Living Standards, Social Welfare and Labour

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NATO ECONOMIC Colloqium, 
30 June, 1 and 2 July 1993, 
Brussels

ECONOMIC DEVELOPMENTS IN COOPERATION PARTNER COUNTRIES
FROM A SECTORAL PERSPECTIVE

EVOLUTION DE LA SITUATION ECONOMIQUE DANS LES PAYS
PARTENAIRES DE LA COOPERATION DU POINT DE VUE SECTORIEL

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PANEL I
Living Standards, Social Welfare and Labour
Chair: Daniel George, Director, NATO Economics Directorate
Panelists: Michel Gaspard
           Lulzim Hana
           Vladimir Gimpelson
           Silvana Malle

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LIVING STANDARDS, SOCIAL WELFARE AND LABOUR: 
GENERAL OBSERVATIONS

Silvana MalleIntroduction

The standards of living have been falling, by any
statistical indicators, in all ex-socialist countries
since the beginning of the transformation towards the
market. The papers that have been presented at this panel
by Mr. Michel Gaspard, Dr. Vladimir Gimpelson and Dr.
Lulzim Hana provide plenty of data supporting this
conclusion and also present useful considerations on
present trends, on social policy problems and projects as
well as a forecast of possible future developments. They
have all contributed to knowledge. Many questions have
been answered, but some remain unanswered. Data are not
always mutually consistent. Necessary information about
crucial developments in the private sector is incomplete
or misleading. My comments are based on the evidence
presented in this colloquium as well as on other sources,
including unpublished opinion polls and personal
information.

The major transformations ex-communist countries are
undergoing in their transition to the market and
individual property rights encompass: price
liberalization and stabilization policies, together with
large scale restructuring, shut down of unused and
unusable capacity and large scale technological
upgrading. The social and economic background of most
countries is such that the transaction costs of property
transfer are very high and do not attract unadventurous
domestic and foreign investors. The release of capacity
in some branches is not matched by adequate new
investment in other branches. Thus, the fall in the
standards of living can be expected to last for some
time. What we are interested in is, therefore, the social
sustainability of such changes, compared to their
actualimportance for the population in general and for
particular groups. The measurement of these changes,
however, is difficult. The questions raised by evidence
on falling living standards, therefore, relate to the
quality of data as well as to their meaning. Only with a
proper understanding of the ongoing processes can social
policy and foreign assistance be worked out.

I. Are Statistics Reliable?

Statistics in most socialist countries could not be
trusted, because of both methodological accounting
differences and voluntary disinformation. We must ask
ourselves whether official statistics have become more
reliable. If they are not, as many sample surveys and
opinion polls strongly suggest, particularly those
concerning the distribution of incomes and living
standards, the question to be asked is what is likely to
be concealed now, compared to the past. When measuring a
change, we do not only need present figures, but also
past data for comparison. Any data reflect different
systemic values, organization, behaviour and motivations.
To call attention to a well known, but crucial, fact, let
me point out that past data tended to overestimate
growth, the rate of growth, productive output, and
particularly industrial output, compared to
non-productive branches and agriculture. The scale of the
underground economy was limited by law, controls, police,
but mostly by the lack of a market for capital and
equipment goods. Presently, the interest of private
business is to conceal output and employment in any
sector where it operates. Both facts cooperate in
producing an overestimation of recession and fall in
living standards.

Nowadays all countries in transformation are working out
indicators of poverty and subsistence levels. These
indicators are not homogenous and are often affected by
different interests. In Russia, the different agencies
concerned with estimating the poverty line, from the
Goskomstat to the trade unions, never agreed on where it
should be drawn. The Ministry of Labour even indicated a
poverty line expressed in calories (2240
calories/adult/day), which is unsuitable to discriminate
between standards of living.(1)



II. How do we Measure Changes in Quality?

We should not forget that Soviet statistics used to
include fat and bones in the production and consumption
of meat, and all TV sets were counted as such, even
though quite a few should have been counted among
explosive devices! In market economies meat is meat and
TV sets do not explode. However, whilst the quality of
some goods increases, the quality of other goods may
decrease. Some traditional domestic items may have
disappeared from the market suddenly invaded by foreign
goods of inferior quality, of which there is evidence in
some Central East European countries, namely in the
branch of food processing and dairy products.

III. How does one Measure, in Comparative Standards of
Living, Intangible Items, such as Culture, Education,
Information, Personal Dignity?

