metadata: authors: 0: author: Commander, Simon
1: author: Liberman, Leonid
2: author: Ugaz, Cecilia
count: Russian Federation
docna: 0: docna: The behavior of Russian firms in 1992 :
            evidence from a survey
docty: Policy Research Working Paper
subtopic: Urban Housing and Land Settlements,Labor Markets,Labor Standards,Urban Governance and Management,Urban Housing,International Trade and Trade Rules,Inflation,Employment and Unemployment,Municipal Management and Reform,Rural Labor Markets
teratopic: Infrastructure Economics and Finance,Macroeconomics and Economic Growth,Industry,Finance and Financial Sector Development,Environment
abstracts: cdata!: The authors surveyed 41 firms in and
            around Moscow in the last two weeks of November 1992 to get
            an empirical handle on how firms are responding to the
            changing economic environment.  They found the following
            conclusions.  There were large negative (supply and demand)
            shocks to output for a significant number of firms and
            branches.  Profitability was remarkably buoyant in real
            terms.  There was clear evidence that firms with market
            power rapidly adjusted producer prices, trying to maintain
            or increase their markup.  There was no evidence of a
            strategic change in pricing rules.  Most firms experienced
            relative stability in earnings and in the distribution of
            revenues.  There was no substantial evidence of
            decapitalization - at least through greater borrowing or
            predatory wage settlements.  The upward shift in interfirm
            arrears was smaller than aggregate numbers might have led
            one to expect. Inertia in the wage system should not be
            ignored.  Real wages were cut back sharply by the great
            price shock of January 1992, but real statistical wages then
            climbed back toward early 1991 levels.  Benefits firms
            provided account for large shares of labor income and 40 to
            45 percent of firms' costs.  Firms may have tried to
            squeeze benefits particulary in housing, but allocations to
            the Social Fund have generally stayed constant. Employment
            adjustments were limited, despite the downward pressure on
            output and the lack of growth in firms surveyed.  Net
            employment separations were relatively restricted.  Firms
            continued to hire at significant rates in 1992, in part
            because of fixed factors technology, in part because of the
            reluctance of firms to discard workers.  Consequently, firms
            have shed few workers - mostly ancillary and clerical staff,
            usually women; some firms chose to place workers on minimum
            wages, reducing labor costs significantly.  The result is
            that unemployment benefits are provided de facto within the
            firms rather than through labor offices.  In short the
            status of the so-called production worker, the core of the
            Russian industrial firm, remains untouched. Clearly there
            was a large "employment overhang" at the end of
            1993.  The next stage of the transition will be difficult.
geo_reg_key: 517208,517191,517190,82689,517198
repnme: repnme: The behavior of Russian firms in 1992 :
            evidence from a survey
display_title: The behavior of Russian firms in
            1992 : evidence from a survey
listing_relative_url: /research/1993/08/698943/behavior-russian-firms-1992-evidence-survey
topicv3: Inflation m1326709 0870F4727ACED1CF8525815C00471347,Trade m1326924 698,Minimum Wages m1327199 1671,Land and Housing m1327648 817,Unemployment m1504051 2747
publishtoextweb_dt: 2010-07-01T00:00:00Z
historic_topic: Infrastructure Economics and Finance,Macroeconomics and Economic Growth,Industry,Finance and Financial Sector Development,Environment
origu: World Bank Institute
no_of_pages: 52
model_extractions: **Policy** Reaeuch|

**National Economic Management|**

# WPS **1166**

This paper-aproduct of the National Economic Management Division, Econom;c Development Institute - was funded by the Bank's Research Support Budget under the research project "Labor Markets in Transitional Socialist Economies" (RPO 677-30). Copies of this paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Olga del Cid, room M3-047, extension 35195 (August 1993,46 pages).

The authors surveyed 41 firms In and around Moscow In the last two weeks of November 1992 to get an empirical handle on how firms are responding to the changing economic environment. They found that:

- There were large negative (supply and demand) shocks to output for a significant number of firms and branches.

Profitability was remarkably buoyant in real terms; there was clear evidence that firms with market power rapidly adjusted producer prices, Lying to maintain or increase their markup.

* There was no evidence of a strategic change **in** pricing rules.

* Beneflmt firms provl'ed account for large shares of labor income and 40 to 45 percent of firms' costs. Firms may have tried to squeeze benefits, particularly in housing, but allocations to the Social Fund have generally stayed constant.

* Employment adjustmaents were limited, despite the downward pressure on output and the lack of growth In firms surveyed. Net employment separations were relatively restricted. Firms continued to hire at significant rates in 1992, In part because of fixed factors technology, in part because of the reluctance of firms to discard workers. Consequently, firms have shed few workers - mostly ancillary and clerical staff, usually women.

* Most firms experienced relative stability in earnings and In the distribution of revenues. There was no substantial evidence of - decapitalization at least through greater bofrowing or predatory wage settlements.

* Some firms chose to place workers on minimum wages, reducing labor costs significantly. The result is that unemployment benefits are provided de facto within the firms rather than through labor offices.

* **The** upward shift in interfirm arrears was smaller than aggregate numbers might have led one to expect.

* Inertia in the wage system should not be ignored. Real wages were cut back sharply by the great price shock of January 1992, but real statistical wages then climbed back toward early 1991 levels.

* In short, the status of the so-called production worker, the core of the Russian industrial firm, remains untouched. Clearly, there was a large "employment overhang" at the end of 1992. The next stage of the transition will be difficult.

ThePolicyResearchWorking PaperSeriesdisseminates thefindingsof workunderwayin theBatc. Anobjectiveofthe series is to get these findings out quickly, even if **presentations** are less than fully polished. The findings, interpretations, and conclusions in these papers do not necessarily represent official Bank policy.

Produced by the Folicy Research Dissemination Center
The Behaviour of Russia, Firms in 1992 Evidence from a Swvey Simon Commander, Leonid Libxmnan, Cecda Ugz and Ruslan Yemtsov<sup>1</sup> The World Bank, Institute for Economic Forecastng, Russian Academy of Sciences and Moscow State University The authors thunk Timothy King and Jeni Klugman for supporting the work. The paper is closely keyed to - - a companion text *Wage and Employment Decisions in the Russian Economy by the same authors which is available on request.
# The Behaviour of Russian irms In 1992 Evidence from a Survey

# By Simon Commander, Leonid Liberman, Cecilia Ugaz and Ruslan Yemtsov

# Table of Contents

|I.|Introduction.1................|...<br>I|
|---|---|---|
|1|The Survey .....................|1|
|2|Output Chang. .<br>-----..-..--.--.|2|
|_3._|Financial Performance<br>.............|_3_|
|_3.1_|Market Power ....................|10|
|3.2|Inter-enterprise Arrearm. .|12|
|_3.3_|Decapitalization .15||
|4|Employment Changes .*-|15|
|4.1|Labour Hoarding............<br>.|24<br>|
|_5_|WageSetting ...............<br>.|25|
|5.1|Relative Wages .................|27|
|_5.2_|Bargaining and Wage Targets .|29|
|6|Firm-Provided Benefits .30||
|6.1|Costs of Beneits .34||
|6.2|Housing ..|37|
|7|Condusion............-.<br>-.|41|
|Bibli|ography<br>.<br>.43||
|<br>App|<br>endix Table1<br>.|44|
|App|endix Table 2 ................|45|
|Appe|ndix Table 3 .<br>--..---.-|46|
-1-

Behaviour of Firms

# Introduction

At the outset of 1992 much was made of the change in regime that was to be associated with price liberalization, reform of property rights and a new-found intolerance by the monetary and fiscal systems to financial indiscipline. The heart of these changes had necessarily to be the enterprise sector - the bedrock of the planned economy. By early 1993, however, aggregate data indicate that the regime break was less evident than might have expected, that price liberalization had transiated into-persistent and high increases in monthly inflation aad that structural changes remained restricted. Moreover, we have shown elsewhere that despite very significant negative shocks to output over 1992, changes to employment and hence to unemployment have been less than might have been predicted **2.** Further, the shift in the stance ,f the central monetary authority in mid-1992 validated the accumulation of large inter-enterprise arrears that had been accumulated through the first half of 1992 and, at the sane time, sent a qualitatively - different signal to firms regarding the viability of thei: claims impiicit and explicit - on the budget and/or banking system.

The response of Russian firms to the price shocks of 1992 and to the large and, in some cases, random disturbances transmitted through the combination of trade and political changes is clearly of key importance. In particular, we need to know how those shocks have distributed themselves with respect to branches and the subsequent actions taken by firms in response to those shocks. This, however, is easier said than done. One cost of disintegration has been considerable disruption of the statistical system and of the reporting protocols that characterised earlier practice. One consequence has been the ncid to rely on new data collection primarily centred on the firm.

This paper provides an extended discussion of firm behaviour with particular emphasie' on the associations between output, financial performance and wage and employment decisions. In addition, we provide a first attempt at systematically quantifying the values and costs of non-monetary wage components. The main objective of the paper is thus to get some empirical handle on a fluid and diverse set of changes in the environment facing firms and structuring their decision rules.

'1: The Survey The paper is largely organized around the results from a small survey of 41 firms that was carried out in and around Moscow in the last two weeks of November 1992. The firms were randomly selected and covered ten branches, including trade and services. Appendix Tables 1 and 2 give the breakdown - of the sample by size in terms of employment and assets, as well as by branch and property type. As 2 Commnder, LibeMan ad YeMtSov (1993a)
# Behaviour of Finms

regards location, iust over 50% of tho sample were situated within Moscow, a further 16 firms in Moscow oblast and 3 in other oblasts. All were however in fairly close proximity to Moscow. The bulk of the sample were industrial firms with an average current labour force of over 800. The legal status of the sample was reasonably diverse. If we include state property currently rented by collectives alongside collectives and joint stock entities we can see that 11 or over 25 % of the sample were, loosely defined, private firms.

While the sample size is small and localized, the survey results at th.. least provide some crosscheck on the information given by more aggregate data. Comparing the salient 1991 information for the industrial firms in our sample with a Goskomstat survey of over 26,000 Russian industrial enterprises, we find that our sample is, however, strongly biassed toward larger firms. While we find fair correspondence with respect to nominal wages and employment levels, for sales revenues and profits, the World Bank averages are significantly different from the Goskomstat firms. Revenues were over 80% higher for the smallest fims with less than 200 employees but were 30% lower for the other two categories. For gross profits, the World Bank survey reported consistently higher average levels across all size classes. This obviously suggests the dangers of over-generalizing from the sample. Simply put, the universe we have surveyed appears likely to be charctrized by larger firms with higher average revenues and gross profits.

