Russian Wages Are Fast Converging To Western Levels

Via The Economist, I’ve come across some fascinating research by Orley Ashenfelter and Stepan Jurajda (Comparing Real Wage Rates, 2012) showing how real wages can be meaningfully compared across different regions by taking notes on prices and wages in McDonald’s restaurants.

The methodology seems solid. Big Macs are a very standardized product, hence they are already used in the so-called Big Mac Index to assess international price differences (and whether currencies are undervalued or overvalued) and REAL wage rates (prices tend to be lower in poorer countries, mitigating the effects of lower nominal wages). By combining these two measures, you can derive the quantity of Big Mac a McDonald’s worker can buy through one hour of his labor (BMPH). This in turn is a good proxy for real median wages, i.e. the life of the average Joe and Ivan in comparative perspective. While we might not want to people to buy too many Big Macs it’s a positive thing if they can actually afford to.

The results for Russia are stunning, and no doubt go a very long way why Putin has retained 70% approval ratings since 2000. Russia’s BMPH increased by 152% (!) from 2000 to 2007, and a further 43% through to 2011, leaving all other economic regions in the dust, even despite a sharp recession in the latter period. The only major region with a comparable performance is China. In contrast, the BMPH has stagnated throughout the developed world since 2000; and Not So Shining India joined them from 2007.

During the boom years of 2000-2007, real wages for lower-class workers appear to have risen sharply in Russia, China, and India; while stagnating or declining in Japan, the US, and Canada.

Furthermore, the MBPH continued rising sharply in Russia throughout 2007-2011, despite a very deep recession; and to a lesser extent, in China and the rest of Eastern Europe. Two of the BRICS, India and South Africa, had very deep declines.

The result of this growth is that even by 2007, the Russian BMPH was already at about 50% of West European and American levels; while its wages were still much lower, this was mitigated by concurrently low prices for its Big Macs.

Another noticeable thing is that the effects of higher West European minimum wages disappear as they are mitigated by higher Big Mac prices relative to the US. As a result real wage rates across the developed world seem to be remarkably similar, with Japan’s somewhat higher. But Japan too would converge by 2011.

BMPH 2000 BMPH 2007 BMPH 2011
U.S. 2.59 2.41 2.19
Canada 2.41 2.19 2.06
Russia 0.47 1.19 1.70
South Africa 0.81 0.56
China 0.36 0.57 0.71
India 0.23 0.35 0.30
Japan 3.03 3.09 2.22
The rest of Asia 0.53 0.50
Eastern Europe 0.8 0.86
Western Europe 2.23 2.12
Middle East 0.39 0.39
Latin America 0.35 0.36

Using data on BMPH growth rates from the original publication, I calculated the BMPH for 2000 and 2011 in addition to 2007 to get the figures above.

This shows the BMPH for 2000, 2007, and 2011 for each major economic region. What’s remarkable is that even in many of the countries lauded as “emerging markets” there was hardly any visible progress, and in a few cases, outright decline.

But what’s most fascinating is how Russia, whose economy has never received much in the way of praise, has emerged from Latin American-like destitution in 2000 to perch fairly close to the BMPH of the US, Canada, Japan, and Western Europe by 2011. If that is not an “economic miracle” then I don’t know what is.

This convergence is reflected in many other aspects such as Internet penetration (now equal to Greece and Portugal), new car sales (Czech Republic), GDP in PPP terms (Poland). Furthermore, as the MBPH directly reflects the earnings of lower income workers, it implicitly accounts for the relatively high – but by no means exceptional – levels of inequality in Russian incomes.

That said, the finding that Russian real incomes (as per the BMPH) are now at about 80% of American and West European levels has to be treated with some caution. After all, the Big Mac is domestically produced, but to buy stuff like quality cars or take foreign holidays you have to pay international prices which are far higher than Russian domestic prices. E.g. only 8% of Russians will vacation abroad in 2012 (5% if you just include the ex-USSR Far Abroad), compared to 20% of Americans.

As shown in the graph above, originally compiled by Sergey Zhuravlev, Russian consumption of food products, meat, fish, milk, and fruit is now essentially equal to US and West European levels. (Consumption of tobacco and alcohol is unfortunately significantly higher). But spending on clothing, housing, furniture, healthcare, transport, holidays, and restaurants is below 50% of US levels, even after accounting for price differences. (The situation vis-a-vis Western Europe is slightly better).

