The Labor Market During Wartime: What Changes are Needed

As part of the international conference “Reconstruction of Ukraine: About People and For People,” organized by Vox Ukraine with the support of The National Endowment for Democracy, speakers shared their thoughts on the current state of the labor market and discussed possible changes in unemployment and the labor market’s structure and dynamics.

Employer’s perspective: main challenges

Volodymyr Hlashchenkov, Head of the law firm HD Partners; Chairman of the Supervisory Board at Molokia

In 2022, our primary objective was to instill confidence in people that companies would continue to operate. Apart from salaries, the emotional well-being of colleagues and a sense of assurance about the future are crucial factors. Moving into 2023, a significant challenge we face is the shortage of workers, with an increasing number of vacancies emerging. It’s not just a matter of struggling to recruit new employees; we’re also witnessing the departure of those who were previously part of the workforce. The employee structure in enterprises is changing: the proportion of women is increasing, mostly because men have joined the Armed Forces. This presents an additional challenge for businesses, as they must consider adapting processes to accommodate the absence of men and ensure that tasks can be performed by women effectively.

In my opinion, businesses are now facing three main tasks.

The first task involves reorganizing and changing the business model despite external factors. The market is expected to shrink due to a decreasing population in Ukraine, leading to a reduction in consumption. Maintaining previous sales volumes will be challenging. To remain competitive, it’s necessary to increase efficiency and automate processes wherever possible to reduce reliance on human capital. However, this is not easy, as it requires investment.

The second task is to increase salaries for employees who remain in the company, along with the need for new investments. Higher salaries are essential to attract new talent, but this presents a challenge for businesses as they must decide between investing in efficiency improvements or raising employee salaries.

The third task is to understand how to manage workforce military deferments. Sometimes, a project starts, and subcontractors are hired. Today, you have ten people arriving to do work, but the next day, only two show up. That’s the reality — there’s no certainty about the number of people available. Many are joining the military by themselves. Over 70 people from our company have gone to fight, including the financial director and the development director. Therefore, one should be prepared to be left without department heads and top management at a certain point. Adaptability is what businesses in Ukraine need. Every day, there should be a readiness to conduct business processes differently than they were conducted a week ago. At the same time, long-term plans for company development need to be established. That’s the reality of today.   

Unemployment: forecasts and the situation on the job market

Nataliia Kolesnichenko, Head of Division for Analysis of Real and Fiscal Sectors, Monetary Policy and Economic Analysis Department, National bank of Ukraine 

The significant spike in unemployment at the onset of the full-scale invasion is a typical situation for the labor market in countries experiencing martial law.

However, today (the conference took place in November 2023 – ed.), it can already be observed that economic activity is recovering. People and businesses are demonstrating high adaptability and becoming active again in the labor market. According to estimates from the National Bank of Ukraine, unemployment in 2023 will be around 19% (in 2022, unemployment stood at 21.2%, according to revised estimates).  

At the same time, there are negative trends, particularly unemployment, which is becoming structurally entrenched. Economic changes resulting from the destruction of production capacities, emigration of Ukrainians abroad, and internal migration within Ukraine are exacerbating disparities in the labor market. This means that the qualifications offered by workers do not match the needs of employers. For example, if workers from metallurgical plants move to western Ukraine, they may struggle to find jobs in their profession because such facilities are simply not available there.

The shortage of workers with the necessary qualifications is pushing up salaries: we are seeing an increase in wages both in the public and private sectors. However, according to surveys, as of August, most enterprises did not increase their workforce. Some even reduced the number of employees, such as construction companies. This downsizing is not always desirable, as many enterprises simultaneously suffer from a staff shortage. Among the reasons for this shortage are not only migration but also mobilization. The highest demand is felt for manual labor specialties. There is also a shortage of staff in retail trade. Previously, this sector was predominantly staffed by women, many of whom are now abroad. 

However, provided that the current conditions predominantly persist, our forecast for the coming years anticipates a decrease in the unemployment rate.

Yaryna Kliuchkovska, Communications Director, Work.ua

The labor market continues to stabilize; however, Ukraine is facing significant territorial imbalances. Due to security risks, businesses have mostly relocated to western regions, with the highest number of job vacancies being observed there. Conversely, the closer to the front line, the more challenging the situation in the labor market.

There’s a problem where, on the one hand, businesses are not receiving enough responses to their job offers, while on the other hand, people are actively seeking employment and complaining about unemployment. This suggests that either Ukrainians have higher expectations regarding compensation/working conditions, and the offered conditions do not satisfy them, or their qualifications differ from those required by employers. Employers will need to invest in the development and training of personnel, in what is known as reskilling and upskilling, to redirect people to the specialties they need. 