The access to cultural events is becoming more expensive,
and from this point of view, it affects negatively the
standards of living. However, people nowadays have access
to a wider range of radio and TV shows and reports, they
are free to communicate openly and to travel domestically
and abroad. The levels of higher education could worsen
in some cases, but improve in others. Top researchers who
formerly underwent several years of training before
mastering their research field, will now be obliged to
shrink their time horizon. But in the meantime the narrow
profile of vocational schools, which in the past
prevented flexible adaptation to technical change,(2) is
being changed to the profit of students. Personal dignity
and values of liberty as such should also be given a
weight in measuring the standards of living, since they
should contribute to a society respectful of each
individual and his/her choice. If statistics cannot
measure values and people's reactions to these changes,
the results of opinion polls and, eventually, of free
elections should be given a weight.

IV. How to Interpret Wage and Income Differentials?

Wage statistics are among the least realiable data
nowadays to measure living standards. Real incomes have
fallen,(3) but they are also likely to be much
underestimated.(4) This question is in part related to
the reliability of statistics and to concealment of
output and incomes data for tax evasion. Individuals who
figure as state employees also work privately in
different jobs. Worktime spent in unofficial jobs is
underestimated. Unreliable output statistics also bring
about unreliable employment statistics. The number of
those involved in unreported jobs may be increasing as a
positive reaction to availability of goods and higher
market prices, that is to demand for consumer goods, as
well as to increasing supply of jobs in the private
sector. This sector for some time will retain habits and
practices acquired in black markets under socialism,
namely incorrect or inexistent income declaration and no
payment for social safety. The unreported sources of
income concern not only the black economy, such as shadow
jobs or payment derived from utilization of foreign
currency in one's own country, but also what Richard Rose
defines as other social economies, namely, non-monetized
alegal economies, such as household production, exchanges
of help between friends and neighbours, mutual favours,
queuing. Altogether illegal and alegal economies provide
from 72%, 65%, 64%, 62% and 61% of household needs,
respectively, in the Czech, Slovak, Hungarian, Polish,
Belorussian republics to a minimum of 45% in Bulgaria.(5)

As wage and income differentiation is increasing, the
median value becomes an illuminating indicator of access
to individual goods and services by lower-middle classes.
The income polarization must also be monitored (6) to
keep track of the most fragile income groups, for which
some form of social safety must be provided. But one
should not argue a priori that income differentiation
is resented as such by people. In the socialist system,
there were differences of access to goods and services,
depending on status and power, that could not be overcome
by any personal effort in work and savings. These
difference ranged from quality goods and services and
quality education, knowledge of foreign languages, access
to superior health services and to travelling abroad and
information, which were reserved to the few in power.
There were also differences in the access to the
so-called collective goods, such as rest homes, holidays,
cultural and physical premises which did not depend on
personal efforts, but on branch priority. People in the
rural areas were neglected. The market economy favours
income differentiation, but provides at the same time
goods and services demanded by citizens. With increasing
supply prices tend to diminish. New price ratios are
formed which also affect the standards of living.(7)

V. What are the Consequences of Increasing Unemployment
on the Standards of Living?

It is commonly held that increasing unemployment is the
most serious negative result of the market economy.
Unemployment has increased in the Eastern European
countries that were more advanced in market reforms and
may still grow. Nonetheless, the preoccupations for the
social and political consequences of increasing
unemploment should not be exaggerated.(8) Three
considerations must be kept in mind when monitoring
employment figures. Firstly, former statistics did not
include unemployment but only non-employed people, who
both statistically and conceptually are different
categories.(9) Secondly, private employment is
underestimated for the reasons suggested above. Thirdly,
the income differentiation brought about by the market
will affect the supply of labour. In most socialist
countries the individual supply of labour, particularly
from mothers of young children and pensioners, was
sustained by the low level of family income. These
groups may well retreat voluntarily from the labour
market, if the family income increases. Comparatively
strong family links, due to low labour and geographical
mobility, may help the old age groups who are losing in
terms of lower real pensions.