On the one hand, this means that whereas Russians now have full bellies, the country still lags on life’s perks and luxuries – most especially on restaurants and holidays. On the other hand, it may well presage strong growth in the years to come as Russia during the past decade has laid the base for a rich consumer society.

  • kirill

    What this demonstrates is, for lack of an actual term, “economic capacity”. It appears that India, South Africa and other developing nations lack this capacity. Parts of their economies are developing but from the wages it appears that they are saturating at low levels as if hobbled by other factors or lack of capacity. I would suggest that hobbling factors in Russia such as corruption and the alleged lack of sufficient structural reforms are not at levels that they are deemed to be. I am not aware of any economy where real wages are soaring without real GDP growth. Alex asked the question on Mark’s blog if Russia’s GDP growth is understated. Maybe it is.

    • Albo

      There is the huge discrepancy between the World bank figures and IMF’s and others. Haven’t found yet an explanation for that one.

      • AK

        The World Bank (and OECD’s) figures are more up to date, being based on a more recent revision. That’s the difference.

      • kirill

        If one does a search using Google most hits regurgitate the CIA “factbook” rubbish. I recall there was a very large discontinuity in the CIA figure for Russia’s GDP around 2003 (+/-) that had no rhyme or reason. Basically it looked like some deliberate lowballing of Russia’s GDP to punish evil Putin.

        Both the IMF and World Bank engage in BS when discussing Russia’s economy. The World Bank invokes some mythical 10% budget deficit minus the oil and gas revenues. I wonder what they would do in the case of Saudi Arabia: does it have an infinite % budget deficit without oil revenues? In their PDF overview of Russia they have a graphic which compares the GDP performance after 1998 and after 2008. There was robust growth coming out of the 1998 meltdown over a span of two years but Russia’s GDP only recovered its pre-meltdown level in this time span after 2008. This is an example of a pointless comparison. They really should compare Russia’s recovery after 2008 to the Baltic “tigers” and to OECD states. Russia mops the floor with all of them. Russia in 1998 was very different from 2008 and the unique situation in 1998 where the collapse of the GKO pyramid scheme devalued the rouble and led to a resurgence of Russian domestic production, which was withering under Yeltsin’s monetarist voodoo economics, is not likely to be repeated.

  • Albo

    The end of your post present the necessary caveat that this index is significant as far as domestic prices are concerned, in other word the Big Mac Index isn’t the “Apple index” or any other globalized products on which consumers want to spend their wealth. Afaik, PPP economic figures are caclculated through the comparison of a basket of goods, and I assume they include some imported products too, but this will necessary be imprecise and flawed given that in each country people would buy some specifics goods that don’t exist or aren’t in demand elsewhere therefore at some point it’s comparing different things.

    I hope this study can help clarify the aforementioned discrepancy though, if we can harmonize it with the level of imported goods in Russia (about which I often hear authorites complain that it’s too high). May be some day international institutions reach some sort of consensus about the riddle wrapped in a mystery inside an enigma…

    • Albo

      Oops just seen your answer Anatoly. Here’s to hope IMF will update then

      Because two month ago they still refused to make the correction…

      • kirill

        I prepared the table of GDP figures for Russia at the IMF site and clearly see a heaping steam of nonsense. They claim that Russia’s nominal GDP in roubles will be growing under 4% per until 2017. They need to get off the crack at the IMF. Look at Russia’s nominal rouble GDP growth during the last 10 years and it has been growing more than 10% per year. This is not the real GDP growth rate which is lower but the IMF stooges are seriously mixed up if they apply the real GDP growth rate to the nominal growth rate.

        There is still plenty of room for monetization in Russia’s economy so expect large money supply increases and large nominal rouble GDP values. According to the monetarist voodoo economics theory Russia should have been in total hyperinflation by now as it has seen 50% annual money supply increases after 1998. Yeltsin’s Harvard crew all pushed for fiscal austerity in a severly under-monetized economy. This resulted in non-cash aka barter trade due to the massive shortage of the national currency. This insanely destructive policy was replaced in 1998 when Primakov became prime minister and the “era of market romanticism was over”. Subsequent governments applied the proper macro economics policy and grew the money supply to reflect the real size of the economy. This was not Pancho Villa’s printing press “revenue”. The Russian money supply is still growing at a rapid clip because the monetization has not reached equilibrium.

