Mariya Aleksynska: Ukraine’ s Low Labour Productivity: Who is Truly Responsible

In a recent article, Tom Coupé questioned why Ukraine’s labour force was unproductive. He put forward several suggestions as to what could be done about increasing Ukraine’s labour force productivity and hence about raising wages. Tom Coupé argued that, while Ukraine has a well-qualified workforce, it is not able to transform years of education into measured production because of a poor quality of education, low ability to retain talents, but chiefly because of poor institutional and macroeconomic environment in which firms employing labour operate.

While not dismissing these arguments, this column offers a few additional explanations to low productivity in Ukraine, as well as offers a more nuanced look at the role of the institutional factors and of potential institutional reforms in improving productivity.

Immediately after the collapse of the Soviet Union, Ukraine was plagued by depreciation of skills accumulated during central planning period. Twenty-five years down the road, Ukraine still possesses a sizeable cohort of old-age workers, whose skills have become obsolete in an economy demanding new types of jobs. The start of the transition period made factor allocations highly distorted; privatisation of state-owned enterprises and liberalization of the private sector lead to massive job destructions and to creation of jobs that would require new types of skills. In this situation, skilled and unskilled individuals found themselves competing for jobs, rather than complementing each other.

But the education sector was slow to adjust to these demands, meaning that new cohorts of young workers arriving on the labour market over the past two decades were inadequately educated to fully respond to the new labour demands. One the one hand, specialized vocational and technical training lagged behind in adopting new curricula. On the other hand, it also failed to attract and motivate talented youth, much of which has been lured by better prospects offered in more “prestigious” specialities, such as accounting or business administration – a fashion effect confirmed by higher wage premiums to those specialities. Thus, the education system has been consistently over-producing white-collar management personnel, while what the economy needs is skilled workers in industry, agriculture, and services sector (notably such as construction). Indeed, according to the World Bank (2009), about three-quarters of all newly created jobs in Ukraine are for manual workers, with half of them are for skilled manual workers (electricians, plumbers) and machine operators. The resulting situation is sharp shortages of some skilled workers and excess supply of others. This has also lead to current sizeable vertical and horizontal mismatches [1], whereby Ukrainian market is marked by workers over-educated for the tasks that need to be performed, or by workers who, within tasks requiring the same (usually low) level of education, have specializations in fields different from those required for the job. It is this latter phenomenon – education-job mismatch – coupled with chronic underinvestment and lack of modernisation in the industrial sector, community services and agriculture, but also with continuing slow restructuring, persistent over-manning, and old-style management of still numerous state enterprises that is responsible for aggregate low productivity.

While Tom Coupé notes that “business in Ukraine does rarely see lack of qualified staff as a major problem for business: less than 5% indicate it is the most problematic factor in Ukraine”, the devil, as usual, is in details. According to the World Bank Enterprises Survey, conducted among formally registered firms in Ukraine in 2008 and 2013, the answers to the question “What is the most serious obstacle affecting the operation of your business” show that, indeed, only 3% of firms in 2013 (against 7% of firms in 2008) stated that inadequately educated workforce was a major issue. However, when a question is asked differently in the same survey, i.e., “Note the degree of how much of an obstacle is inadequately educated workforce to the operations of your firm”, 63% of surveyed firms in 2008 answered that those were “moderate to very severe obstacles” [2]. Even though this number went down to 20% in 2013 – a remarkable decrease indeed – it remained sizeable, thus confirming, and not rejecting, as Tom Coupé suggests, the idea that the education quality and education-job matching do require improvements. This percentage is also higher in Ukraine than in any other transition economy [3]. Moreover, the same survey respondents consistently over the years suggested that the inadequately educated workforce was a problem more severe than business licensing or land rights acquisition.

Given this, potential state interventions should aim at improving the education quality, adjusting curricula to the new market needs, and involving enterprises, including foreign ones, into the development of curricula. The state should also create incentives to firms to provide apprenticeships, traineeships and internships so as to create bridges between the world of education and the world of work; provide incentives for on-the-job training and life-long learning opportunities; help organize career fairs and fairs for the schoolchildren choosing a profession as to raise awareness about the new types of jobs and new types of skills that emerge and that are needed; improve the overall image of skilled workers with technical or vocational training; continue modernisation of state enterprises, including thought public-private-ownership initiatives.

But the key argument of Tom Coupé is that, in order to improve productivity, Ukraine needs to improve its institutions, and that reform complementarities matter. While it’s hard to disagree with this general statement, this argument also needs to be nuanced. Reforms of which institutions specifically are needed? Which institutional reforms will be particularly effective, and what is the order of the priority of the reforms? “Institutions” is a catch-all phrase that needs to be “unpacked”. Indeed, if we look at what constitutes the Global Competitiveness Report “Institutions” index, on which Ukraine scores poorly, it consists of over twenty items, including intellectual property protection, public trust in politicians, judicial independence, various corruption measures, efficiency of legal framework in settling disputes, organized crime, reliability of police services, but also ethical behavior of firms or strength of auditing and reporting standards. Many of the recent reforms have already taken place in some of these areas, notably police services, corruption, or judicial reforms. But other reforms, such as intellectual property protection or strength of auditing and reporting standards are still to be taken seriously. Interestingly, however, this “Institutions” index does not contain measures of other institutions, such as labour market institutions (and to which a special Global Competitiveness Report indicator is dedicated), on which Ukraine actually scores relatively well. At the same time, Global

Competitiveness Report also contains a “Financial markets development” and “Goods market efficiency” indices, on which Ukraine does score as poorly as on the “Institutions” index, though Tom Coupé’s article does not suggest reforming those. To what extent improvement in those areas can help stimulate productivity can be subject of further research.

As to Ukrainian businesses, they tend to partially agree with the Global Competitiveness Report priorities. In fact, firms surveyed by the World Bank Enterprises Survey, in answering the same question “What is the most serious obstacle affecting the operation of your business”, named political instability, corruption, but also high taxes and access to finance among top obstacles. Potentially, these are additional areas of further improvement to help businesses raise their efficiency, and hopefully labour productivity.

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