Nevertheless, the survey allows us to get a richer handle on emerging changes to important decision rules with respect to wages, employment and benefits that the aggregate data does not capture. Finallyi we should note that from aggregate data it is clear that the Moscow region has been subject to higher than average employment contraction over 1992; the sample may then reflect some of the upward bias in separations that appears characteristic of the region as a whole.

# 2: Output Changes

Aggregate data for Russia indicate that industrial output declined by around 20% in 1992. The distribution of those losses by branch and region is far from uniform but the evidence broadly points to a significant and generalized negative. shock to output dominated primarily by an aggregate rather than a sectoral process. Nevertheless, there are some signs that sectoral or reallocation shocks have been present. Retating relative producer price changes to relative output changes we ooserve a reasonably robust and positive correlation over 1992.

The heterogeneity of the firms covered in the survey and difficulties in secuing accurate estimates of either value or vol'ume indicators resulted in the output questions being couched in terms of direction of change and broad physical magnitude. As Tables 1 and 2 indicate the picture is fairly mixed across
Behaviour of Firns 3 firn size classes and branch. For the industrial firms, the weight is clearlY cn the negative side with nearly 60% reporting declining output. For firms with falling output the unweighted mean projection for the year was 20/25% with roughly half the firms reporting over that range. Even so, the picture is not quite as bleak as one might have initially imagined. 15% of respondents reported output increases and the remaining 25% projected constant output over 1992. While aggregate data show engineering and light industry to have been hardest hit, the survey shows just under half the engineering firms reporting constant or increasing output. Moreover for those firms with output losses, the decline was significantly under the sample mean.

The source of the shocks to output can be variously traced. In 35% of cases where the output change was negative firms reported the primary source of the shock as irregularity of input supplies. This source does not seem to be systematically related to disruptions in intra-CIS or ex-CMEA trade. Firms with significant output declines were primarily served by local subcontractors. In the same proportion, firms reported product demand shocks to be the principal factor - this dominated, for example, the .-sponses of engineering firms. But in the majority of cases, firms reported simultaneous input supply and product demand shocks. Suspension of subsidies was evidently a lesser factor accounting for only 13 % of responses. Not surprisingly, we find both demand supply shocks to be present, even if attribution of components remains problematic.

