Can Russia Compete?: Enhancing Productivity and Innovation in a Globalizing World

4. Upgrading Skills

69 Russia, even with its highly educated workforce, faces a growing shortage of skilled workers in industry. In the transition to a market economy, Russia’s workforce underwent a wrenching reallocation of labor across industries and occupations, and many specialized and technical skills that workers acquired under central planning were no longer in demand.1 Mismatches in the labor market became widespread, with sharp shortages of some types of skilled workers coexisting with excess supplies of others. The formal education system and the specialized vocational and technical training institutions in particular were poorly prepared to operate under the new market conditions and to supply the new skills that the market required. Employers who once hoarded labor are now reporting skill shortages as a major production constraint , and some are upgrading the skills of their existing workers through various training programs. To raise labor productivity in industry, improve industry’s international competitiveness, and participate more fully in the global knowledge economy , Russia must analyze the issue of skill requirements and develop policies to address it. Skill shortages can directly constrain production and prevent firms from meeting demand and using available inputs efficiently, with lower productivity as a consequence. And—indirectly—they can inhibit the absorption of new knowledge, a skill-intensive activity. With respect to the general economy, the mismatch between the skills that firms require and those that education and training institutions offer can waste four Upgrading Skills HONG TAN, VLADIMIR GIMPELSON, AND YEVGENIYA SAVCHENKO 11148-04_CH04_rev.qxd 6/6/08 11:12 AM Page 69 scarce public and private resources.With respect to individuals, the mismatch leads to sunk investments in their human capital that yield low returns and unfavorable labor market outcomes. Whether a corrective policy is appropriate depends on the cause of a skill mismatch. The likely causes include —inadequate funding or governance of education and training institutions , which constrains them from responding to the needs of the market —inappropriate labor regulations, which inhibit hiring and firing by firms to meet staffing shortfalls —restrictive compensation policies, which prevent some employers from paying wages that are competitive enough to attract needed labor —market failures in the training market, such as high turnover of trained workers, which inhibit the willingness of employers to invest in training to meet their own skill needs. This chapter draws on the complete Russian Competitiveness and Investment Climate Assessment Survey—including the Large and Medium Enterprise Survey (LME Survey) and the Small Enterprise Survey (SE Survey)— and related research and information sources to gain insight into skill shortages and mismatches and in-service training. It examines recent trends in the level and quality of education, the effects of economic restructuring on the skill composition of the workforce, the returns to schooling, and the aggregate supply and demand for skills in the Russian labor market. Using data from firm surveys, it then characterizes the distribution and nature of staffing and skill shortages among different groups of manufacturing firms, thereby contributing to the understanding of reported skill shortages and staffing problems, including labor turnover, compensation policies, and the inhibiting effects of labor regulations. A discussion of worker training follows , presenting evidence on the distribution, intensity, and determinants of in-service training and the implications for productivity and wages. The chapter concludes with some policy implications. Evolution of Human Capital in Russia The transition from a centrally planned to a market economy has strongly affected the evolution of human capital in Russia. Before the transition, most of Russia’s workforce was concentrated in industry and the service sector was underdeveloped. Educational attainment was high, but the educational system was oriented toward imparting narrowly defined technical skills at the expense of more general knowledge and skills. Wage inequality was arti70 H. TAN, V. GIMPELSON, AND Y. SAVCHENKO 11148-04_CH04_rev.qxd 6/6/08 11:12 AM Page 70 ficially compressed, and rates of return to higher education were relatively low (in the 1 to 2 percent range). That employment structure changed dramatically after 1991. In the first stage of the transition (1991–98), industrial restructuring was accompanied by decreases in employment and working hours and steep declines in real wages. The second stage (1999–2006)—against the backdrop of a dynamic recovery following the crisis of 1998 that positively affected all labor market indicators—led to rising returns to education and reports of skill shortages. According to Barro and Lee (2001), in 2001 Russia had one...