That the extensive model of growth caused a strain on
labour resources, drawing into the working group also
people below and above the working age, should not be
neglected in comparing living standards. This is
particularly evident for the Russian Federation. The
figures on 1986-90 employment in Russia show that, while
labour resources kept decreasing in the last years of
Soviet rule, an increasing number of pensioners and
people below working age were employed.(10) Official and
unofficial benefits attached to social work (such as food
parcels, garden plots, treatment in enterprise clinics,
opportunity to buy a car, etc.) also stimulated people to
supply additional work. Though the maternity leave was
made longer, most women did not make use of it and
continued working out of necessity.(11) Students carried
out their studies while working. Comparisons of living
standards should not neglect the fact that there were
economic and social disadvantages, in terms of health and
life expectancy, from an increasing extensive use of
labour time. Demographic patterns in the seventies and
part of the eighties show increasing infant and adult men
mortality in many Soviet-type economies,(12) which should
be taken into account when full employment policies are
pursued in systems lacking both static and dynamic
efficiency. The average life expectancy of men in Russia
in the late eighties was only 63 years. Changes occurring
in the labour market may reflect both demographic trends
and new incentives. In the 1980s additional labour
resources were obtained in Russia by drawing into the
labour force an increasing number of pensioners. In 1991
labour resources decreased by 0.2%. As the working age
population and employed pensioners diminished, the number
of below working age people was increasing (by 13.8%
versus 0.8% average increase in the eighties). An
absolute decrease of labour resources occurred in the
North-West, Central and Volga-Viatsk and Ural economic
regions, that is in regions characterized by
comparatively higher unemployment rates (1.47, 1.35, 1.37
and 1.01 versus 0.99 in Eastern and Far Siberia).
Considering that in the Central and North-West regions,
where unemployment is mainly due to the cutting of
workplaces andthe number of working old age people is
relatively higher than in other regions, the decrease in
labour resources may indicate thatsome labour mobility,
particularly among the youngest, is now taking place
spontaneously towards more attractive regions. This phen
omenon can be seen as a positive one, reflecting an
unexpected flexibility of the labour market,
characterized so far by low geographical mobility. When,
and if, a real estate market develops this will sustain
increasing geographical mobility.

Labour mobility is badly needed if the economy is going
to work according to market forces and is going to bring
about higher rates of unemployment.(13) Higher wages in
leading branches, in industry taking advantage of new
price ratios and in the private sector will help to
reshape the labour market, which could mitigate
the social tensions.(14) People should be stimulated to
work as long as they wish and take up as many jobs as
they wish, if efficiency is to improve. The social safety
network, therefore, cannot be upgraded to the level
afforded in many capitalist countries. Higher social
safety standards find a limit in domestic productivity
increases andsocial solidarity. But an ethics must also
be created which will make individuals responsible for
their own well-being. Non-governmental voluntary
organization and private social insurance schemes can
help in upgrading the level of necessary social services.

VI. Some Further Considerations on Unemployment
and Living Standards based on Recent Developments:
Regional Differences

There is an increase in unemployment rates, but
also a regional differentiation of employment
opportunities in all ex-socialist countries, which an
assessment of living standards must take into account.
The regional differentiation is the result of systemic
imbalances produced by the former planned system. The
regions where new capacity was built and financed by the
state budget with non-economic motivations are now badly
hit byrecession and unemployment. Together with those
facts, there are higher mortality rates, strong
pollution and unattractivness for foreign investments.
These regions are to lose jobs and employment
opportunities.(15) Any policy directed to rescuing
inefficient and hopeless production is doomed to failure.
If inefficient industry is kept, through state subsidies,
in one region, negative externalities are likely to hit
other regions, with an overall loss of welfare, which
economies in transformation cannot endure.

The alternative is to keep under control the rate of
liquidation, while stimulating labour mobility. The lower
pressure on the side of labour supply and the
restructuring of branch development could, then, favour
the redistribution of labour towards other branches
and jobs, including the tertiary sector, tourism and new
leading branches (e.g. those related to the recycling of
scrap and cleaning of the environment). These policies
require sacrifice in the short term and may still be
conducive to regionally lower living standards, but the
reallocation of resources towards expanding sectors is
the only way to build the economic resources needed to
support the poorest income groups.
 
 
 
 Notes
1. In Russia the minimum subsistence level was estimated
to be 1,779 roubles per month in July, and 2,163 roubles
in September 1992. In August 30% of the population was
estimated to live below the minimum subsistence level,
see S. Marnie, "Economic Reform and Poverty in Russia",
RFE/RL Research Report, Vol. 2; no. 6, 5 February 1993,
pp. 31-7.

2. In Poland most unemployed people aged 18-24
do not have any qualification.

3. From the Russian Goskomstat figures, in 1993
the real incomes of the population (incomes minus taxes
deflated with consumer price index) fell to 44% of the
level in 1992.

4. An indication of concealed sources of income can be
found in savings and consumption patterns. Private
savings increased from March to July 1992, and then
started decreasing. Nonetheless consumption in real terms
increased in the third quarter of 1992 by 14% and
continued to increase in September. Actual savings are
higher than shown in official records, since the latter
do not include savings in valuta retained by people.

5. These data are the result of a regular annual
monitoring through a sample survey, called New
Democracies Barometer carried out by the Centre for the
Study of Public Policy under the direction of Prof.
Richard Rose of the University of Strathclyde in Glasgow.

6. In Russia income differentiation measured with the
Gini coefficient has increased, but still remains
comparatively rather low (it was 0.238 in January and
0.289 in July 1992).