# 3: **Fnacal** Performance

The performance of Russian firms over 1992 is difficult to gauge at all accurately; in part because of accounting procedures. Even so, the obvious impression given by the path of interenterprise arrears and the sets of claims on the budget for preferential treatment, suggest that a significant share of firms have encountered financial difficulties over 1992. Aggregate data show, for example, that while over _55%_ of Russian firms experienced a fall in output over the first half of 1992, between 60/70% increased input and output inventories over the same period and roughly comparable shares suffered negative demand shocks. The coincidence of deflation in household demand for firm output and by dislocation to inter-firm and inter-CIS transactions could, at first approximation, be expected to result in adverse balance sheet developments for many firms. However, we also know of course that the transition from a suppliers' to a buyers' market - to use Kornai's term - requires more than a relaxation of shortages; it presumably requires some basic level of competition in the provision of goods and services. This assumption is rather problematic in the Russian context where we observe rlatively high levels of concentration and market power. Indeed, in the survey it is instructive to note that 60% of firms were
- ~~~ ~~~~

4 -

|Table 1|Physical O<br>Directio|utput in 19<br>n<br>of C!.ange|92:<br>||I|
|---|---|---|---|---|---|
||Decline|Constr.t<br>|Increase|No reDlv|TOTAL|
|BY EMPL.||1<br>_||.||
|SIZE*<br>_||||||
|1|2|.__|2._||10|
|2|'<br>6|1|3|II|11|
|3|7|3|_3<br>O -|<br>O|10|
|4|6|||_<br>_I_<br>_<br>_||
|5|2|1_<br>1|<br>0|_|3__|
|...|.<br>~<br>~<br>~<br>~<br>,-I-i|<br>~~~~-----|<br>..-|----|1 ------.|
|| TOTAL|:3|1<br>1|6|.|4||
|Table 2|Physical O<br>Direction|utput in 19<br>of Change b|92:<br>v Branch|||
||Decline|Constant|Increase|No reolv|TOTAL|
|BY BRANCH||||_|__<br>i|
|Metall.|4|0|0|0|4|
|Chemic.|1|-<br>0||O|<br>2|
|_aci|3|2|_|1<br>|8<br>|
|Bld-Matr.|<br>3|1||l<br>|___O|<br>|
|§Licht|*||<br>*|1|_|_|r<br>j|
|| Fooc|2|0|**0**<br>|<br>|<br>|O|<br>2|
|Agro|2||O|j)|-|
|Constr.|1|4|0|_|5|
|Trade|1|1|1|0|3|
|Science|2|1|1|0|4|
|,,,,,.**..**....|- - - - -|- - - - -|- - - - -|- - - - -|... ......<br>1|
|TOTAL|23|<br>11|6|1|41|
|Source:|<br>World|<br>Bank|Survev|||

**"Flr Sine Cetegorti:** 1- 80-350; 2- 351-700; 3- 101-900; **4m** 901-1500; **5- >150l employees SOurce: Vorld** lank **Survey**
-5

Fig 1 <!-- Start of picture text --> Real Pre-Tax Profits; 1991.1 - 1992.3<br>By branch (1991.1 prices)<br>10<br>9<br>B<br>7<br>6<br>4<br>3<br>2<br>91.1 91.2 91.3 Q1.4 92.1 92.2 92.3<br>0 Metol + Chem 0 Mochnbld A Build Met X Ught<br><!-- End of picture text --> <!-- Start of picture text --> Real Pre-Tax Profits; 1991.1 - 1992.3<br>By bronch (1991.1 prices)<br>7<br>6<br>5<br>4<br>2<br>0<br>91.1 91.2 91.3 91.4 92.1 92.2 92.3<br>0 Food + Agrolnd O Constr A Trade & Serv X Science<br><!-- End of picture text -->
-6-

Fig 2 <!-- Start of picture text --> Sales Revenues; 1991.1 - 1992.3<br>1991.1 prices by Broncn<br>24<br>22<br>20<br>18<br>16<br>14 9<br>12 -<br>10<br>8<br>6<br>91.1 91.2 9 .3 91.4 92.1 92.2 92.3<br>0 Food + Agroind O Constr A Trade&Serv X Science<br>Sales Revenues; 1991.1 - 1992.3<br>1991.1 prices by Branch<br>28<br>26-<br>24<br>22-<br>20-<br>18_<br>16-<br>14-<br>12-<br>10-<br>8<br>6<br>4<br>91.1 91.2 91.3 91.4 92.1 92.2 92.3<br>0 Metall + Chem O Machnbldg A Buildg Mat X Light<br><!-- End of picture text -->
-7-

Behaviour of Firms either monopolists or oligopolists, here deflned as between 2-S producers. Competitive conditions only dominated in light industry and in other expected areas such as trade and services.

Given the large disturbances to the price level and turbuience in relative prices, we would expect considerable volatility in proflts of firms and a higher measure of randomness in their distribution over branches. That, for example, was the evident outcome in Poland in the first year of price liberalization over 1990 and we might expect such random effects to be ampli:ied in the presence of differential constraints on price setting and the insignificant trade liberalization that has occurred in Russia<sup>3.</sup> And it is indeed the outcome we appear to observe over 1992 This result obvIously cautions against making any firm predictions regarding the future path of profits or their distribution.

Figures 1 & 2 point to fair persister^e in both sales and gross profits. At branch level, we find that revenues and gross profits are generally little shifted from early 1991 levels, even if there is greater mtra-quarter variation in 1992. For firms classified by inirket power, it is striking to observe the divergent movements in real revenues and profits for competitive as against firms with market power. Competitive firms suffer an unambiguous negative shock to gross profits and sales over 1992 (see Figure 3).

We find some increase in the sample variance over time for monopolists' gross profits but looking at variance in branch level gross profits although there are erratic movements we find no evidence of widespread and increasing variance, as measured by the coefficient of variation. Even so there is considerable dispersion in the level of profits at the firm level. Thus, at first inspection we find no evidence of a generalized sales and profits slump among the sample. There is one exception -<sup>the largely</sup> budget-financed 'scientific' firms whose revenues indeed turn strongly negative in real terms, particularly in the first half of 1992 when the explicit stance of the government was to reduce budgetary flows to firms. But the bulk of the discussion below centres on the industrial and trade firms in the survey.

Ir principle, the net profit position of firms ought to Provide some indication of retained profits and hence of the implicit trade-off between current allocations and the longer term viability of the firm. This is more complicated in the Russian context as the allocation rule governing the distribution of gross profits has been qualitatively different than in a market-based system.

The net profit position of firms reflects the distribution o. .oss profits over the respective funds, profit tax and interest payments. In general, firms are expected to assign all gross profits but<sup>can hold</sup> back a certain share. Tables 3 suggests that in 1992 the dispersion in net profits was considerably greater 5See Pinto et al (1992a)
Fig 3 SALES REVENUES 1991.1 - 1992.3 by TOTrPt pCver ( 1991 .1 prices) <!-- Start of picture text --> 151<br>14<br>13<br>10-<br>7-<br>6<br>5<br>4-<br>3-<br>2<br>91.1 91.2 91.3. 91.4 92.1 92.2 92.3<br>0 manopolIt + oliopolIt O competitUe<br><!-- End of picture text -->

# FIRM TOTAL PRC.-'ITS **1991.11992.3**

<!-- Start of picture text --> by rmaeot pewr (1991.1 prices)<br>5<br>45<br>4<br>3.5<br>3<br>A 2.5<br>2<br>1.5<br>0.5 I<br>91.1 91.2 91.3 91.4 92.1 92.2 92.3<br>a monopolist + elluopelwst competitive<br><!-- End of picture text -->
-9-

Table 3 :efficient of variation REAL TOTAL PROFITS BEFORE TAX )rted by branch

||1Q91|2Q91|3Q91|4Q91|1Q92|2Q92|3Q92|
|---|---|---|---|---|---|---|---|
|1 METALLUR.|0.F4|<br>0.86|<br>0.59|<br>0.53|<br>1.05|<br>1.21|<br>0.35|
|2 CHEMIC.|0.86|<br>0.69|<br>0.42|<br>0.45|<br>0.96|<br>0.83|<br>0.79|
|3 MACHNBLD.|0.70|<br>0.75|<br>0.90|<br>0.76|<br>1.26|<br>1.67|<br>1.80|
|4 BUILD.MTR|0.92|<br>0.77|<br>0.68|<br>0.60|<br>0.66|<br>0.49|<br>0.74|
|5 LIGHT IN.|1.03|<br>0.86|<br>1.12|<br>1.09|<br>1.11|<br>1.13|<br>1.41|
|6 FOO'VTND|0.87|<br>0.61|<br>0.84|<br>0.76|<br>0.80|<br>0.89|<br>0.92|
|7 A.. z)IND.|0.49|<br>0.90|<br>0.96|<br>0.83|<br>0.91|<br>1.00|<br>0.95|
|8 CONSTR.|1.20|<br>0.78|<br>0.56|<br>0.44|<br>0.67|<br>0.86|<br>1.09|
|9 TRADE&SER|0.63|<br>0.76|<br>0.79|<br>0.80|<br>0.64|<br>0.81|<br>1.13|
|0 SCIENCE|0.42|<br>0.24|<br>0.35|<br>0.60|<br>0.29|<br>0.71|<br>0.98|

oefficient of variation NET PROFITS orted by branch:

||1Q91|2Q91|3Q91|4Q91|lQ92|2Q92|3Q92|
|---|---|---|---|---|---|---|---|
|1 METALLUR.|1.08|<br>2.13|<br>4.83|-0.91|<br>0.89|<br>3.31|<br>2.40|
|2 CHEMIC.|-1.00|-'.00|-1.00|-1.23|<br>1.00|-0.68|<br>1.06|
|3MACHNBLD.|-20.64|-37.08|<br>2.46|-1.75|<br>2.88|<br>2.28|<br>2.25|
|4 BUILD.MTR|-4.02|-2.40|-2.27|<br>0.92|<br>3.27|-1.73|<br>1.47|
|5 LIGHT<br>IN.|11.86|3.66|4.35|0.78|1.26|2.55|1.61|
|6 FOOD IND|1.24|1.61|1.28|-0.94|-0.84|-0.89|-0.96|
|7 AGROIND.|0.86|<br>1.02|-0.74|<br>0.95|<br>0.91|<br>1.01|<br>1.00|
|8 CONSTR.|-1.44|-3.03|-9.24|-2.07|-1.28|-2.31|-1.40|
|9 TRADE&SER|3.31|<br>2.36|<br>2.66|<br>1.59|<br>1.71|<br>2.11|-8.85|
|10 SCIENCE|-2.67|-4.13|-15.71|-7.02|-1.47|-1.48|-4.27|
- 1

5

# Behavior of Finns

than for gross profits. Indeed, over a quarter<sup>of the sample registered negative net profits in at least two</sup> of the three reported quarters of 1992. However,<sup>almost all these finrs reported negative profits through</sup> 1991 which obviously weakens the<sup>argument that negative profit shocks were loaded into 1992.</sup> Further, given uncertainty over rules regarding<sup>investment allocations, profit tax rates and self-financing</sup> requirements as well as strongly negative<sup>real interest rates, it is not surprising to find finms assigning</sup> more than current gross profits. This can<sup>reflect a drawing down of financial reserves or commitments</sup> which firms seek to cover ultimately through<sup>financing by the banking system.</sup> We can also note the general stability of the shares<sup>accounted for by the respective funds in the</sup> allocation of gross profits (Figure 4). In<sup>particular, it is striking to note the resilience of investment and</sup> technical development fund allocations. While<sup>we cannot satisfactorily capture the end-use of fund</sup> expenditures, we do not observe any notable<sup>shifting off resources towards bonus payments or the social</sup> fund, where the translation into current<sup>wages would be easier.</sup>

# 3.1: Market Power

Market power can obviously trace itself into<sup>both output and price decisions. High concentration</sup> in Russian industry and the maintenance<sup>of cost-plus pricing rules are occasionally cited as explaining the</sup> inflation in producer prices over 1992. Figure<sup>5 plots the change in aggregate producer prices relative</sup> to retail prices. The sharper acceleradon<sup>in the former is very evident. How can this be explained ?</sup> First, we should note that the sample generating<sup>the data plotted in Figure 5 is both small and restricted</sup> to larger firms in each of the sampled branches.<sup>We are therefore observing the behaviour of producer</sup> prices for large firms in the Russian economy;<sup>a possible indication of the pricing rule pursued by large</sup> enterprises.

As revealing, perhaps, is the light that the survey<sup>sheds on the implicit differential pricing</sup> behaviour of firms when classified in terms of<sup>market power. For 32 firms where we have information</sup> on both changes in output volume and changes<sup>in real profits we are able to break this down in terms of</sup> market attributes, classifying in terms of monopolists,<sup>few producers and competitive firms 4.The most</sup> striking result is that in nearly half the cases<sup>where firms were either monopolists or one among few</sup> producers, negative shocks to output in 1992 were<sup>systematically and inversely associated with positive</sup> changes to profits over the same reference period.<sup>The relation holds most strongly for firms in the</sup> machine-building and metallurgy branches.<sup>By contrast, competidve firms -particularly in light industry</sup> - display a more conventional positive co-movement<sup>in output and profits. For almost aU competitive</sup> 4We exclude the adminisrve atites, suchas those<sup>clamified in 'Science' from the sub-sanle.</sup>
**1.g** 4

- 11 -