It’s worth understanding that there won’t be an increase in the number of people in Ukraine in the near future. And if a year ago, it could be said that employers set the tone in the labor market, now the conditions may be dictated by job seekers. The only exception is the IT sector, with about 150 responses for one job vacancy. Due to the shortage of workers, we can observe an increase in average wages. However, this situation puts pressure on employers. Therefore, they should think not only about financial motivation but also about making working conditions comfortable for employees to compete for workers not only with money.

Risks and factors Influencing the job market. What should we focus on today?

Oleksandr Tsymbal, PhD of Economics, head of the Employment Risk Research Department, Institute of Demography and Social Studies, National Academy of Sciences of Ukraine

The workforce, population size, number of employers, and consumers are highly interconnected elements with significant recursive relationships. This is because the population consists not only of workers but also of employers — those who create job opportunities and those who shape demand.

Security risks are not the only factor currently influencing the labor market. A powerful factor is how the Ukrainian labor market has evolved over the past 20 years.  

When we use the term “unemployed,” it’s important to understand that an unemployed person is not just someone who lacks a job. It’s someone who actively sought employment but could not find it. If a person is not actively seeking work, they are not considered part of the labor force. This creates another problem in the labor market, which existed even before the war: the presence of those who are neither employed nor actively seeking work. It’s difficult to say what they do or how they live. Unfortunately, very little attention has been given to studying this category of people. A significant portion of these individuals are women who are on childcare leave. Additionally, a substantial portion consists of people with disabilities who could potentially work but face barriers to employment. Before the full-scale invasion, it was estimated that around 800-900 thousand non-disabled men who did not have disability status were not seeking work and were not employed. What were they doing? Perhaps during surveys, they simply didn’t want to admit to working without formal employment.

As with pre-war conditions, wage levels will be a key factor determining labor shortages in specific sectors. There will be industries where employers won’t be able to raise wages even if they so wish with all their heart, and they may be the first to face a shortage of qualified personnel. When the question arises of whether there will be enough labor force, we need to immediately ask, “For whom?” In my opinion, we should focus not so much on quantitative characteristics (few or many people) but rather on qualitative structural characteristics. There is no single labor market mechanism working at the national level. Different professions have their own space. Some professions already have access to the global market. For instance, software developers can work for foreign companies as outsourcing employees. Then there are professions where people are engaged locally and are limited to their immediate area, not further away than rural outskirts. Therefore, different labor market segments apply to different population groups. There are completely archaic segments and progressive ones that align with global practices. The problem would be to focus policy solely on supporting and developing progressive segments while ignoring the fact that millions of people around us are engaged in clan-family practices and don’t even understand the need to formalize their activities. These people also work, but it’s impossible to talk about progress in those areas. Without sufficient attention to such areas, we will continue to see structural imbalances and significant segments (both territorial, professional, salary-related, and social) where painful, marginalizing processes will be concentrated. All parties involved – employers, the population, and the government – need to pay enough attention to building infrastructure that would engage these people in a normal process and pull them out of the practices they are currently involved in.

Therefore, if we’re not just talking about restoring existing practices but about a qualitative transformation of both society and the economy, then we must also discuss a profound transformation of the labor market.

The impact of war on the job market

Olha Kupets, assistant professor, Kyiv School of Economics

It’s essential to understand the long-term impact the war will have on people, as they are the foundation of the labor market. Studies show that if the majority of losses during hostilities are human capital, then post-war recovery is much slower than if physical capital was destroyed.

When analyzing the impact of war on the labor market, it’s important to discuss the main methods and audiences of such influence. 

The first group consists of children and youth. Did children receive education during the war? Did they face challenges related to access to food and basic necessities or experience psychological trauma? Studies have indicated that the younger the child affected by adverse circumstances, the more difficult it becomes for them to integrate into the labor market later in adulthood.

The second group consists of veterans. Firstly, participation in war negatively impacts their education. Men who fought often do not complete or even begin their education. Studies from World War II revealed employment issues among men who were wounded. This problem intensified closer to retirement age, leading them to retire much earlier. Prejudice is also a significant factor: in countries where war participants were perceived as heroes, veterans had high employment rates. Conversely, in places where veterans were perceived negatively (such as those returning from the Vietnam War), labor market difficulties also arose. 

The third group consists of internally and externally displaced persons. Studies from the war in Bosnia and Herzegovina show a higher likelihood of unemployment among men and economic inactivity among women even six years after the war ended. Conversely, research on the military conflict in Tajikistan showed a positive impact on women’s economic activity and employment.

Finally, the fourth group comprises all other individuals. War has a long-term impact on them due to their subjective perception of their own well-being. 

What can we do to mitigate the negative impact of war on the labor market? Taking Croatia as an example, which is now a member of the EU and previously faced similar labor market challenges, an active and quality labor market policy will work, but not immediately. It’s crucial that we maintain a static reference point on the European Union and adhere to the guidelines provided to us for further integration into the EU.