ecsoc_t2_n5

V. Multivariate Analysis

To disentangle the effects of different possible causes, we regressed our indicator of public employment, PEt, on explanatory variables related to our hypotheses. We used a crosssection, time series design to exploit both the cross-sectional and intertemporal variation in the data. We calculate coefficients by OLS, but report “panel-corrected standard errors”, as recommended by Beck and Katz [1995], which are corrected for panel heteroskedasticity and contemporaneous correlation18. To reduce problems of autocorrelation, we included a lagged term of the dependent variable, as recommended by Beck and Katz (1996), who argue that this is preferable to using generalized least squares or other available techniques. The results should therefore be interpreted as explaining change in public employment shares rather than their absolute level. We also included dummies for year in the regressions, to separate general trends from patterns associated with particular regions.

Table 4 shows the results of these regressions. We first look for a simple correlation between the given independent variable and public employment, controlling only for year and previous year public employment. Then, in the model shown in column 9, we include the full range of relevant explanatory variables, along with controls for the age structure of the population (which may capture differences in regions’ demand for public services such as health care or education), and for Moscow and St Petersburg (in which the relevant sectors include some significant federal public component and private element)19. Relatively quickly-changing variables such as unemployment or central transfers are included in the form of the previous year’s level and the one-year change to make it possible to capture effects of both recent changes and longer run trends. In Table 5, we show the full model when run for different sectors separately.

[Tables 4 and 5 about here]

A number of results emerge from Tables 4 and 5. First, Wagner’s law does not help to explain interregional variation in public employment in Russia. On the contrary, there is a negative correlation between development (measured either by per capita gross regional product or urbanization) and public employment (though this drops to insignificance if the other explanatory variables and controls are included). If Wagner was right that economic development increases demand for public services, this does not seem to be what is driving changes in the pattern of public employment in 1990s Russia. Second, public employment growth was faster in ethnically-defined sub-units of the Russian state. Most of the effect reflects the younger age-structure characteristic of such ethnic republics and districts. On average in the ethnic regions, almost 28 percent of the population was aged under 16, compared to 22 percent in the non-ethnic regions. Controlling for the proportion under 16 by itself caused the estimated coefficient on ethnic status to drop from .84 to .39. A younger population should boost the demand for education, and ethnic status was significantly associated with higher employment in this sector but not with higher employment in administration or health20. But although most of the “ethnic” effect looks more like meeting

18 Panel-corrected standard errors are more accurate than standard errors computed by the Parks FGLS method for data of the kind analyzed in this paper [see Beck and Katz 1995]. In STATA, we used the option pcse.

19 The results are not changed if we leave the capital cities variable out. In including the age structure controls, we follow previous studies such as Alesina et al. [1998].

20We tried running regressions like those in Table 5 but dropping the age variables. Ethnic status was highly significant in the regression for employment in education, but not in those for employment in healthcare or administration.

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demand than political redistribution, a significant residual effect does remain even once all controls are included, suggesting that ethnic units have on average almost one third of a percentage point higher public employment that is not explained by the population’s age structure.

Does this reflect pressures for ethnic redistribution? Obviously, more direct information would be needed to establish this—for instance, data on the ethnic composition of public employment in the regions, data that unfortunately were not available. And there are other possible explanations. As noted already, the ethnic regions have a different administrative status and political relationship with the center which affords them greater rights and privileges than their non-ethnic counterparts. Here we can only present some additional indirect evidence. If public employment in ethnic regions was higher because of redistribution to non-Russian ethnic groups, the pressures for this might be greater if the non-Russian population in the region was larger21. We tried including a term for the proportion of the population in the ethnic regions that was non-Russian (as of the 1989 census) in the full model regression. In fact, the proportion non-Russian was negatively (but not significantly) related to the change in public employment. This might cast some doubt on the interpretation of the finding as evidence for ethnically motivated redistribution. However, another piece of evidence is slightly more supportive. Controlling for the status of the ethnic unit, if the unit had a governor (for at least part of the year) who was of non-Russian nationality, the increase in public employment tended to be almost one third of a percentage point higher (though this was only significant at about p < .20, and so should not be viewed as at all reliable). Our preference is to remain agnostic about whether the faster growth of public employment in Russia’s ethnic units is the result of redistribution to non-Russian groups or is better explained as a result of the distinct administrative status of ethnic regions.