# DISTRIBUTION OF PRE-TAX PROFITS

<!-- Start of picture text --> 0.4<br>0.35<br>045_ ...<br>0.25<br>0.1<br>0.05<br>010 2091 3001 4091 1492 2092 3022<br>- wvMfl t bonuw lPAid tck devia. Amd s7ocdl fti<br>FI8 5<br><!-- End of picture text --> <!-- Start of picture text --> Russia: Price Changes<br>Retail ond Industrial Producer Prices<br>450<br>400 -<br>330 -<br>300-<br>.C<br>200-<br>E SO<br>100_<br>50'<br>Jon1 f mor f moy j jul I sOP nv 0 jon92 - mar may 1 jul 1 Sp<br>feb opr jun oug Oct dec91 feb opr jun oug<br>0 retail prices + ind prod prices<br><!-- End of picture text -->
Behaviour of Firms

-1

fitma, we observe ne changes m output associated with negative changes to profits. The obvious conclusion to be drawn is that firms with market power have adjusted outpUt prces with the imtention of m aining or esing deir mark-up. Figures 6 & 7 provide scatters relaig output and grcs profit changes. For firms with market power it is clear that negtve stockm to oupt have mostly been associated with positive changes m gross profits. This does not hold for competitve firms.

The firm level imation dts seems consistent with the path of the more aggregaed producer price series available for branches at a Russian level. The implication is that we are coemiing to obsrve the behaviour of de fato price setten able to control direcdy gross value added.

3.2: _ntupuise Arrears A well noted fetre of 1992 and it now appears, also of early 1993 has bern the a lio of arge inter-fin arrears. The process was motivated by a combination of factors, including institutiona facts _- swuh_ as the nenalt of payables and recevables with t cmrest to r borrowing from the banking sysm - but is gen truaced to the initial naive shods to bale shees aising frm seective leralination 3. We can also add that the attibton of aras financin has had clear politd ecowxny implicaos, beiqg in deffct a clear challenge to the credibility of the govmet's anonced monetry and fiscal sace.

e smvey results are _ id in Fiue 8. This gives the path of net payables over 1991 and 1992 brokS down by size of fim It is clear that fims have generally shifted their net payables position upwarsin real tms over 1992 even alongside rlavely buoam profits' profiles. This has pauly come a **Ollt dlroug1h** uieasg ous **mg** paymnmts to **sppliers;** a _ftature_ that seems fuaher to be positvdy assoated with the maret power parmet. The raio of net payables to sales rises quite significaty for monopolists, rainin bradly stable for other entties. But it is patculaly stikng that in general, dte increase in n payables is largdy 1edent of the path of profits at the firm level. There is no remotly robust invse association, for example, between profits and net payables; an association that one mig presume to hold if arrears **are** a reaonbly sti fiction of caT profitabty. Tbis points to a common process and one where it has been perceived that the gams from fored bonowing are nontrivial, eiter via interest rate eifcts (ie the negtive real interest ates) or via probabilites of having outslg obligaidons covered by the Central Ban Obsmring the path of interest costs over 1991/92, Fie 9 prvides informadon on the aio of tota interest to sales for firms classed by asset sir. There is little evidence of any icas in inte sSee _Cmumde_ et al (1993a) for more dismsimo on the ies.
'li; '. I! ~, . -.

- 13 -

Fig 6: Output 6 Profit Changes Firms with Market Pover <!-- Start of picture text --> I50 -<br>.. 44.<br>100-<br>Wq +<br>o" 50<br>X ~~~+<br>0- +<br>o ~~~4 ..<br>4.~~ 4<br>50<br>-60 -50 -40 -30 -20 -1o 0 lo<br><!-- End of picture text --> <!-- Start of picture text --> Fig 7: Output and Profit Changes Competitive Firms<br>0 4.<br>X ~~+<br>E-2<br>o -50- +<br>-75- 4<br>_,ts +<br>-100,<br>-30 -20 -10 0 10<br>OUTPUT<br><!-- End of picture text -->
- 14 -

<!-- Start of picture text --> Fig 8<br>Arrecrs: Firm Net Positions 91.1-92.3<br>Net Poyables (1991.1 prices)<br>2.8<br>2.6-<br>2.4-<br>2.2-<br>2<br>1.6<br>1.4<br>1.2<br>0.8<br>0.6<br>0.4<br>0.2<br>0<br>-0.2<br>91.1 91.2 91.5 91.4 92.1 92.2 92.3<br>0 Asset Size Class I + Asset Size 11 o Asset Size III<br>7<br><!-- End of picture text --> Fig 9 Ratio of Interest to Sales 1991.1 - 1992.3 <!-- Start of picture text --> 0.11<br>0.1<br>0.09 /<br>0.08<br>0.07<br>0.06<br>2.05<br>0.04-<br>0.05<br>0.02-<br>0.01<br>91.1 91.2 91.5 91.4 92.1 92.2 92.3<br>0 Asset Size Class I + AS 2 0 AS 3<br><!-- End of picture text -->
- 15

# Behaviour of Firns

charges pointing to a strategy of financial distress borrowing or reliance by firns on borrowing to maintain current output in the face of falling capacity utilization and sales. Taking the same ratio over the branches, we do observe a sharp increase in trade financing costs but the general conclusion holds.

# 3.3: Decapitalization

The issue of decapitalization of firms is obviously relevant given the loose control structure that now obtains, the uncertainty over future viability and the presence of very significant insider bargaining power. Decapitalization is hard to capture satisfactorily but at first approximation can be thought to proceed by three possible channels. First, by running down current capital stock through little or no maintenance; second, by letting depreciation exceed current investments and third, by excessive current wage claims that likely imperil the future financial well-being of the firm. The first is impossible to measure but some summary ratios are quite instructive in getting a handle on the other two possible channels 6.

On wages and benefits costs, we find considerable stability in the share relative to revenues. The ratio of wage tax payments to revenues also provides a simple proxy. But the data indicate no upward d-rift across branches, save in the budget sector where the scale of deterioration in revenues swamps the adjustnent to wages. We also find no evidence in the evolution of the wage tax of predatory wage setting and short run behaviour.

Data on the investment-depreciation ratio provide no general evidence of a slowdown in investments. At branch level there are signs that by 1992.3 the upward shift in the ratio over early 1992 was being reversed and moving back towards 1991 ratios. Further, we do see a sharper decline for the budget sector entities - the scientific firms - that we know to have been in financial difficulties over 1992. However, where we observe a fall in the investment /depreciation ratio little of this can be traced to excess wage tax payments. The finding is hardly surprising given the weak bite of the wage tax, which we discuss further below.

# 4: Employment Changes

The employment picture is most notable for the relatively slow adjustment of employment given the size of changes to output alongside a substantial volume of labour turnover and churning.

Table 4 provides some information on the structure of employment in the firms that were sampled. Several features stand out. In the first instance, the classical feature of the Soviet-type firm - the dominance of production workers - stands out. Across the full sample, nearly 70% of the workforce 6 As also done in the case of Polish state firms by Pinto, Belka and Krajewski (1992a).
16 -

-

I Table 4:(ITployaent Profile, 1992

|Shares|--|<br>Firm|SizeClas|s------|----|
|---|---|---|---|---|---|
|Fir<br>Slze|<br>1|2|3|4|S|
|Administr|26.2|<br>23.8|<br>16.9|40.7|<br>12.9|
|ITR|21.8|<br>22.4|<br>20.1|33.5|<br>12.1|
|Clercs|<br>4.3|2.8|<br>2.1|6.8|0.8|
|F?T Workr|<br>68.9|<br>72.0|<br>71.0|56.3|<br>77.5|
|Prod.Work|56.9|<br>63.0|<br>68.4|50.2|<br>77.5|
|Unskill|14.3|<br>15.8|<br>5.8|6.1|0.4|
|Apprents|<br>0.9|0.2|<br>0.6|0.2|2.8|
|Paret-tim|<br>4.1|2.2|<br>3.2|3.0|1.7|
|RetraLn|0.2|0.3|<br>0.4|0.8|0.0|
|TOTAL|100.0|<br>100.0|<br>100.0|<br>100.0|<br>100.0|
|KaleF-T|61.2|52.8|<br>51.1|48.2|36.7|
|Fem. F.T|31.7|45.0|<br>45.3|46.3|63.6|
|KaleP-T|3.5|1.2|<br>2.0|1.9|0.8|
|fem._P1T_|0.6|0.6|<br>0.8|1.1|0.0|

|Table 5:<br>Separa|Employment<br>tion,<br>HirLu$|Chnges<br>over1992<br>and Vacancy Rates<br>Firm Size|, 3rdQuarter<br>(% of labour|force)|
|---|---|---|---|---|
||1|2<br>3|4|S|
|Separations|10.5|10.0<br>9.5|5.7|7.8|
|HLres|7.2|3.7<br>4.8|2.5|9.9|
|Net Separations<br>|3.7|7.0<br>5.2|3.3|-2.2|
|Expacted Separ-|||||
|ations<br>in 92.4|2.4|2.4<br>2.3|0.5|0.5|
|VacancLes<br>|1.5|3.1<br>1.0|2.2|1.9|
|Posted Vacancy|0.1|1.0<br>0.7|0.9|1.1|

Source: World Bank Survey Table 6:

|Table 6:|1|JobSeparation<br>(% of total<br>**Flzz**<br>2|s<br>by Type<br>separations)<br>Size<br>3|4|5|
|---|---|---|---|---|---|
|Quits|62.2|52.3|52.9|43.4|52.7|
|DisciplinAry|<br>8.5|3.2|3.4|7.7|4.7|
|Employment||||||
|Reduction|10.4|31.3|10.7|37.1|3.1|
|Other|19.9|13.2|33.0|11.8|39.5|

# Source: World bank Survey
-17-

Behaviour of Firms was of this category. Moreover, the share of unskilled labour remains fairly low -ad primarily characteristic of the smaller firms. Second, we note the high proportion of female workers in the labour force. Third, part time work remains a fairly limited phenomenon across all firn size classes.

At an aggregate level, the main conclusions that emerge from Russian data regarding the path of employment in 1992 can be summarized as follows. Employment losses have been relatively small across the state sector as whole and for industry in particular. Indeed, over 1992 industrial employment declined by under 1% relative to 1991 levels. The losses in the state sector as a whole - under 2% - have been larger and more regionally concentrated. Preliminary information suggests that a sizable share of job losses in the state sector, primarily in the non-material sector - have been concentrated in the Central region and most particularly in the area around Moscow. Therefore, a starting assumption would be that our survey might inipart a upward bias to estimates of job losses, given the overall characteristics of the region.

This is not fully supported by the firm evidence. There has been an undoubted acceleration in the rate of job destruction but the process has not been as one-sided as one might intuite from a casual understanding of the size of the shocks to output. Reallocation shocks resulting from the change in relative prices would hypothetically result in differential paths of job destruction and creation. But we observe little that accords with this view. Rather, we continue to observe the coincidence of relatively high rates of job destruction and creation that do not apparently match to relative price shifts. Of course, one may be failing to capture intra-branch shifts but the dominant impression is of persistence in job hires with low net inflows to unemployment as a consequence. Indeed, aggregate unemployment fell below 2% of the labour force at the end of 1992 in both the Moscow region and in Russia as a whole.

Figure 10 provides the basic infomiation at the Russian level on inflows to and outflows from unemployment. Of course, on the inflows side it includes new entrants but the fact of relatively constant monthly inflow numbers alongside a significant flows out of unemployment, including to jobs, provides a first approximation at the underlying process we appear to be observing. That process seems characterized by a high degree of churning in the labour market that does not simply accord with the prognosis that only job destruction should be occurring. While job destruction obviously dominates new starts, net destruction rates are fairly low. This gives some insight into the trpe of churning we should expect to see.

The response of firms to a perceived permanent negative shock might be expected to show up in reductions in labour capacity, through short time and involuntary holidays or an increase in part time working. It would also be expected to show up in increased net separations. With regard to the first, we
> - 18 -

# Fig 10

<!-- Start of picture text --> Russia: Unemployment inflow and outflow<br>Jonuary- October 1992<br>230<br>220 -<br>210<br>190 9<br>170-<br>IS0<br>150<br>140<br>8130<br>120<br>110<br>.100<br>90<br>80. *<br>70-<br>60<br>40-<br>30<br>Jon 92 Feb Mar Apr May June July Aug Sept Oct<br>1992'<br>a Inflows + OutsCJob finds) 0 Outs (ex.job finds) A Total Outflows<br><!-- End of picture text -->
