Alexei Gaskarov: A 25,000 Ruble Minimum Monthly Wage Is a Good Idea

Rank-and-file Russians deserve a mandatory minimum wage, argues Alexei Gaskarov, and it would be good for the economy. Street scene near Haymarket Square in Petersburg, 4 February 2017. Photo by TRR
Rank-and-file Russians deserve a mandatory minimum wage, argues Alexei Gaskarov, and it would be good for the economy. Street scene near Haymarket Square in Petersburg, 4 February 2017. Photo by TRR

A 25,000 Ruble Minimum Monthly Wage Is a Good Idea
Alexei Gaskarov
Snob
February 8, 2017

How would a high minimum wage help Russia turn into a developed country? Why is Alexei Navalny’s campaign pledge not stupid at all? Financial analyst Alexei Gaskarov shares his opinion. 

What’s Wrong with Russia?
Russia ranks at the very top in international ratings of social inequality.

There are different means of combating inequality, including progressive taxation and raising unemployment benefits. But as soon as someone proposes a solution to the problem, he is immediately dubbed a populist.

This fate has befallen Alexei Navalny. In his presidential election program, he proposed setting a minimum wage of 25,000 rubles a month [approx. 400 euros at current exchange rates].

Is This Populism?
Let’s see how the structure of Russia’s GDP would change if this measure were implemented under current macroeconomic parameters. And let’s compare Russia’s GDP with the GDPs of the G20 countries.

GDP is the market value of all goods sold and services rendered in the country during the year. Costs are always someone’s income, so GDP can be calculated not only in terms of consumption, investment, government expenditures, and net exports but also in terms of income.

STRUCTURE OF RUSSIAN GDP IN TERMS OF INCOME IN % (PER ROSSTAT)
2015 2016 2017
GROSS DOMESTIC PRODUCT 100.0 100.0 100.0
Compensation of employees, including wages and mixed income not captured by direct statistical methods 47.2 45.0 46.6
Net taxes on manufacturing and imports 13.9 11.1 10.7
Gross economic profit and gross mixed income 38.9 43.9 42.7

There are three types of income:

  1. Compensation of employees, includes expenditures on insurance and pensions.
  2. Net taxes on production and imports. Essentially, this is revenue from the extraction of natural resources and their subsequent import abroad.
  3. Business income: company profits, capital gains, incomes of individual entrepreneurs.

The table shows that business income is nearly equal to the income of all employees.

Indirect taxes (e.g., income tax and VAT) are not included in GDP in order to avoid duplication, since they are based on the same profits and wages.

This is what average income distribution looks like in the G20 countries:

Source: The Labour Share in G20 Economies (ILO, 2015)

The labor share in Russia is 6–7% lower than the average for the G20 countries. The reason for the difference is the weakness of democracy and civic institutions in Russia. Election results do not depend on the opinion of the populace, trade unions are weak, and protests against social policy are far and few between. So it makes no sense to redistribute incomes to benefit employees.

How Much Would We Spend?
72,323,000 people are employed in Russia. We have to subtract entrepreneurs [i.e., the self-employed] from this figure. According to the Unified State Register of Individual Entrepreneurs (EGRIP), they amount to approximately 3.5 million people. We also have to subtract those people who work part-time: according to Rosstat, there are around one million such people, if we discount those involved in small business. So the upper limit of full-time employees in Russia is 67,820,000 people. Within this group, 50.3% earn less than 25,000 rubles a month.

However, 1.4% of employees earn between 5,000 and 5,000 rubles a month, and 20.9%, between 17,000 and 25,000 rubles a month. Another 50 percent of employees receive an average monthly wage of 15,329 rubles [approx. 240 euros].

Accordingly, the poorest wage earners would benefit most of all from the introduction of a mandatory minimum wage. On average, every employee currently earning less than 25,000 rubles a month would be paid an additional 9,671 rubles (i.e., 25,000 rubles – 15,329 rubles = 9,671 rubles ).

We would thus have to reallocate almost 3.96 trillion rubles annually: 9,671 rubles (the average pay rise) x 67,820,000 (the number of employees) x 50.3% (the share of those currently earning less than 25,000 rubles a month) x 12 (months) ≈ 3.96 trillion rubles.

Let us add in insurance premiums and pension contributions, which amount to 30.2%. The overall total would be around 5.15 trillion rubles (3.96 trillion x 1.302).

Russia’s GDP in 2015 was 83.23 trillion rubles. If we reallocate 5.15 trillion rubles from profits to wages, we arrive at the following ratio.