The evidence on electoral effects is mixed. At the national level, Russia held a presidential election in 1996. The trend of public employment growth shown in Table 2 fits the predictions of the electoral cycle hypothesis perfectly. The public employment share grew by one percentage point in 1995, by 1.2 percentage points in the election year, and then fell by .1 percentage point in 1997. In absolute terms, public employment increased by 201 thousand jobs in 1995, by 670 thousand in the election year, and then fell by 445 thousand in the year after. Examination of the year dummies in Table 4 suggests that this pattern held not only in the aggregate but on average across regions. The estimated effects (from model 9) were for a 1.17 point increase in public employment in 1995, a 1.64 point increase in 1996, and a .35 point drop (not significant) in 1997. The evidence is hardly conclusive—many other factors might explain why such a trend appeared in these years. Note, however, that such a pattern is not explained away by the other factors hypothesized to affect public employment and included in the regressions. Table 5 shows that this trend is entirely caused by changes in the level of employment in public administration—both health and education employment do not have this trend in the estimated year effects. Recall that public administration was the category of public employment that actually rose not just as a share of total employment but as the number of jobs positively increased.

Evidence of cycles in public employment around elections for regional governors are far less clear. The pattern appears to fit the hypothesis when no controls are included—there is then a significant increase in public employment during the year in which the region held a gubernatorial election (Table 4, columns 4 and 5). However, this effect disappears completely in the aggregate regressions once controls are included (column 9). A significant effect

21 At least, that is the argument in Alesina et al. [1998], though note our uncertainty about the logic behind this in footnote 11.

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remains, however, in the regression for public administration employment (Table 5, column 3), which increases significantly in the year before a gubernatorial election and falls significantly in the year after. Are new, non-incumbent governors more likely to sweep out the Augean stables after election, firing the political appointees of their predecessors? The signs of the coefficients on the variable for a non-incumbent elected the previous year fit this conjecture, but the estimates are not significant except in the regression for education, culture, art and science employment in Table 5. (And, for public administration employment, there is no greater propensity for a new governor to reduce employment after the election.)

To sum up, there is some quite persuasive evidence of political business cycle manipulations in the levels of employment in public administration, but not in those of education or healthcare22. Public administration employment in the average region rose before the 1996 nationwide presidential election and fell afterward (in ways that cannot be explained for instance by changes in unemployment levels). Public administration employment also rose significantly faster in the year before an expected gubernatorial election and fell significantly faster in the year after the election. There is some relatively weak evidence that newly elected governors reduce public employment—at least in education, culture, art and science—faster than if the incumbent is reelected.

One interesting negative result emerges from the analysis: the political ideology or affiliations of the governor do not appear to influence his public employment strategy. Governors affiliated with the communists were no faster or slower than others to increase the level of public employment, either in the aggregate or taking different types of public employment separately.

The economic insurance hypothesis was quite strongly supported. In regions with higher unemployment rates and especially in those that had suffered a particularly sharp increase in unemployment that year, public employment increased significantly. A one percentage point jump in unemployment in a given year was associated with a .09 percentage point increase in public employment, other things equal23. Most of the increase came in education, culture, art, science, healthcare, sport and social protection, but a small part may also have come in public administration (see Table 5). Thus, the evidence does support the conjecture that regional governments in Russia act as “employers of last resort”, trying to cushion the blow of sharp increases in local unemployment. Their ability to do so is obviously limited, as suggested by the low estimated coefficient.