7. In Russia after the policy of price liberalization
pursued by the Gaidar government the increase in
foodstuff consumer prices fell steadily from a monthly
20% in February 1992 to 6% in August. (Misdirected
monetary policies led later to price increases of 11% in
September and 26% in October.) The structure of prices
changed reflecting relative scarcities: the sharp
increase in butter and meat was matched by milder
increases in the prices of potatoes, milk and vegetable
oil until June 1992. The foodstuff price index increased
36 times from December 1990 to October 1992, whilst the
index for non-consumer goods price index increased 44
times and that of services 52 times.

8. From January 1992 to November 1922 in the Russian
Federation the number of vacancies decreased from 600,000
to 300,000 and the number of registered unemployed
increased from 450,000 to 900,000, see Obzor Ekonomiki
Rossii, 1993 vypusk 1, p. 11. The unemployment rate in
Russia is presently 1.4%. The unemployment rate in the
Czech Republic in March 1993 was 2.9%. In Prague a rate
of 0.35 indicates a taut labour market. It was higher,
12.01% (306,090 people) in the Slovak Republic, where
most defence industry was situated. The unemployment rate
is higher in Poland (14.5%) with 2,648,742 unemployed at
the end of March 1993, i.e. 0.90% more than in February
(see SWB EE/WO278 A/4-5-6 22 April 1993), as well as in
Hungary (13.6% in February 1993) and in Romania (9.6% in
April 1993), see Summary of World Broadcasts (SWB)
EE/WO277 A/5-6 15 April 1993.

9. Unemployment now in all ex-socialist countries
includes all working age people having no job, registered
at the job placement offices and in search of a job. In
Russia most of these people have no right to unemployment
benefits (UBs), since those who lost their job receive
for three months the full wage from their firm. People
dismissed for disciplinary reasons and pensioners have no
right to UBs. Thus, only 1/3 of the actually unemployed
receive UBs. 

10. In 1991 working age people, working pensioners and
below working age represented respectively 93.3%, 6.5%
and 0.2% of the employment. In 1992 Russian labour
resources included 86.2 million people, i.e. about 60% of
the population. In the national economy 72.3 million
people were employed, see Ekonomika i zhizn', 1993, no.
4, January p. 13. In 10 months of 1992 the number of
unemployed decreased by 1.4 million. In November 1992
unemployment went above one million, i.e. 1.4% of the
total able-bodied population. In January registered
unemployed were 0.6 million, i.e. 10 times January 1992.
The unemployed were 730,000 in April 1993 see Rossiiskaia
Gazeta (Moscow first edition) 17 April 1993.

11. In 1989 there were 1,862,000 single or divorced
mothers in the USSR. The monthly allowance for a baby was
20 roublesa month.

12. In Poland because of pollution the lifespan in the
Upper Silesia region is six years shorter than in other
regions and infant mortality is much higher.

13. The Czech Minister Jindich Vodicka expects
unemployment to rise to 5.5-6.5% (290 thousand to 340
thousand) at the end of 1993 due to large redundancies
(see SWB EE/WO278 A/4 22 April 1993).

14. In Russia, where the service sector is highly
underdeveloped, industrial wage increases lag behind
other branches and priority branches wages lag much
behind other sectors, thus helping to mobilize the
workforce. The average wage in one of the largest defence
industries of Ekaterinburg is 5,500 roubles per month -
at the nearby tobacco factory it is 30,000 roubles per
month - at the local distillery 40,000 roubles. In 1992
600,000 people left the defence industry and 200,000 left
R&D (see Moscow News, 12 March 1993, p. 7). The number of
private firms is increasing in all branches. In October
1992 the number of private firms was 160,281. In 1992
there were formed more than 950,000 new firms (Ekonomika
i zhizn', 1993, no. 4, January, p. 13). Statistics
include among the new firms also state enterprises
undergoing privatization, which makes it more complicated
to estimate the number of new jobs. Among the new firms
in 1992, the statistics included, indeed, more than
400,000 societies, 200,000 private individual
enterprises, about 150,000 cooperatives and about 100,000
Joint Stock Companies, and 12,000 associations, concerns,
consortiums. Out of the 16 million people employed in all
these structures, only four million work in the private
sector as such.

15. In Poland unemployment increased in 41 provinces and
fell in eight. In Upper Silesia women make up two-thirds
of theunemployed. There are now over 170,000 unemployed
in Katowice Province alone. 22,000 miners will be
released by the end of the year, see SWB EE/WO278 A/6 22
April 1993.

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First edition 1993
ISBN 92-845-0079-6

This is the latest in a series bringing together papers
presented at the NATO colloquia organised by the NATO
Economics Directorate and Office of Information and Press
on economic issues in the former USSR and Central and
East European countries. For further information please
write to the Director, Office of Information and Press,
1110 Brussels, Belgium.

The articles contained in this volume represent the views
of the authors and do not necessarily reflect the
official opinion or policy of member governments or NATO.