2015 2015 (%) 2015* 2015* (%)
GROSS DOMESTIC PRODUCT 83.233 trillion rubles 100 82.233 rubles 100
Compensation of employees 37.471 trillion rubles 45 42.621 trillion rubles 51
Net taxes on manufacturing and imports 9.272 trillion rubles 11 9.272 trillion rubles 11
Gross economic profit and gross mixed income

 

36.489 trillion rubles 44 31.339 trillion rubles 38

In the resulting structure, the share of labor income is slightly higher than the average figure among the G20 countries.

Obviously, many people would lose their jobs after a minimum wage of this kind was introduced, primarily those people who dig pits with a shovel where an excavator should be doing the work. These jobs are safe nowadays only because you can pay people almost nothing in Russia.

In turn, employers would seek to maintain profits by increasing prices for finished products. In aggregate, these effects would shape an economy typical of developed countries.

What Do We Risk?
Many people fear inflation. Let’s evaluate the risks. To introduce a mandatory minimum wage of 25,000 rubles a month, according to the structure indicated above, we would have to increase wage costs by 13.7%. The share of labor costs in the economy is 45%. Accordingly, to cover the increased costs, the price of finished products would have to be increased by 6.165% (13.7% x 45% = 6.165%). That would be the upper limit of possible inflation.

In reality, however, a rise in prices decreases consumption and forces prices to creep downwards. In addition, unemployment and inflation are inversely proportional to one another, meaning the higher the unemployment rate, the lower the rate of inflation.

Additional inflation would be two or three percent, and for the most part it would be spread out over the whole of society, meaning that people who earn a lot would forfeit this percentage of income, while the incomes of the poorest workers would increase significantly.

Of course, such a drastic rise in wages is a rather radical measure, given that the minimum wage is currently even below the subsistence level, and it is bound up with a variety of social benefits that would also automatically increase. But the tenor of the reform is absolutely correct and corresponds to successful examples in world practice.

The introduction of a statutory minimum wages in Germany has lead neither to inflation nor unemployment. In the US, increases in the minimum wage have increased the salaries of low-paid workers while maintaining employment.

Translated by the Russian Reader. Thanks to Alexei Gaskarov for the heads-up. For another take on the Russian economy’s performance and the figures provided by Rosstat, see yesterday’s featured post, “Lies, Damned Lies, and Statistics,” a translation of an op-ed piece by liberal economist Sergei Aleksashenko.

Lies, Damned Lies, and Statistics

rubiks-cube-costume-amazon-2

Instrument Failure: Why It Is Hard to Trust Rosstat’s Data on the Recession’s End
Sergei Aleksashenko
RBC
February 6, 2017

Over the last year, Rosstat has ceased publishing a number of important indicators for judging the economy’s real performance.

The other day, Rosstat published its updated assessment of the Russian economy’s performance over the past two years. Strictly speaking, there is nothing surprising about the fact that Russia’s official statistics agency amends its previously published assessments. It happens constantly in other countries, too. The fact is that the initial assessments, which are released a month or a month and a half after the the end of the latest quarter, are derived from on-the-spot information that is subsequently corrected.

A Rubik’s Cube
But what is really surprising is that, according to the updated view of Rosstat’s statisticians, the economy’s performance over the last two years was significantly better than had been thought. Rosstat now claims that, in 2015, Russia’s GDP decreased only by 2.8%, rather than 3.7%, as indicated in earlier assessments, and that 2016 basically saw no decrease whatsoever. This new take has been a surprise to everyone, including the Economic Development Ministry, whose experts have said they don’t understand why Rosstat has so radically revised its own assessments. They have been seconded by experts at Vnesheconombank (VEB), which nowadays employs a large team of macroeconomists led by ex-deputy economics minister Andrei Klepach. Rosstat’s assessement has also been a surprise to the prime minister and president, who have expressed no joy the economy had been doing much better than they thought only a couple of weeks ago.

As in many other cases, the different indicators in GDP figures do not exist in isolation from one another. They are closely linked, and it is almost never possible to change one of them without changing another. In very simple terms, it looks like this. GDP is the sum of the added value produced in different sectors of the economy, such as industrial manufacturing, agriculture, transportation, finance, etc. If the figures for manufacturing have suddenly improved or deteriorated, then, with all other things being equal, the figures for GDP should change just as much. But in addition to a manufacturing element in GDP, there is an end use element in GDP, which shows the level of demand for what the economy produces. In this case, the factors of demand are the populace, the state sector, nonprofit organizations, accumulation (investment and inventories), and net export (the difference between exports and imports). If the figures for manufacturing have deteriorated, not only should the total amount of GDP change but one of the components of demand should change as well, meaning we should be able to understand not only what manufacturing sector produced more added value but also who paid for it.