- 19-

Behaviour of Firms find little evidence of an increase in part time work being the preferred route. Nor do we find evidence that short time working and involuntary holidays have been that widely used. By 1992.3 under 35% of finns in the sample reported use of short time work and 17% use of involuntary leaves. Under 5% of the total sample labour force was on involuntary leave and nearly 90% were concentrated in machine building and light industry. This estimate appears on the low side comparing with information available from more aggregate data. A far larger Goskomstat suivey in August 1992 covering over 1500 finns across all regions reported nealy a third of employees on rnvoluntary leave or short time 7.

For explicit separations, the survey data indicate that while nearly three-quarters of the sample reported net employment losses for the third quarter of 1992, over 25% posted net employment gains. At the same time, in one quarter alone nearly 3% of the labour force experienced some labour market transidon. Table _5_ contains some interesting information. In the first place, total separations amounted to between 8-10% across the firm size classes and the separation rate was rather evenly distributed. Nfet job losses were much smalller amounting to no more than 5% over the whole sample. This is higher than the national level but reasonably consistent with what we know about the path of employment in the Moscow region. For net job losers, the dispersion is fairly low but in general biassed upwards for smaller firms. Indeed, the largest finns experienced net increases to their labour force over the reference period. Expected job losses over the fourth quarter of 1992 were similarly reported at low frequencies and were inversely associated with firm size.

Table 6 also pins down the principal characestics of the separations process. The dominance of quits is striking and over 50% of all separations can be classed as voluntary. Explicit job reduction decisions display considerable varance and amounted to around 17% of gross job losses for the full sample. Total involuntary separations comprised less than a quarter of reported total separations. The weight of quits in total separations reinforces the view that the Russian labour market remais characterized by rather high turnover at local lev"ia, if not across regions where institutional, housing and other constraints tend to be more binding.

The persistnce in hires raises some interesting questions. Relating output changes to employment changes in the sample is instructive. Perhaps most striking is the absence of a clear and predictable relationship between output and employment movements. Indeed, for the 25% of the sample that reported positive net hires in 1992.3, nearly 70% projected output losses over 1992 with an unweighted mean decline of 15% There is significant dispersion over branches and firm size classes with respect 7 For Moscow the figure was 25% for a sample of 23 firms.
.. - 20 -

# dhviour of Fun

to enoyment chages but tdere if Oer aynfzty with rgd to the si of shock to oupu. For the outmos obsevato when outtt losses ranged betwen 35-50%, employmnt contraction avead no more tha 15%.

Tabe 7 ad Figures 11-14 pat togedher the diection of output, gro profit and employnt chqns for the survey fire. It is clar that the gap btween ouW ad emuployment chan was quite large. The scauers aga classifv m tums of mrku power and ae mainly remadrable fo; showing no pdiable relationip beten ouptp or profits and eloyment cbges for ither types of fim. The clear cowcusion thu can be drwn. bearig in mind the limitatons of the ow quare recall period , is that employment adjus_new have been suggh, _uneven_ ad resticd gien the sine of c_ages to ouqau At fist approxination, we may assume that labour prodctivity has decined. Ibe survey rults renforce the concsion gathered from more aggreate data sours regarding the caoning high aties of ovaer, very low lvels of involhny separtions, significant hiin **and** a gen_aly low levd of net job loes in Russia though 1992. Hove, sevra fctors repqay more atenin Fst, the high level of quits ad hir for workas - i both cases dte prq nom we Inict above the shre of worrm in the fin' labour force. Second, thee is the d_mn of prodtonworkers, **_rather_** n **_unskl_** workers, in thse quits. It se likely at this process has been prmotd by emgig competitio for workers and by the pesite of sperp shorages for skldled or producom worken. Th recet _liberalizion_ of the wage settig and wag stuctu - while _qu videnly_ highly ncomple (see Seai _5)_ - pes liely to have promotd local job tuwver as production woes chase relative wage adju us. Tis obviously begs the quesin of why labor demnd for such workers remains so rlatvely buoyan Te nswer seems aily to found in fixed fators or techology. What we know about work orgaimut i Soviet industrial plants aso enma the strong and somewhat mechanical asociaton of plant to labour.

Involuntary labour sheddig ha consequently been concenrtd on nowprodction workers and, in parcular, women. We know frm the unemployment daa that women comprse over 705 of the unemployed in the seond half of _1992._ We also bnow that tbis share has not been vasdy shiftd by dte growing weight of layoffs in total inflows to unemployment. While inflows to unew oy _t hve_ Iap y dominated by releases frm the admisative sector, it also seems to be the case that pducte sector fim have shed a ive, unskilled and fe bour first. The clear impict is that producion workers have remained largely untouched by unemloyment and by the process of 'These _lim_ ons inlude possble seasonal disturn and out-of-period dnges.
# Table 7 : Output and Employment Chaniges in 1992 by Branch

|Branch<br>Increase Con<br>|output<br>Decrease---<br>stant<br>1<br>2|-------<br>3|Employment<br>----- Decreas<br>Growth Constant<br>1<br>2|e<br> <br>3|
|---|---|---|---|---|
|Metallurgy|3|1|1<br>1<br>2||
|Chemicals<br>1||1|<br><br>1<br>1||
|Machine Building<br>2|2<br>4||<br><br>2<br>5<br>1||
|Buildinig<br>Materials|1<br>2<br>1||<br><br>2<br>1||
|Light<br>1|2<br>3|1|1<br>4<br>1|<br>1|
|Food|I|1|I<br>I||
|Agrotndustry||2|1<br>1||
|Construction|4|1|3<br>1<br>1||
|Trade & Services<br>I|1|1|<br><br>1<br>2||
|Science|1<br>I|1|2<br>1||

Decrease 1= 0.1-9.9%; 2= 10-19.9Z; 3= 202 + Source: World Bank Survey I-
<!-- Start of picture text --> OUTPUT<br>OUTPUT<br>X w N<br>oF cn .P c+ N .-<br>CDCD<br>C D<br>I-l,<br>'S,, 0<br>l<br>Cl 4 4~~~~~~ 4<br>Cp ~ - ~ ~ ~ ~ ~ ~ ~ ~ ~ ~<br>4 +<br>4 .~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 4.~~~~~~~~~~~P<br><!-- End of picture text -->
- 23 -

Fig 13 Employmenc and Profics: Firms with ttarket Power <!-- Start of picture text --> 150.<br>100 -<br>E-.<br>50<br>X~~~~~4 + 4<br>0 + + +4<br>+~~~<br># + ~~~~~~~~~4b<br>-50<br>-15 -10 -5 0 5 10<br>EMPL<br><!-- End of picture text --> Fig 14: Profits **and** Employment: Competitive Firms <!-- Start of picture text --> +<br>-50 Eu~~~~~~~~~~~~~~~~~~~4 + +<br>-100- .<br>-15 -10 -5 0 5<br>EMPL<br><!-- End of picture text -->
- 24

Behaviour of Finns involuntary separation. Firms have, wherever possible, dispensed with ancillary workers, largely concentrated in administrative work and in many cases female labour. However, even here the job losses in industrial enterprises remained very limited by the end of 1992. The bulk of job losses have been concentrated in the state budget or non-material sector not in industry. This also explains the high weight of female in total unemployment.

# **4.1: Labour Hoarding**

The relatively ge:tle decline in employment relative to output in industry is striking particularly given the widespread acknowledgement of extensive and continuing labour hoarding. Nearly two-thirds of sampled firms reported excess employment levels in 1992.3. This was fairly equally distributed across firm size class and branch and, with the exception of the largest firms where the estimate was below **1%,** was put at between 8-14% of current employment.

At first glance, one might expect institutional factors governing dismissals and/or union presence to impede involuntary sepa&ations 9. But this appears generally not to be true. Unions are present in most workforces but carry negligible bargaining power so that in only 10% of cases where excess employment was present were dismissal rules and worker protest cited as factors of any significance in governing employment decisions. By contrast, in nearly two-thirds of those cases the motive for labour hoarding was the belief that output would shortly expand, warranting current retention of excess workers. In 25% of cases, the argument given was that such workers were not a significant financial burden to the film.

The latter response can also be related to the prevalence of minimum wage workers within firms. Average industrial wages exceeded minimum wages by a factor of between 5-12 times over 1992. Evidence from the survey suggests that some firms - particularly in engineering and light branches - have begun to place parts of their labour force on or around minimum wages with minimal work requirenents. Minimum wages were reported for nearly 4.5% of the sample workforce °. In one instance, the aerodynamics design firm - TsAGI - we found that around a quarter of the workforce of - - c. 10,000 primarily the unskilled had been placed on minimum wages. This amounts to de facto provision of unemployment benefit within the firm, with, of course, the difference that workers still have access to some firm-provided benefits. Assuming the rough distribution of wages in total labour costs 9 Firing decisions were taken by the administration alone in 60% of cases, by the administration in association with the trade union in 159 of cases and by the factory council in the remaining 15%. Opposition to dismissals arose from the trade unions in half the sample, but significantly no opposition was reported in a third of cases.

'° 13% for engineering firms; 9% for light industry.
- 25 -

Behaviour of Firms from the finm-side (as indicated below in Section 6) and constant access to non-wage benefits, resort to minimum wages would have allowed firms to make per capita cost savings of at least 45% over 1992. At the margin, a reduction in the nominal wage would likely have had a more powerful effect than the cut in benefits costs associated with a marginal employment change.

Finally, in time with aggregate data we observe low vacancy levels with posted labour demand - a better indicator than notional vacancies - amounting to under I % of the current sample workforce. This again is consistent with the idea that hiring behaviour is largely conditioned by replacement of turnovers and by an apparent rigidity with respect to employment levels in industrial firms. Labour hoarding appears motivated by a combination of factors, including teclmology and an apparent willingness to provide fall-back wages - the minimum wage - within the firm.

# S: **Wage Settng**

The appropriate treatnent of wages is problematic given significant variance in levels of shortage in goods markets over time and region. Further, there is wide dispersion in price levels across region alongside significant variation in regional inflation rates, as well as in the changes to nominal wages, over 1992. Figures 15 & 16 provides information on wage levels over the period February to October 1992 for all-Russia as for Moscow and Moscow oblast. There is a notable gap between the latter two areas; a gap that widens over the course of 1992, largely via divergences in local inflation rates than by changes to nominal wages.

Despite these significant variations, a summary of recent wage developments need highlight the climb in statistical real wages over the second half of 1991, followed by a substantial cut induced by the price shock of January 1992. That shock took average industrial wages back to mid-1991 levels. Following January 1992 we observe a consistent increase in real wages over the course of the rest of the year. By October 1992, real wages were notionally 13% higher than in July 1991 and over 85% higher than in January 1992. The regional coefficient of variation was around 25%.

