Despite the cataclysmic economic and political changes in Russia and the concomitant fall in output, the level of Russian unemployment during this transition has been remarkably low. Explanations range from unreliable data sources and new production in the parallel economy to enforced holidays imposed on workers as a result of the production collapse. In Discussion Paper No. 1224, Programme Director Daniel Cohen argues that the main reason for low unemployment levels in Russian is that the majority of reductions in firms' employment levels are due to a high degree of wage flexibility and job-to-job mobility.

Cohen analyses this proposition using a model in which an economy is hit by a shock that forces the labour force to switch entirely from an old sector to the most productive modern sector. In a laisser faire economy, workers shift from the least to the most efficient sector without ever entering into intermediate activities. But with a mafia, there is a lower rate of entry into the most productive sector, creating new opportunities for less efficient sectors. To the extent that the mafia is a permanent phenomenon, these inefficient opportunities become entrenched in the economy and the distribution of wages never reaches the perfect equalizing steady state. By contrast, under a modern tax regime or under liquidity constraints, the speed of transition is still be slowed down, but the most efficient sector expands and all inefficient sectors die out asymptotically.

The Transition in Russia: Successes (Privatization, Low Unemployment...) and Failures (Mafias, Liquidity Constraints...). A Theoretical Analysis.
Daniel Cohen

Discussion Paper No. 1224, August 1995 (IM)