But that is not all. There is a third component of GDP, sources of income: added value divided by household income, net taxes (on manufacturing and imports), the gross operating surplus, and mixed income. That is, after we have determined from GDP figures for manufacturing who has produced more, and from figures for use who has bought what has been produced, the figures on sources of income tell us who earned money from this. It is a kind of Rubik’s Cube, which has only one correct (objective) combination. We see it clearly at once, just as see clearly when the cube has not been put together correctly.

The Quarterly Maze
There are other subtleties in GDP figures. For example, one of the big problems is calculating GDP in real terms, that is, adjusting it for inflation. Rosstat publishes deflators for individual sectors and, naturally, when they are used with sector-specific nominal data, the grand total should converge. So everyone has a good sense of the state of the economy, Rosstat should assess each quarter’s GDP performance in terms of the previous quarter. We are well aware that the first quarter, in which half of the month of January is taken up by holidays, and cold weather puts a halt to many kinds of work, bears no resemblance to the third quarter, when the weather is warm and the harvest is underway in the countryside. Nor does it bear any resemblance to the fourth quarter, when builders are trying to bring on line as many completed (or almost completed) buildings as possible, and the government spends at least twice as much money from the budget as in other months. When all these things are factored out, we arrive at the most important indicator, which tells us how things stood in the previous quarter.

Don’t laugh, but Rosstat has not published this figure since April 2016. At the recent Gaidar Forum, I needled one of the heads of Rosstat to find out why this had been happening. For fifteen minutes, he tried to persuade me I had simply not been able to locate the right table on his agency’s website. Rosstat’s website leaves a lot to be desired, of course. To fish out the right information, you sometimes have to spend an hour or two figuring out the poorly organized databases. In this case, however, I insisted the information was simply not there. A couple of days later, I received a letter from Rosstat saying that, indeed, Rosstat did not calculate this figure and did not know when it would be doing so again.

That alone is enough to take Rosstat’s published data about the Russian economy’s improved performance at less than face value. If we add to this the fact that Rosstat stopped publishing monthly investment figures in the spring of last year, and announced in November that revised figures for the manufacturing sector’s performance (figures that would, of course, be revised upwards) would be published only in the spring, it becomes obvious that Russia’s official statisticans cannot actually put the Rubik’s Cube together, and they don’t really know what is going on with the Russian economy. Meaning that all the instruments that should be telling us where the ship of our economy is sailing and how fast it is sailing there have failed.

The Secret GDP
I don’t want to argue the problem I want to touch on in my conclusion prevents Rosstat from adding everything up correctly. I suspect there are many more problems, and I fear that even the heads of Rosstat are not aware of all of them. But we cannot avoid talking about the fact that vast amounts of data relating to the work of the military-industrial complex and the security agencies are classified.

In fact, if this secrecy keeps anyone from understanding anything, it is the Russian authorities and Russian society. When it receives classified information, Rosstat has to hide it amidst its tables in such a way that not a single spy will guess it is there. To do this, Rosstat inevitably distorts the performance indicators for different sectors, adding something here, and trimming something there. But since hiding the truth from spies is much more important than telling the truth to Russian society, don’t shoot the piano player, as they say, for the poorly assembled Rubik’s Cube. He is playing as well as he can.

If you think about it, it is obvious the financial figures for the military-industrial complex’s performance are no state secret. The technical specs of weapons, the technology used to produce them, and, maybe, their locations can be secrets, but not the amount of money spent on their procurement (the classified section of the budget) or the amount of added value generated by the military-industrial complex.

I am confident that under the current Russian president we should not expect any progress in declassifying these figures. That was not what he was taught at the Higher School of the KGB. Since that is so, we are unlikely to find out in the coming years what is up with the Russian economy.

Sergey Aleksashenko is a senior fellow at the Brookings Institution in Washington, DC. Translated by the Russian Reader. Image courtesy of liketotally80s.com

Vladislav Inozemtsev: The Calm before the Storm

A common sight: first-floor commercial space for rent in downtown Petersburg
A common sight: first-floor commercial space for rent in downtown Petersburg.

