Social Benefits in Russian Enterprises

Russian firms historically provided a significant range of non-monetary benefits to incumbent workers. This component of total compensation was not only quite large but was intended to be an important factor in governing individual agents' employment decisions. Further, in a significant number of settings, due to concentration in employment, firms were broadly equivalent to local governments in functions and tax assignments. To a greater extent than in East and Central Europe, Russian firms were effectively sites for providing a wide range of services that would commonly be provided by municipalities or other branches of government in market economies.

Expenditure on social benefits and services by Russian firms amounted to about 4.1 percent of GDP in 1992 and 3.3 percent in 1993 (2.1 percent for industrial firms) and firms are estimated to have contributed at least a quarter of total expenditure on housing, health, education and cultural services in 1993. Spending on social benefits and services was also equivalent to about 14 percent of the enterprises' total wage bill in 1993 for all firms and, for industrial firms, around 20 percent. By comparison, in Poland expenditure on social and housing funds as a percent of the wage bill (net wage cost) was no more than 10 percent in 1989 for industry.

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Benefits and Restructuring: a Hindrance or an Aid?

A series of policy measures designed to cut the Gordian knot tying firms to benefits have already been implemented, including recent decrees that have forced firms to divest themselves of their social assets. The arguments for divestiture are several.

First, it has been widely argued that the use of benefits to achieve worker attachment sets up an inappropriate incentive in the current environment, given the need for restructuring and associated employment contraction. Pinning workers to firms through benefits may consequently impede labor reallocation and mobility.
Second, freed through institutional change -- primarily privatization -- from an exogenously given requirement to provide benefits, firms may likely choose to limit provision of benefits that are costly or more risky to them. This may, however, have negative welfare implications.
Third, firms should concentrate on raising productive efficiency and profits, liberated from a need to provide benefits. If benefits, for example, are a net burden to some firms this may distort competition.
Fourth, multiple provision of benefits through firms in a locality may be inefficient and these losses could in principle be addressed through consolidation.
Fifth, liberalizing wage setting should allow employers to use monetary compensation as the main sorting and motivational mechanism; this would likely be impeded by continuing provision of blanket access to benefits.
Sixth, benefits hitherto provided by firms could either be devolved to individuals, as through privatization of housing, or where that option is unavailable through transfer to local governments.

Enterprise Restructuring in the FSU