The acceleration in nominal claims has to be tempered by the knowledge that cash shortages and other constraints in the first half of 1992 drove a wedge between notional and actual claims, one symptom of which was the accumulation of substantial wage arrears by finns. Nevertheless, the dominant impression is of an initiad shock to cash wages subsequently cancelled out by increasing claims and weak constraints exerciaed tirough the current excess wage tax rule "'.

" A wage bill exceeding the minimum wage times four times the number of employees was added to profits and taxed at 32%.
- 26 -

<!-- Start of picture text --> Fig 19<br>Pussic and Moscow Rezion Nominal Wc-es<br>July 1991 - OC:_e- 199_<br>10<br>9<br>2 ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~ "11<br>1<br>July91 I Feb. | Apr. JunO | Aug. | Oct92<br>Jon92 Mar. Mcy July Sept.<br>0 Russia + Moscow 0 Moscow Oblost<br>Fig 16<br>Russia and Moscow Region Wage Levels<br>Jon 92 v:ces<br><!-- End of picture text -->

<!-- Start of picture text --> 2.9<br>2.<br>2.5-<br>2.3<br>2.2-<br>2.<br>2-a -<br>1.9<br>1 L<br>1.75<br>1.2 -<br>1.5<br>0.9<br>Fet9, Moc A;' May .- e Ju;y Aug Cc:92 o<br>C Russia + Moscow 0 Moscow oblost<br><!-- End of picture text -->
27 Behaviour of Firms

-

The survey results are broadly consistent with the story told by aggregate data. In the first place, comparing the third quarters of 1991 and 1992 we find that real statistical wages (see Tables 8 & 9) fell on average by around 30%; a fall consistent with real wages broadly equating early 1991 levels by the third quarter of 1992. Figure 17 presents information on the evolution of the real wage bill across firm size classes using the retail price deflator. It can be seen that for the full sample the aggregate real wage Jeclined slightly over the period 1991.1/3 - 1992.1/3. There is a clear dip in the first quarter of 1992 followed by a robust, across-the-board recovery. By the third quarter of 1992 wages had largely recovered the levels of early 1991. There is some evidence of growing variance within three of the ten branches, but in general we observe little movement in the coefficient of variation.

The wage path is striking for demonstrating the apparent rigidity of real statistical wages. Over the. same period, we know that for the sample there were employment losses, even if not of high rvagnitudes. The clear result is that average per capita wages increased unambiguously over the same reference period.

Relating wage changes to the measure of market power is again quite interesting. The stability or growth of real statistical wages of the period for monopolists or those with few competitors contrasts with the non-trivial decline in wages that can be seen for competitive firms. Further, relating output and wage changes by categories of firm, we can see from the scatters (Figures 18-19) that for firms with market power, output and real wage changes are largely inversely related. However, as we also know that output and gross profit changes were inversely related for many of these firms, the association between profits and wage changes is more conventional. By contrast, the majority of competitive firms demonstrate clear co-movement of output and wages. Again, the reference periods are the first three quartes of 1992 over the same quarters of 1991.

# **51: Reative** Wags

The path of relative wages is revealing. Table 8 drives home the perverse wage structure of the Russian firm and the strong bias toward skiled workers in the earnings profile. But they also bring home the point that relative wages had by 1992.3 shifted surprisingly little. Over the period 1991.3 - 1992.3 we find rather close convergence in the rates of increase across the main grade categories. The only relative loser was professional or ITR staff, such as engineers, but the shift in relativities was not that - large. It is also evident that wage changes at the top of the grade structure for highest level - management have been consistently higher and that this has been true particularly among the larger firms.
- 28 -

Fig 17 <!-- Start of picture text --> Wage Bill, 1991.1 - 1992.3<br>By Firm ASset Size (1991.1 prices)<br>2.<br>2<br>1.9<br>1.4<br>1.2<br>1.6<br>1.5<br>1.4<br>1.3<br>0.9<br>0.8<br>0.O __A<br>1991.1 91.2 91.3 91.4 92.1 92.2 1 9921.3<br>0 Asset Size I + Asset Size 11 0 Asset Size III<br><!-- End of picture text -->
- 29 -

Behaviour of Firms The data presented above suggests that the compression in the returns to skills given by the previous tariff wage system has only just begun to come apart and the process as yet remains rather muted. Indeed, while 40% of sampled firms reported an increase in wage differentials, the remaining 60% reported either no change or a decline in differentials. Where differentials increased, the primary reason given was developments in the labour market rather than any explicit association to private sector wages or prices. Indeed, in 75% of cases private sector wages were viewed to be consistently higher across all comparable grades and skills. The shift in relativities is likely to be part of the process geneating the substantial churning among skilled workers that we have already referred to in Section 4.

_5.2:_ **Bargaining and** Wage Targets The survey also allows us to get some idea of the process by which wage claims are generated and - - subsequently validated. Several features largely of an inertial quality can be isolated. First, few firms resort to any systematic bargaining with labour over wages. When explicitly asked whether wages were set by management or resulted from an explicit bargain between the administration and workers, only 7 (17%) firms reported the latter procedure. Of interest is the somewhat higher predominance of bargaining among cooperative, private and collective firms - over a quarter of these firms had active bargaining.

This is not to say that current members do not have very significant influence over the wage setting. The path of nominal claims and the stability of employment is reasonabl **e** nough evidence of tdat fact. But it may be more appropriate to couch the problem in terms of a cooperative association between management and workers with current membership claims on employment and wages given preference. However, this can also explain, through the continuing dominance of general or administratively set wages, the relatively restrained rearrangement of relative wages that appears to have occurred and which we have noted sbove.

Clear evidence of the increasing association of wage changes to consumer prices also emerges - over 60% of firms sought to link wages to prices explicitly and the remainder complemented this with increased provision of social benefils. However, while the benchmark for wage changes was indeed consumer prices for over a quarter of firms, we can observe the presence of constaints on this linkage. Nearly 70% of the sample noted that the wage benchmark was largely overdetermined by current ithinfirm resources. This is confirmed by the responses to an explicit question on constraints to wage increases over 1991 and 1992. For the former, we find that taxation and current revenues have equal weight (both yielding 40% of responses) in determining the wage path. Explicit outside regulation only was a factor in 7 firms, declining to 4 in 1992. Most significantly, taxation constraints were cited by
Behaviour of Firms 30

-

only a quarter of firms as a strong constraint in 1992, with over 60% citing current revenues as the primary factor. This is consistent, of course, with wllat we know about the excess wage tax rule and its general ineffectiveness over 1992. And as expected, we find that real wage tax payments by firms decline slightly across most size classes for the period 1992.Q1-3 over 1991.Ql-3.

# 6: Fnrm-Provided Benefits

It has long been realized that benefits provided through the firm were an important component of labour income. Nevertheless, it has been far from clear what the value of such benefits were, particularly given the large non-monetary component. The matter acquires yet more significance in the light of demands for local authorities and other institutions to take over the benefits programmes hitherto run by firms. This section provides both an overview of the type of benefits provided by firms and then attaches costs and/or income flows to those benefits. In this way, we hope to provide some measure of the share of benefits costs in total labour charges from the cost perspective of the firm while also picking up the effective distribution of labour income. In addition, we provide a more extended discussion of one - crucial component of benefits the housing programmes run by a significant minority of firms in the survey.

But first a simple listing of the types of benefits provided by firms is given in Table 10. It can be seen that a significant proportion o, the total labour force continues to have entitlements to child care, paid vacations, housing and holiday homes. We can make a distinction over mandatory benefits - such as maternity or child care allowances - and discretionary benefits. It is clear that the latter are both varied and pervasive across all firm size classes. Further, there is a positive association between firm size, as measured by employment, and range of benefits. The absence of housing programmes among several of the largest firms may be unrepresentative. Bigger samples - such as the ILO survey of 500 firms - point to housing programmes as an almost defining feature of larger firms **12.** This is more likely to be true for firms that act as locally dominant employers. Here, the functions of local authorities appear to be commonly arrogated.

Among smaller firms with less local labour market dominance, the evidence suggests that firm provided benefits may not necessarily exceed those covered by local authorities. Indeed, in our sample for housing, child care and health facilities, firm expenditure at local level was comparable or in excess of local authority or non-firm expenditures in only 10-30% of cases, depending on the function (see 12 See Standing (1992a)
- 31 -

<!-- Start of picture text --> Fig 18: Wtge 6 Output Changes: Firms-with Market Power<br>150<br>100<br>-<br>;50<br>X)-<br>-60 -50 -40 -30 -20 -10 0 10<br>OUTPUT<br><!-- End of picture text --> Fig 19: Wages 6Oucpuc Changes: Competitive Firms <!-- Start of picture text --> XC -25 + -<br>,O,,P,T<br>-500<br>-75<br>-30 -20 -10 0 10<br><!-- End of picture text -->
- 32

Table 8: Wage Levels, 1991.3Q<sup>-1992.3Q: Moscow Region</sup> By Firm Size and Type of<sup>Employee:</sup> Monthly Wages (roubles)<sup>1991 and 1992 Third</sup> Quarters

|Vice-<br>Director|91.3<br>826|1<br>92.3<br>8192|Fi<br>91.3<br>1175|rm Siz<br>2<br>92.3 <br>10583|e (emp<br><sup>91.3</sup><br>1209|loyme<br>3<br><sup>92.3</sup><br><sup>13581</sup>|nt)<br><sup>91.3</sup><br><sup>1186</sup>|4<br><sup>92.3 91.3</sup><br><sup>13766 1058</sup>|5<br><sup>92.3</sup><br><sup>16896</sup>|
|---|---|---|---|---|---|---|---|---|---|
|ITR<br>Professiona|803<br>l|6773|904|5559|791|7952|796|8001 546|6533|
|Skilled<br>Workers|903|8070|808|6927|877|9410|738|8566 681|9151|
|Unskilled<br>Workers|539|5897|524|4600|400|3591|275|3354 299|4207|

Firm Size Categories:<sup>1- 80-350; 2- 351-700; 3- 701-900; 4- 901-1500; 5- >1501</sup> employees Source: World Bank Survey Table 9: Real Statistical<sup>Wage Index; by Firm Size and Type of Work; (1991.3-100)</sup>

|Vice-|1-|Fi<br>2|rm Size<br>3|4|5|
|---|---|---|---|---|---|
|Director|64|58|72|75|103|
|ITR<br>Professional|54|40|65|65|77|
|Skilled|58|55|69|75|87|
|Workers||||||
|Unskilled|70|57|58|79|91|
|Workers||||||

Source: World Bank Survey
- 33 -

|Table 10: Benefits--|Type and Availability<br>---<br>Firm Size-|by Firm Size,<br>--|November 1992|
|---|---|---|---|