The Calm before the Storm: Can We Avoid Economic Collapse in 2018?
Vladislav Inozemtsev
Slon.ru
August 1, 2016

Last week, Tatyana Nesterenko, one of Russia’s most experienced financiers and a person distant from politics, a person who has held the post of deputy finance minister and head of the Federal Treasury for almost twenty years, said the Russian economy should expect serious financial problems as early as next year, comparing the current situation with the “eye of a storm, [meaning] a condition in which everything [merely] looks quiet and safe.”

In my view, Nesterenko is undoubtedly right. The government has recently appeared to be the epitome of tranquility. It has even been drafting a new three-year budget, although in terms of revenues for 2016, the previous such plan (for 2014–2016) was off by 42%! Revenues were projected at 15.9 trillion rubles, but actual revenues in the first six months of the year were 4.6 trillion rubles. I don’t think the new draft budget will prove more accurate, if only because no sources of income for covering the deficit are envisioned after 2017. The president, who from time to time meets with economists and recommends developing a new development strategy for the country “roughly within a year,” meaning when the Finance Ministry’s reserves will run out and the budget’s huge social commitments will prove impracticable, has mainly been busy reshuffling the security forces, believing, apparently, that a sum changes by rearranging its components.

Coins tossed for good luck onto a stanchion in the Fontanka River
Coins tossed for good luck onto a cable spool anchored in the Fontanka River.

Today, Russia’s economy, to invoke Economic Development Minister Alexei Ulyukayev‘s maxim, really has hit rock bottom. The authorities are elated that the rate at which the GDP has been falling fell to 0.6% in the second quarter, but we should note this reduction took place in conjunction with an accelerating reduction of real incomes (by 6.2% in May, and 4.8% in June) and a considerable increase in inflationary expectations. Annual inflation was 7.5% as of June and showed no tendency toward decreasing.

Moreover, oil prices have fallen considerably. Brent fell by 15.2% during July, and, apparently, black gold is near a new equilibrium price ranging between 38.5 and 43 dollars a barrel. A 15–16% fall in the oil price will cost the Russian budget 430 to 460 billion rubles in the remaining five months of 2016, which is also no cause for optimism. Responding to it by “managing” the descent of the ruble will not be easy. Devaluing the national currency will no longer lead to a growth in exports, which this year has lagged behind last year’s figures by 30.5%. On the other hand, imports, which have basically not shrunk (they are down by only 10.4%) will inevitably become more expensive, dragging along with them the prices for a wide range of goods, thereby causing inflation and setting the tone for high interest rates.

Empty billboards are also not hard to come by in the city center.
Empty billboards are also not hard to come by in the city center.

In mid 2016, the Russian economy really is situated in the eye of a kind of storm. It is quite calm there at the moment: the authorities have become accustomed to the new circumstances. They have no hesitation in spending reserve funds. Generally, fears of popular discontent over lowing living standards have been overcome. Seemingly, a certain reduction in the degree of hostility toward western countries might do the trick of restoring relations with them.  There has been a glimmer of hope the EU’s problems will deepen with the UK’s exit. The possibility of Donald Trump winning the presidential race in the US has been taken seriously. Putin feels like a winner in his confrontation with Turkey. It is no wonder officials have dubbed the situation the “new normal.” It really is the new normal, so as long we take into account two factors: oil at 50 dollars a barrel and spending accumulated reserves at the rate of 600 billion rubles a quarter. That is around 8% of the overall amount in both sovereign wealth funds, the Reserve Fund and the National Wealth Fund.

Another empty billboard
Another empty billboard

However, the problem is not so much that sooner or later we will have to break back into the open sea through the hurricane’s eye wall, but the fact that the eye of the storm might move, and it would appear we have no instruments for tracking it. The country has not been trying to find the best place in this “quiet corner.” It has simply been drifting, humbling waiting for what happens next.

Evaluating the numerous programs and strategies that experts affiliated with one or another wing of the government are now trying to draft, one cannot help thinking that none of them is capable of boosting the Russian economy in view of two circumstances.

An elderly woman turning in scrap paper and other junk to supplement her pension.
An elderly woman turning in scrap paper and other junk to supplement her pension.

On the one hand, anti-crisis measures should have been implemented yesterday, rather than postponing their preliminary discussion to 2017. By the way, Russian Finance Minister Anton Siluanov warned in early 2016 that, at current oil prices, the Russian budget would be short 3 trillion rubles, which in turn would lead to spending the greater part of the National Wealth Fund. Little has changed since then. In the absence of reserve funds, the hole in the budget cannot be closed in 2018 either by raising funds on the international capital market (in this case, we would have to raise considerably more money than all the central government’s current international obligations) or by privatizing. (One year’s deficit could be papered over only by selling off the lion’s share of the state’s holdings in Gazprom and Rosneft.) Whatever economic development strategy the Kremlin approves a year from now, it will not prevent a large-scale collapse in 2018, with all the attendant consequences.