Finally, the government budget constraint hypothesis was strongly supported by the evidence. Regions receiving higher or more rapidly increasing financial aid from the federal government had faster growing public sectors. The estimates in Table 4 are remarkably stable whether or not controls and indicators for other hypotheses are included. For every additional thousand December 1991 rubles per inhabitant a region received in a given year in federal transfers and loans, public employment increased by about .6 of a percentage point. For instance, Archangelsk Oblast had the median increase in transfers and loans in 1997—about 53 December 1991 rubles per capita. Had its transfers and loans increased as much as in the Evenk Autonomous Okrug (by 1,332 rubles per capita), the regression predicts that its public employment level would have been about .8 of a percentage point higher. Table 5 suggests that increases in transfers and loans translated within a year into higher employment levels in

22For an argument that one should not expect to see political business cycle patterns in all indicators in all elections, see Treisman and Gimpelson [2000].

23This is based on the estimates of the model in column 9, with controls and indicators for other hypotheses included.

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education, culture, art or science, but that higher federal aid led with a longer lag to higher staffing levels in healthcare, sport, social protection, and public administration as well.

Are regional governments more likely to spend money received in transfers and loans from the federal government on increasing public employment than they are to spend other kinds of locally raised revenues on this? The data suggest that the answer is yes. When terms for the region’s real revenues from other sources and change in the region’s real revenues from other sources are included in the regressions—either with or without controls and other variables— the estimated positive effects of transfers and loans remain highly significant with similar coefficients, but the coefficients on both previous year other revenue and change in other revenue are negative (not significant if controls are included). That is, other things equal, regional governments with higher or faster increasing other revenues do not have faster growing public employment. It is only federal transfers that appear to stimulate this public sector expansion.

To recap, contrary to Wagner, it was less developed regions that had the greatest increases in public employment after transition to the market in Russia. Ethnically defined units of the state also had larger increases, especially in education, culture, art and science, which might suggest ethnically motivated redistribution, but might equally well reflect different demand for and supply of public employment in regions with different administrative status. The political ideology or affiliation of regional governors does not seem to affect their public employment strategies. There was some evidence of opportunistic increases in public administration employment before elections (and reductions afterward). Public employment correlated positively with the trend and recent changes in unemployment, and was strongly related to the level and recent change in federal transfers and loans—though not to the level or change in locally raised revenues.

VI. Discussion

Public employment in Russia’s regions increased more when federal transfers and loans increased. But what caused what? It might be that increased transfers make possible increased public sector hiring (or slower firing), the interpretation we have assumed. But higher levels of public employment might themselves call forth larger federal transfers.

We lacked a sufficiently long time sequence of data to run reliable Granger tests of causality. However, we did run panel regressions trying alternately to predict PE with lagged transfers and loans and transfers and loans with lagged PE24. Lagged transfers and loans turn out to be extremely significant (at p < .001) predictors of PE, controlling for lagged PE and year dummies. When the full period 1992-98 is included, lagged PE is not at all significant in predicting transfers and loans. However, lagged PE became a better predictor of transfers and loans as the decade progressed. It is only in 1992-94 that PE is insignificant; if a similar regression is run using just the data from 1995 on, lagged PE is even more significant at predicting transfers and loans than vice versa. Our interpretation is that: (a) transfers and loans help to predict public employment in the whole period 1992-98, and (b) higher public employment helps to predict faster rising transfers and loans in the period from 1995 on.

In fact, observation of political events and discourse suggests the possibility of a perverse interaction between public employment and federal transfers in the late 1990s. Governors may have consciously chosen to boost (or slow decline in) local education, health, and administrative payrolls in the hope of attracting greater federal financial aid. By hiring more

24The regressions were of the form: (1) pet = a + b1pet - 1+ b2transt - 1 + b3d, and (2) transt = a + b1pet - 1+ b2transt - 1 + b3d, where trans ≡ federal transfers and loans; d is a vector of year dummies; and b3 is a vector of coefficients on the year dummies.

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doctors, teachers, and the like—or not laying off those for which long-term financing was unavailable—regional politicians used the federal transfers received in a given year to create hostages who could help to pressure the federal government for transfers in the future. Higher transfers made this hiring possible, but probably left a good deal of the total for governors to divert to other uses25.

