,op. cit., p.6).

9.) Reuters Textline, April 24, 1995

10.) The official minimum wage in Ukraine, on which the wholeindustrial system and policy of wages/pensions is based, is 60,000karbovantsi per month, i.e., near 30 cents. According toOleg Soskin, the price of labor in Ukraine is extremely low. (OlegSoskin, "I u 1996 nas chekaye budzhetna "Fata Morgana"Time/Chas. September 22, 1995, p. 3) 11.) Pratsya ta zarplata,1994 – #13

12.) According to Volodymyr Yerasov, real economic restructuringin Ukraine will bring about a disengagement of some 25 percentof the employed population, or close to 5.5 million workers. (YerasovVolodymyr, Holos Ukrainy, May 22, 1995)

13.) Fretwell, D. Jackman, R. "Labor Markets: Unemployment,"in Labor Market and Social Policy in Central & Eastern Europe,IBRD, 1994, p. 160, Solow, R. M., "Two Ways of ThinkingAbout Unemployment," in Labor Economics & IndustrialRelations, Cambridge, Harvard University Press, 1994, p. 2582E

14.) Economic Bulletin for Europe, Vol. 47 (1995). Prepared bythe Secretariat of the Economic Commission for Europe, Geneva,1995, p. 24-26