Russian economy hit by severe labor shortages despite low unemployment rate

Russia, despite achieving a significant drop in unemployment in recent years, is grappling with severe labor shortages exacerbated by its expanding defense industry amid the ongoing conflict in Ukraine.

While Western sanctions have adversely affected various sectors of the Russian economy, the defense industry has seen substantial wage increases of 30% to 60% over the past two years, according to a statement from Russia’s first deputy prime minister.

President Vladimir Putin highlighted in a February statement that approximately 520,000 people have been employed in Russia’s defense sector since the onset of the conflict in Ukraine. This surge in employment accompanies increased the production of military equipment such as tanks and missile systems.

Estimates suggest that between 600,000 to 800,000 individuals temporarily left Russia during a month-long mobilization related to Ukraine, with some returning afterward.

Elvira Nabiullina, governor of Russia’s Central Bank, identified the shortage of personnel as a significant economic challenge during a statement last November.

Despite these challenges, Russia's unemployment rate hit a record low of 2.6% in May.

According to a report from the Institute of Economics of the Russian Academy of Sciences, the country currently faces a labor shortage of 4.8 million, a situation that has rapidly worsened in 2022 and 2023, impeding economic growth.

Maxim Reshetnikov, Russian minister of economic development, emphasized in September 2023 that human capital has become the scarcest resource in the economy, surpassing investments, finance, and technology in importance.

A report by the Moscow-based Institute for Entrepreneurship and Economic Development revealed that more than 90% of companies across various sectors in Russia are experiencing labor shortages, despite wage increases and financial incentives.

The report also highlighted contrasting perspectives between the private sector, which views migrant workers as crucial resources, and the conservative approach of the state toward their employment.

President Putin acknowledged on April 4 the impending personnel shortages due to demographic challenges, emphasizing the necessity for reform.

Experts argue that the Russian government’s current measures to address labor shortages have been insufficient, advocating for innovative approaches to the labor market.