||1<br>2|3|4<br>5|
|SAMPLE SIZE|10<br>11|10|7<br>3|
|Housing (permanent)|2<br>5|8|5<br>0|
|Housing (temp)|1<br>3|4|3<br>0|
|Kindergarten|1<br>5|8|6<br>2|
|Land for dachas|3<br>7|7|6<br>3|
|Canteen (subsid)|4<br>6|8|7<br>2|
|Polyclinics access|2<br>2|5|5<br>2|
|Community House|0<br>1|3|3<br>0|
|Fitness facilities|0<br>0|1|2<br>0|
|Sanatorium|0<br>6|4|4<br>1|
|Food Store with|8<br>9|7|6<br>2|
|subsidiz. prices||||
|Sick Pay|0<br>0|3|2<br>1|
|Housing rents|0<br>0|0|1<br>0|
|assistance||||
|Other forms of|0<br>6|4|4<br>0|
|housing help||||
|Transport allowance|3<br>3|1|3<br>2|
|Maternity allowance|10<br>11|10|7<br>2|
|<br>Child Care allowance|<br>10<br>11|9|7<br>3|
|Paid Vacation|4<br>8|7|3<br>0|
|Pre-dismissal allow.|8<br>10|8|4<br>3|
|Sanatorium vouchers|8<br>10|9|6<br>3|

Source: World Bank survey
3 Behaviour of Firms Appendix Table 3). As these items constitute<sup>the major expenditure charges on the benefits side, this</sup> cautions against a simplistic view of the scale of<sup>firm-level functions.</sup>

# 6.1: Costs of Benefits

Considerable uncertainty currently exists with regard<sup>to the respective shares of benefits costs in</sup> firms' labour payments. The survey allows us<sup>to get a reasonably detailed picture on this score. Several</sup> points stand out. First, wages as reflected in<sup>the firms' wage bills (inclusive of the wage tax) account</sup> for roughly _50%_ of total labour costs. Including bonuses<sup>raises this share to just over 60% for the entire</sup> sample. The remaining costs are distributed<sup>over Pensions, Social Insurance taxes, Employment Fund</sup> payments and, most significantly, Social Fund allocations.<sup>The latter amount to over 20% of total labour-</sup> related costs and around 40% of benefits charges (ie; excluding<sup>the wage bill). This information is given</sup> in terms of firm size for 1991.1 - 1992.3 (Figures 20<sup>-22). While we observe considerable variance</sup> over firm size classes, as well as for branches, for the<sup>respective shares, we do in general find a</sup> surprising degrte tf stability. This is also true for<sup>the levels. There is some evidence that social fund</sup> shares have been boosted over 1992, poss Mly as a<sup>mechanism for raising de facto wage payments while</sup> circumventing the excess wage tax, but the trend<sup>is by no means universal across or within firm size</sup> classes. Overall, the inertia in shares is the more<sup>striking feature.</sup> Comparing the first three quarters of 1991 with 1992 real<sup>aggregate labour costs fell slightly.</sup> Small declines were registered in 70% of branches<sup>with, significant increases in the remaining 30%.</sup> Figure 23 shows ie path of aggregate labour-related<sup>costs for the period 1991.1 -1992.3. The main</sup> story is the fair constancy of labour-related costs when<sup>ironing out the climb in statistical claims over the</sup> second half of 1991. As such, we find considerable<sup>corroborative support for the conclusions derived</sup> from more aggregated wage data. Further, we<sup>can pin down reasonable stability in the cost structure</sup> allowing us to conclude that, at least for our sample,<sup>benefits do not appear to have been a widespread</sup> mechanism either for significandy raising or lowering<sup>aggregate labour costs. The path of both the levels</sup> and the shares indicates that including benefits costs<sup>in total labour costs has no marked effect on the</sup> distribution. This holds whether classifying over<sup>branch or firm size, as measured by employment or</sup> value of fixed assets.

Taken from the income side, we likewise find considerable<sup>stability in the shares -wages</sup> accounting for roughly 50% of total labour income,<sup>rising to around 65% when factoring in bonus</sup> payments - and for the levels. In summary, it seems<sup>that benefits, dissociated from more conventional</sup> cash wage or effort-related incentives, comprise<sup>at current prices approximately 35 % of labour income.</sup> The dispersion is dampened by the dominant, across-the-board<sup>weight (0.6) of Social Fund expenditum</sup>
- 35 -

Figs 20 - 21 <!-- Start of picture text --> WAGES + BENEFITS shares from cost side<br>asses ize fimi I<br><!-- End of picture text --> <!-- Start of picture text --> O's<br>0.5<br>0.4-<br>0.3<br>0.2-<br>0.1*<br>1Q91 2Q91 3Q91 4Q91 1Q92 2Q92 3Q92<br><!-- End of picture text --> wae bill bonus fund soelal _hi._ tax **e** mployment fund5 iMl penason fund = social fund WAGES + BENEFTS shares from cost side asets aim frrm n1 <!-- Start of picture text --> 0.6<br>0.5<br>0.4<br>0.3<br>0.2 0<br><!-- End of picture text --> <!-- Start of picture text --> pension fund 2 seciel fund<br><!-- End of picture text -->
- 36 -

# Fig 22

<!-- Start of picture text --> WAGES + BENEFITS shares from cost side<br>esots euf rtm Ill<br>0.6<br>0D.5<br>0.4<br>0.3<br>0.2<br>0.1<br>0-<br>1 Q91 2Q91 3Q91 4Q91 1Q92 2092 3092<br>wage bil bonus fund social is. tax C emprloMent fund<br>pensmin fund [ social fund<br><!-- End of picture text -->
Behaviour of Firms 37

-

in total benefits. Clearly, a more satisfactory measure might be achieved by attributing shadow prices. Given the volatility of prices and the uncertainty with respect to the levels at which key prices are likely to settle, we do not attempt this task.

# 6.2: Housing

Housing programmes provide the single largest component of benefits programmes. Though by no means universally provided, we found that a signficant minority of firms - over 50% of the sample - - had some form of direct housing programme. There seems to be a clear positive association with firm size but, save among the smallest firms, housing programmes were offered by a majority of enterprises. In all, over 28% of the total labour force was housed in firm property and this share rose to over _75%_ in the case of the second largest firm size class (see Table 11).

While housing has normally been financed through the Social Fund, the survey indicates some recent departures from this practice. Firms with large housing programmes have tended to shift to financing directly from profits or by borrowing. This is likely to reflect in part some of the risk sharing that firms are creating for new construction projects.

Figure 24 is instructive for showing a significant decline in the real value of housing outgoings for fms. Construction by firms across most firm size classes fell by around 60% when comparing 1991.1-3 with the same period of 1992. We also observe a fall in maintenance charges which, considering the - limited scale of the intervening privatisation of housing barely 2% of tenants had privatized their apartments by November 1992 - largely relates to the same housing stock. Over the same reference period, the decline is less than 30% and is not uniformly distributed over size classes. Putting the two expenditure items together, the result is a halving of housing sector outlays by firms comparing the first three quarters of 1991 with 1992. The fall is considerably steeper among the firm size classes with higher frequencies for housing programmes. Relating housing outlays to total benefits expenditures captured by the firms' Social Fund, we again see a reasonably significant reduction in the share. For all firms housing expenditures declined from around 45% in 1991.1 to under 20% in 1992.3. A similar decline in the share of gross profits - from 9% to 5% - can also be observed.

The motivation behind the fall in housing expenditure is not difficult to fathom; indeed one might erhaps have expected a sharper decline. Rents remain regulated and yield derisory current incomes. Moreover, while housing programmes were commonly built up in the Soviet period to reduce labour mobility, this is cerzainly not an objective they attain at the present. We can see, in fact, that nearly 40% of current tenants in the housing stock of the survey were not current firm employees. This share was moreover rather stable across all firm size classes with significant housing stock.
-38-

23 <!-- Start of picture text --> Total Firm Wage and Benefits Costs<br>1991.1 prices: 1991.1 - 1992.3<br>4.5<br>4<br>5.5<br>5<br>2.5<br>2<br>1.5<br>0.5!<br>91.1 91.2 91.3 91.4 92.1 92.2 92.3<br>0 Asset Size Closs I + Asset Size 11 0 DAset SiZe IIl<br><!-- End of picture text --> Fig 24 <!-- Start of picture text --> Total Real Housing Expenditures<br>(prices)<br>4<br>3.5<br>5<br>2.5<br>2<br>1.5<br>0.5<br>0<br>1 0 1991 2 0 1991 3 0 1991 4 0 1991 1 0 1992 2 0 1992 3 5 1992<br>0 Size Class t + SC2 o SC3 a SC4 x SC5 v All<br><!-- End of picture text -->
39

-

|Table 11: Housing Programmes by Firm Size<br>---------FLrm Size Class ------|-- .- ._-.|-_-_|
|---|---|---|
|1<br>2<br>3|4|5|
|Type of Programme:|||
|Permanent<br>2<br>5<br>8|5|1|
|Temporary<br>1<br>3<br>4|3|0|
|Housing Loans<br>0<br>6<br>4|4|0|
|No Programme<br>7<br>3<br>1|1|2|
|% of workforce|||
|;housed<br>0<br>13.3<br>26.7|75.4|2.0|
|% of non-firm|||
|tenants<br>0<br>37.7<br>36.9|39.4|45.4|
|% of tenants that|||
|have privatised<br>0<br>3.3<br>1.3|1.1|6.1|

Source: World Bank Survey
Behaviour of Firms

- 40

It is interesting to estimate the likely effect of reducing rent controls. Recent figures suggest large negative shocks to current income given the extremely low base from which adjustments will be made. Fortunately, the survey allows a rough estimate of the likely impact of rent adjustments in terms of wage income. As a base, we assume that the objective of the firm .s simply to close the fmiancing gap generated by maintenance expenditures. Bearing in mind that such outlays were 50% lower in 1992.3 than in 1991.3, we can calculate that it would require an additional renm payment by each current tenant of around 320 roubles per month in order to cover maintenance costs for 1992.3. The figure doubles if we assume that 1991.3 expenditures were a more appropriate target. This implies that between 15-30% of average wages (excluding benefits) would need to be directed at housing rents simply to cover msaintenance.

We also get some idea of the likely direction of change for housing variables. In this regard, we can highlight two factors. First, housing benefits were unambiguously the last benefit that workers were prepared to lose, but inversely a benefit that some firms were ready to shed first. The picture on the firm side is ambiguous because housing construction progranmnes potentially offer high rates of return and current revenue streams - either by direct sales of new housing stock or increased commercial lettings'<sup>3</sup> . This ambiguity further shows up in the responses to questions about future plans for housing. Nearly 50% of responses indicated that housing programmes would be sustained at comparable levels to the current. Only 3 firms had already suspended their housing programme with a further 2 reporting it as an intention. A further 30% (7 firms) intended to scale back. Finally, in just over 50% of cases housing stock had already been or was in the process of being transferred to local authorities. The decision appears unrelated to current firm profitability but is clearly associated at the level of the firm with the decision over new programmes. Those firms with continuing or new housing progranmmes tended to retain previous housing stock, possibly cross-subsidising it through new starts.

In short, the survey results indicate a scaling back of housing construction and maintenance. There is a clear and sharp fall in the share of housing in total Social Fund outlays. But the picture is by no means uniform. Housing starts remain reasonably high as sales and more commercial lettings offer the prospect of reasonable current income streams. There is also some evidence that firms are using new programmes to subsidize the substantial outgoings on existing programmes arising primarily via rent controls. Such programmes tend to be primarily financed outside the Social Fund, commonly through borrowing.