On the other hand, all the existing programs, however much Alexei Kudrin and Boris Titov stress their differences, are generally focused on the same thing: relaunching the economy on behalf of manufacturers. There is in fact only one difference between them. Titov’s Stolypin Club has suggested priming major enterprises with money through the earmarked and regulated distribution of cheap loans, subsidized by the Central Bank, while Kudrin’s Center for Strategic Research favors institutional reforms that could include reducing taxes on business and limiting the rights and opportunities of security services and the bureaucracy for extracting additional income from business. The assumption is that either by getting its hands on cheap money or ridding itself of the unbearable pressure of regulators, business will be reanimated, sparking life-saving economic growth.

More commercial real estate for rent in the city center.
More commercial real estate for rent in the city center.

I would love to be wrong, but I don’t think these measures will produce any meaningful outcomes, because the most important factor in the economic slowdown of 2014–2016 has been the crisis in consumer demand. The state has diligently performed its investment obligations, saturating heavy industry with funds via defense sector orders. It has not halted its sometimes pointless but expensive infrastructure projects. It has been encouraging state companies to build new pipelines and railways, but none of it can compensate the effect of declining consumer demand. Moreover, this demand has increasingly shifted towards the continuing flow of imports, while the share of domestic goods on the market has stopped growing. As I understand it, none of the economic development programs has so far offered a solution to this problem.

Therefore, in my opinion, we should introduce as least three new story lines into the ongoing debates.

First, we should stop regarding increases in wages for low-paid earners, pensions, allowances, and other payments to low-income Russians as “costly measures.” Saving money by reducing the incomes of doctors, teachers or pensioners is much more destructive than reducing costs at Gazprom or expenditures in the program for rearming the Russian army. These segments of the populace are most focused on purchasing domestic goods and services, and investing in them produces a multiplier effect in the sales and production of consumer goods. The crisis of 2008–2009 was negotiated much more successfully than the current crisis not only due to the relatively radical reversal in oil prices but also because the government considerably increased people’s incomes at the time, despite budget problems, whereas 41% of the population now say they lack money for food and clothing.

Second, we should think hard about a one-time credit and debt amnesty for people whose indebtedness to banks, the tax authorities or housing and utilities sector companies does not exceed, say, 30 thousand rubles.  Obligations of this amount now account for around 20% of the population’s entire debt burden, and a measure like this would affect 10 to 12 million people. The state would have to allocate up to 2 trillion rubles to implement the program, but both the social and political (why deny it) effect of such a measure would be incomparable with a Stolypin Club-style emission of a similar scale, which would completely vanish in the offshore accounts of executives of major companies in bed with the state and sympathetic officials. In my view, we cannot do without this measure now, but none of the people involved in the current discussion has deigned to mention it in their programs.

Third, direct measures for stimulating demand are necessary. They were adopted by all the governments of developed countries hit by the crisis of  2008–2009, but our officials were quite reluctant to copy them. I have in mind not only programs for encouraging purchases of new automobiles but also a system of issuing food stamps, analogous to the American one, to poor people. For example, pensioners could buy stamps nominally worth four to six thousand rubles for two to three thousand rubles at welfare offices. The stamps would be accepted in shops as payment for domestic food products only, with the exception of cigarettes and alcohol, and commercial outlets would then turn them in at banks at face value and have the amount credited to their accounts. This could be a powerful stimulus both to domestic manufacturers and commerce, not to mention the popularity of such a step among socially vulnerable groups themselves.

Ads like this one for a prostitute service are stenciled and pasted on every available surface in the city center.
Ads like this one for a prostitute service are stenciled and pasted on every available surface in the city center.

In other words, now it is not enough to say that Russia has sailed into a perfect storm. It must be understand that not only the captain and his mates will have to fight for our ship’s survival but absolutely all the passengers as well, and so the basis of an anti-crisis program should be attention to the general population, not to state corporations. And, of course, to be at least relatively prepared to fend off the mighty blows of the elements, we must stop postponing actual steps until tomorrow, and begin taking them today.

Source of original text: Worldcrisis.ru. Translated by the Russian Reader.