While we cannot prove all aspects of this story, a variety of evidence supports it. First, the surprising growth in the public employment share in the 1990s was clearly masterminded by regional governors more than by central officials. Education and health had been almost entirely devolved to regional and local governments, so hiring decisions in these fields were made at these levels. The number of executive branch workers in Russia (rabotniki organov ispolnitelnoi vlasti i mestnogo samoupravlenia) increased by 90,000 between 1994—the first year for which Goskomstat provides figures—and 1998. This represented a fall of 5,000 in federal officials based in Moscow, an increase of 35,000 in federal officials based in the regions, and an increase of 60,000 in regional and local officials26. (In other words, federal executive branch employees in Moscow and the regions grew by 30,000 between 1994 and 1998, while regional and local executive employees grew twice as fast.) As of 1999, there were more officials of the Moscow city government working in Moscow than there were officials of the federal government (20,163 including local government subdivisions, compared to 13,854)!27 Employment in public administration in regions other than Moscow grew by about 1.25 million workers between 1992 and 1998. Some of the increase may have been in regional branches of federal government bodies—but probably only a small part.

Second, as already noted, higher public employment from 1995 on did correlate with higher federal transfers and loans the next year. A far more comprehensive analysis would be necessary to test such a correlation for robustness, but it is at least consistent with the story told above. One reason for this channeling of federal financial aid to regions with high public employment may have been the mounting wage arrears in the public sector. Overdue wages in healthcare grew from 823 billion rubles at the end of 1995 to 3,563 billion at the end of 1998 (though they dropped a little in 1997). Those in education grew from 1,398 billion to 5,582 billion28. Both of these rates were faster than the average for the economy. Regions with higher wage arrears tended to have higher votes for the political opposition in the 1993 parliamentary election and lower votes for Yeltsin in the 1996 presidential election [Treisman 1999, chapter 4]. Also, regions with higher public sector wage arrears may have been more prone to disruptive strikes. In fact, as Table 6 shows, by 1997 strikes in Russia occurred almost entirely in the education sector.29 In 1998, 95 percent of the organizations where strikes occurred were in education; and the education sector lost 66 percent of the total time lost to strikes (see Table 6). The extent of wage arrears in education in a given region as of the end of 1997 (as a percentage of the monthly wage bill) correlated at .39 with the number of

25Freinkman and Haney [1997] find that higher federal transfers correlated during this period with higher spending on housing and heating subsidies—a form of spending that is particularly regressive, since the larger houses and apartments of the rich use more subsidized heat.

26Trud i Zanyatost v Rossii 1999, p. 96.

27Ibid, p.98.

28Ibid, p.345.

29The healthcare sector also has a very high propensity for collective protest, which was partly neutralized by strong moral pressures on medical personnel not to strike and public outrage when fatalities could be linked to strikes. Nevertheless, cases of collective actions such as strikes or hunger strikes of unpaid doctors abound.

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man-days lost to strikes per thousand employees in the region that year. (Controlling for strike losses the previous year, per capita regional product, unemployment, or various other factor renders the relationship even stronger.) Public sector wage arrears also eroded trust in the state, and may have made it easier for private employers to continue delaying wages. Earle and Sabirianova [1999] argue that the institutionalization of wage arrears facilitated their spread across the economy. So there would seem to be good reason for federal policymakers to fear the accumulation of regional public sector wage arrears.

[Table 6 about here]

And there are numerous examples of cases where the federal government provided emergency financial aid to pay such wages. Extracting such aid—with the help of striking workers—was a well-established game. For instance, in February 2000, just before the scheduled presidential election, the governor of Omsk, Leonid Polezhaev, traveled to Moscow to negotiate for aid to pay striking teachers, whose action had left 40,000 school children in the region without classes. He reportedly met with the finance minister and acting president Vladimir Putin. On arriving back in Omsk, Polezhaev’s deputy “assured the strikers that the money necessary for paying out the teachers' salaries should arrive in the oblast in the next 10 days”30.