13See the case of TsAGI (Box 2) reported in Commander, Liberman and Yemtsov (1993a).
- 41 -

Behaviour of Firms

# 7: Condusion

Drawing on a small survey-generated database but checking those findings against information available from more aggregated series, we have attempted to chart the behaviour of some Russian firms over 1991 and 1992. The findings are revealing. Large negative shocks to output for a significant number of firms and branches can be observed in 1992. These shocks came from both demand and supply sides and were fairly common. Aggregate rather than sectoral shocks appear to have dominated. This was not generally associated with a collapse in gross profits. Indeed, the most striking result is that industrial and trade sector firms' profits stayed remarkably buoyant in real terms. There is clear evidence that firms with market power have exercized that muscle by rapid adjustment of producer prices. The inverse association of the changes to output and profits for firms with market power suggests that such firms have tried to maintain or increase their mark-up. Certainly, we find no evidence of a strategic change in the underlying pricing rule.

Reasonably robust financial perfonmance did not characterize the budget-financed entities in our sample. Their implicit call on public financing was probably significant through 1992. But for the bulk of firms in the sample, the main impression is of relative stability in earnings and in the distribution of revenues over the various assigned funds and expenditure titles. We do not find any substantial evidence of decapitalization, at least through greatly enhanced borrowing or predatory wage settlements. Likewise, the shift upwards in interfirm arrears is less large than we might have expected from the aggregate numbers.

Despite the downward pressure on output and the absence of major growth in any of the surveyed firms, employment adjustments were limited. That is not to say that employment transitions were infrequent, but that net separations were relatively restricted given what we know about the size of shocks to output and the continuing presence of labour hoarding. Revealing is the fact that firms continued to hire at significant rates over 1992. This can most likely be explained in terms of fixed factors. It is also obviously related to the continuing high rates of local turnover in Russian firms. In short, firms have discarded little labour and mostly ancillary and female staff.

There is evidence that some firms have chosen to place workers on minimum wages, reducing labour costs quite significantly but with the result that fall-back income is provided within the firm rather than through the labour offices. Increased per capita contributions for the Employment Fund would obviously be one mechanism for breaking this practice. But the larger question relates to the efficiency of fall-back payments through the firm, the implications for job search behaviour and any significance
- 42

# Behaviour of Firms

difference in the likely discount rate to be applied<sup>to the hunan capital -and hence ultimately to the</sup> efficiency of job search - from paying de facto<sup>unemployment benefits inside rather than outside the</sup> firm. In the absence of adequate mobility, for example,<sup>and other labour market rigidities, the inside-</sup> firm option may have merits that in other settings would<sup>not be obvious. In summary, the core of the</sup> Russian industrial firm - the so-called production worker<sup>-remains untouched. The clear implication</sup> is that a large 'employment overhang' existed at the end of 1992.<sup>The next phase of transition will be</sup> suitably difficult.

The wage path revealed in the survey responses matches<sup>well with the aggregate information. Cut</sup> sharply back by the large price shock of January 1992,<sup>real statistical wages then consistently climbed</sup> through the remainder of 1992 back toward early 1991 levels.<sup>Relative wages began to move somewhat</sup> but to a smaller extent than might have been expected.<sup>7te inertia in the system should not be ignored.</sup> Benefits provided by firms are shown to account for large<sup>shares of labour income and firm costs;</sup> to the order of 40/45 _%_ in the latter instance. There are<sup>signs that firms have tried to squeeze benefits -</sup> - particularly in housing - but that Social Fund allocations<sup>have generally stayed constant in the levels</sup> and shares. Housing programmes are already being divested<sup>and annual maintenance outlays curtailed.</sup> Yet simply to cover annual maitenance charges would<sup>require raising current rents to levels equivalent</sup> to between 15/30% of 1992.3 wages.

The overall conclusion that we derive from this small survey<sup>exercise is that matters on the ground</sup> are both more diverse and perhaps rather more original<sup>than conventional economic intution night have</sup> led us to believe. Firms did suffer for the most part negative<sup>shocks to production in 1992 but this was</sup> not generally translated into comparable declines in profitability.<sup>Of course, the survey is localized and</sup> does not really cover the large uni-firm towns or military-industrial<sup>complexes that are elsewhere reported</sup> to be in widespread financial distress. Further, the 1991<sup>comparators suggest that average sales and gross</sup> profits in our sample were high and this likely results<sup>in a more positve picture of firm financial results.</sup> But the results drive home the sad observation that what<sup>is true in some sense for the firm may clearly</sup> be deleterious for the economy at large. Rapid adjustments<sup>to product prices and a stable pricing rule,</sup> combined with a strong acceleration in nominal wage claims<sup>and an accomodating monetary policy, are</sup> key ingredients for high and sustained inflation.
Behaviour of Firms

- 43 -

# BibUography

Commander, Simon, Leonid Liberman and Ruslan Yemtsov. 1993a. "Wage and Employment Decisions in the Russian Economy: An Analysis of Developments in 1992". World Bank, mimeo Pinto, Brian, Marek Belka and Stefan Krajewski. 1992. "Transforming State Enterprises in Poland: Microeconomic Evidence on Adjustment". World Bank, mimeo Standing, Guy. 1992. "Industrial Wages, Payments Systems and Benefits". Paper presented to ILO Conference on Employment Restructuring in Russian Industry. ILO, mimeo
# Appendix Table 1

BY BRANCUI

|Met<br>BY SIZE<br>|all.|Chemic.|Machin.|Bld.Matr.|<br>Light|Food|Agro|Constr.|Trade|Science|TOTAL|
|---|---|---|---|---|---|---|---|---|---|---|---|
|EMPLOY<br>||||||||||||
|Vry Small<br>|0<br>|<br>0<br> <br>|<br>3<br>|<br>1|1|1|1|<br>2|<br>|1<br>0|<br>10|
|Small<br>|<br>|1<br>2<br> <br>|<br>2<br>|<br>0|2|0|0|<br>1|<br>|2<br>1|<br>11|
|Hedium<br>||<br>0|<br>2|<br>2|2|0|I|<br>1|<br>|0<br>1|<br>10|
|Big<br>|2<br>|<br>0<br> <br>|<br>1<br>|<br>1|1|0|0|<br>0|<br>|0<br>2|<br>7|
|Very Big||<br>0|<br>0|<br>0|1|1<br>|0|<br>1|<br>|0<br>0|<br>3|
|.<br>...........<br>.....|.<br>.|...<br>.<br>.<br>.|.<br>.<br>.<br>.<br>.|.<br>.<br>.<br>.<br>.<br>.|.<br>.<br>.<br>.<br>|.<br>.<br>.<br>.\..|.<br>|.<br>.<br>.<br>..<br>|.<br>.<br>.<br>.<br>|.<br>.<br>.<br>.<br>.|.<br>.<br>.<br>.|
|TOTAL|4|<br>2|<br>8|<br>4|7|2|2|<br>5|<br>|3<br>4|<br>41|

BY BRANCII Metall. Chemic. Machin. Bld.Natr. LIghL Food Agro Constr. Trade Science TOTAL BY SIZE FIX.ASSTS Small 0 1 2 2 2 1 1 3 3 1 16 Medium 1 1 4 0 2 1 0 1 0 3 13 Big 3 0 1 1 3 0 1 1 0 0 10 Unclaas I 1 2 TOTAL 4 2 8 4 7 2 2 5 3 4 41.

Source: World Bank Stirvey
- 45 -

# Appendix Table 2

Legal form of enterprises(property) Federal Rep. (obl)Municip. Col.Rent.Cooper. JntSeock TOTAL

|BY EMPL.<br>SIZE*||||
|---|---|---|---|
|Vry Small<br>1<br>4|3|2|0<br>0<br>10|
|Small<br>3<br>5|0|1|1<br>1<br>11|
|Medium<br>4<br>3|1|0|1<br>1<br>10|
|Big<br>5<br>0|0|0|0<br>2<br>7|
|Very Big<br>0<br>1|0|1|0<br>1<br>3|
|TOTAL<br>13<br>13|4|4|2<br>5<br>41|
|Legal<br>form of enterp|rises(property|)||
|Federal<br>Rep.(obl)Munic<br>|ip.<br>Col.R|ent.Cooper.|<br>JntStock<br>TOTAL|
|BY BRANCH||||
|Metall.<br>3<br>1|0|0|0<br>0<br>4|
|Chemic.<br>2<br>0|0|0|0<br>0<br>2|
|Machin.<br>1<br>4|1|0|1<br>1<br>8|
|Bld.Matr.<br>2<br>0|0|1|0<br>1<br>4|
|Light<br>0<br>3|2|0|0<br>2<br>7|
|Food<br>0<br>2|0|0|0<br>0<br>2|
|Agro<br>0<br>0<br>|1|0|1<br>0<br>2|
|Constr.<br>1<br>2|0|2|0<br>0<br>5|
|Trade<br>1<br>1|0|1|0<br>0<br>3|
|Science<br>3<br>0|0|0|0<br>1<br>4|
|TOTAL<br>13<br>13|4|4|2<br>5<br>41|
|Tt|lnumber|||
|*****Staff: 78- 350<br>Vry Small|10|||
|'351-700<br>Small:|11|||
|'701-900<br>Medium:|10|||
|'901-1500<br>Big:|7|||
|>1501<br>Very Big:|3<br>41|||

Source: World Bank Survey
- 46 -

# Appendix Table 3

# Share of social programmes at the local level

# MOSCOW MS.OBLAST OTHER TOTAL

|Enterpr.which have|||||
|---|---|---|---|---|
|HOUSING: None|14|3|0|17|
|Small|6|7|3|16|
|Compartoloc.|2|3|0|5|
|High|0|3|0|3|
|KINDERGARNone|14|7|1|22|
|Small|3|3|1|7|
|Compartoloc.|4|3|1|8|
|High|1|3|0|4|
|HEALTH<br>None|13|8|3|24|
|Small|8|5|0|13|
|Compartoloc.|1|3|0|4|
|High|0|0|0|0|
# Policy Research Working Paper Series

|Title|Author|Date|Contact<br>for paper|
|---|---|---|---|
|WPS**1**51 Is Growth Bad for the Environment<br>Pollution, Abatement,<br>and<br>Endogenous<br>Growth|? Charles van Marrewijk<br>Federick van der Ploeg<br>Jos Verbeek|July 1993|J. Verbeek<br>33935|
|WPS**1**52 Population,<br>Health, and Nutrition:<br>Annual Operational<br>Review for Fscal<br>1992|Denise Vaillancourt<br>Stacye Brown<br>and Others|July 1993|0. Nadora<br>31091|
|WPS1 153 North American<br>Free Trade<br>Agreement:<br>Issues on Trade in<br>Fnancial Services for Mexico|Alberto Musailm<br>Dimitri Vittas<br>Asli DemirgOg-Kunt|July 1993|P. Infante<br>37664|
|WPS**1**54 Options for Pension Reform In Tunisi|a Dimitri Vittas|July 1993|P. Infante<br>37664|
|WPS**1**55 The Regulation<br>and Structure of<br>Nonlife Insurance<br>In the United<br>States|Marin F. Grace<br>Michael M. Barth|July 1993|P. Infante<br>37664|
|WPS**1**56 Tropical Timber Trade Policies: What<br>Impact Will Eco-Labeling<br>Have?|Panayotis N. Varangis<br>Cados A. Primo Braga<br>Kenji Takeuchi|July 1993|D. Gustafson<br>33714|
|WPS1 157 Intertempor**a**l nd Interspatial<br>Comparisons<br>ofIncome: The Meanin<br>of Relative Prices|Sultan Ahmad<br>g|July 1993|E. O-Reilly-<br>Camipbell<br>33707|
|WPS**1**58 Population<br>Growth, Externalities,<br>and Poverty|Nancy Birdsall<br>Charles Griffin|July 1993|E. Homsby<br>35742|
|WPS1159 Stock Market Development<br>and<br>Financial Intermediary<br>Growth:<br>A Research<br>Agenda|Asli DemirgOg-Kunt<br>Ross Levine|July 1993|P. Sinttm-<br>Aboagye<br>38526|
|WPS1160 Equity and Bond Flows to Asia and<br>and Latin America The Role of Globa<br>and Country Factors|Punam Chuhan<br>l Sttjn Claessens<br>Nlandu Mamlngi|July 1993|R. Vo<br>31047|
|WPS1161 Increasing<br>Women's Participatio**n**<br>i<br>the Primary School Teaching Force an<br>Teacher Training in Nepal|Molly Maguire Teas<br>d|July 1993|L. Maningas<br>80380|
|WPS**1**62 The Slovenian<br>Labor Market in<br>Transition: Issues and Lessons<br>Leamed|Milan Vodoptvec<br>Samo Hnbar-Miiic|July1993|S. Moussa<br>39019|
|WPS1163 Domestic Distortions<br>and<br>Intemational<br>Trade|James E. Anderson<br>J. Peter Neary|July 1993|D. Gustafson<br>33714|
# **Policy Research Woiking Paper Series**

|**Title**|**Author**|**Date**|**Contact**<br>**for paper**|
|---|---|---|---|
|WPS1 164 Power, Distortions, Revoit, and<br>Refusm<br>in Agricultural<br>Land Relation|Hans P. Binswanger<br>s.lausDeininger<br>Gershon Feder|July 1993|H. Binswanger<br>31871|
|WPS**1**65 Social Costs of the Transition**to**<br>Capitalism: Poland, 1990-91|Branko Milanovic|August 1993|R. Martin<br>39026|
|WPS**1**66 The Behavior<br>of Russian Firms In<br>1992: Evidence from a Survey|Simon Commander<br>Leonid Liberman<br>Cecilia Ugaz<br>Ruslan Yemtsov|Augus 1993|**0.**del Cid<br>35195|
|WPSI 167 Unemployment<br>and Labor Market<br>Dynamics in Russia|Simon Commander<br>Leonid Liberman<br>Ruslan Yemtsov|August 1993|**0.**del Cid<br>35195|