Financial aid, when it does come, does not always go to pay the wage arrears at which it was targeted. Governors may actually have an interest in keeping some arrears. As the head of the government’s social policy department, Yevgeny Gontmakher, told one newspaper: “For some governors, it is to their benefit to maintain wage arrears, in order to ask for more funds from Moscow. Aman Tuleev is an example”31. In December 1998, the federal Finance Ministry published a list of regions it accused of “misusing federal monies allocated for wages”32. Regions that received larger transfers and loans in 1996 or 1997 did not have lower arrears in education and healthcare in 1997. In fact, the correlation was positive. (And the same was true controlling for other revenues of the regional governments that year.)

While time series for arrears and a number of other variables would be required to test this story more rigorously, there does thus seem to be some evidence that regional governments: 1) deliberately inflate public employment, 2) use the potential militancy of health and education workers to lobby for larger federal tranfers and loans, 3) deliberately create wage arrears in these sectors to invigorate such militancy, and 4) when they get larger transfers, invest part of the proceeds in inflating public employment still further.

If such a picture is accurate, it casts a somewhat different light on the epidemic of wage arrears in the Russian economy in the late 1990s. Such wage arrears have often been taken to be a sign of irresponsible or incompetent budgeting by the federal government. The growing public sector has been seen as the victory of inertia, socialist values, or central incompetence over liberalism. There may be some truth to this view. But a deeper explanation for the apparently irrational growth of public employment and public sector wage arrears may lie in the often dysfunctional game of federal politics as it has developed in Russia33. An inflated regional public sector represents a reserve of hostages that can be used by regional officials to extort aid from central politicians.

30 Institute for East-West Studies, Russian Regional Report, 5, 7, 24 February 2000. 31 “You are talented, so find money!” // Kommersant, 17 December 1999.

32Radio Free Europe / Radio Liberty, RFE/RL Newsline, Vol. 2, No. 236 Part I, 9 December 1998.

33For another argument that many of the roots of current problems in Russia’s political economy lie in the poor state of center-region relations, see OECD [2000].

36

A little arithmetic demonstrates that had regional governments not increased their payrolls so dramatically, the entire problem of public sector wage arrears could have been avoided. Total public sector wage arrears peaked in the third quarter of 1998 at 20.9 bn rubles34. Between 1992 and 1998, employment in health, sport, and social protection increased by 226,000 and that in public administration grew by 1,415,000. These additional workers, if paid at the average wage in those sectors, would have received in 1998 alone 25.1 billion rubles. Had employment in public administration and in healthcare remained at their 1992 levels, governments would have saved enough in 1998 alone to pay all existing public sector wage arrears.

VII. Conclusion

Public employment in Russia has grown quite dramatically in the 1990s, despite the economic crisis that afflicted the country, the sharp drop in tax revenues collected, and the expectation that liberalization and privatization would lead to a smaller state. Most of this increase appears to have occurred at the regional level. The increase has been greatest where unemployment was highest and growing the fastest, in ethnically defined territorial units, and in regions which received larger federal transfers and loans. Public employment did not grow faster where regions themselves collected higher revenues. Employment in public administration grew faster during the buildup to a gubernatorial election, and slowed down afterward. It also grew much faster during the buildup to the 1996 presidential election, and slowed down afterward. Thus, regional governors appear to use public employment for several purposes: as a kind of economic insurance to cushion the population against unemployment; as a way of buying votes before elections; and, possibly, as a way of redistributing to minority ethnic groups. Their willingness to use it for any of these is conditioned by the level of federal financial aid they can attract.

By reducing the flow of regional transfers, the federal government thus might be able to slow the growth of regional public employment. But such a course is fraught with political dangers, not least because existing public employees can be provoked into strikes, as demonstrated by the unusual activism of education employees in the late 1990s. At the same time, regional governors, by diverting funds and increasing public sector wage arrears, can create reservoirs of anti-center discontent, which may show up in regional voting patterns. The paradoxical growth of public employment in Russia appears less a result of ignorant or irresolute central management than a perverse outgrowth of the competitive game of federal politics, in which elected politicians try to buy votes by protecting voters from unemployment, but simultaneously use their political clients as hostages to extract finance from the central budget.

34 Russian Economic Trends, 8, 4, 1999, p. 109.

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