        • Dear Kirill,

          I remember all this very clearly. Both in 1992 and in 1998 various Russian specialists were trying to explain the lack of monetisation in the economy and of the problems this was causing and of the urgent need to increase money emission and the size of the monetary base. All this fell on deaf ears in the west and amongst the claque of liberal economists Yeltsin and Gaidar had collected around themselves. Viktor Gerashchenko, the brilliant Central Banker, whose actions prevented the economy’s total collapse in 1992 and who played a key part in its revival after 1998, got branded “the world’s worst central banker” for his pains when he acted on this. Indeed I remember clearly western pundits confidently predicting after the rate of money emission was increased in 1998 that the economy would collapse and that Weimar style hyperinflation was round the corner. This came notwithstanding the fact that it was their own recommendations that were causing the inflation that already existed. I have always felt that one of the major reasons so many of these people hate Russia so much is because it proved them wrong.

          For the rest I would say what I have said before, that I have previously noticed that your views on economics and mine are very similar.

  • AM

    “On the other hand, it may well presage strong growth in the years to come as Russia during the past decade has laid the base for a rich consumer society”

    And hopefully this growth will be paid for by increasing wages, not by increasing household debt.

    • yalensis

      That’s a good point, @AM. Does anyone know if levels of Russian credit card debt (or mortgage debt) have gone up? If so, that could be bad news, to counter this otherwise good news about improvement in Russian standard of living. There is an acceptable level of consumer debt, but above that expect trouble.

      • kirill

        The Russian personal loan market is highly under-developed. So there is no similarity to the US with its credit card economy and disappearing high paying jobs.

        BTW, this Big Mac type of index is consistent with the factor of 8 increase in Russian wages since 1998 in dollar terms. They are about $800 per month which is not trivial considering that for most people there are no mortgage of even rent payments, just apartment utilities and taxes. In Moscow the wage average in 2010 was about $1300. The most interesting part is that the wage growth did not stall after 2008. So the economic contraction in Russia must have been soft and as indicated by the foreign trade turnover it recovered in under 2 years.

        I think there is a problem evaluating the size of Russia’s economy. After the Soviet collapse many industries operated on barter and even though the bulk of the economy has monetized by now there are some portions that are still operating at non-market prices. I highly doubt that the PPP GDP goods basket includes various defense industries. So the chunks of the Russian economy are underestimated even based on PPP. Over time these sectors are monetizing and adopting market pricing. Of course there is also real GDP growth as the consumer economy matures.

  • Branko Stojanovic

    It’s not such a good thing that wages are growing much faster than GDP in Russia. 5 years ago Russia needed oil price 0f 40$ per barrel to balance budget, now it needs price over 90$. If there is again fall of price like in 2008. there will be a big problem. Russia is unfortunately still just commodity export economy.

    • AM

      Actually some economists (Kudrin for example) make an ergument that if oil did stay very low Russia would diversity, it didn’t because of “duch disease”

      • Branko Stojanovic

        He is probably right. But not if it stayed to low like in 90’s.

  • Dear Anatoly,

    As I once said on your Facebook page, it is surveys of this sort that almost make one forgive the Economist for all the nonsense it writes elsewhere. That there has been a Russian miracle there is no doubt. Its scale is every bit as comparable to that in Germany in the 1950s.

    @ Branko, On the subject of the Russian budget and oil prices, this is a separate question from the question of the growth of Russian wages discussed in the article. Again I am wholly with Kirill on this issue. The point to grasp about the Russian budget is that it is balanced and that Russia has accumulated substantial reserves to cover any disturbance caused by oil price falls, which are anyway likely to be temporary. It would be preposterous for Russia not to put its oil and gas revenues to use given that it receives them. I cannot think of any other country where such a bizarre proposal is seriously suggested or where so much time is spent discussing a problem that so far does not exist.

    @ AM, On the Dutch disease, there may be some truth to it where Russia is concerned but if so very little. Russian industry has in fact expanded substantially since the crisis of the 1990s and that expansion continues. Mostly it produces for the domestic market, which given Russia’s size is very large. Possibly it might have developed more quickly if the oil price had been lower but this is difficult to prove one way or the other. What I do think is more likely is that if the oil price and with it the rouble’s value do fall Russian industry will be in a better position to take advantage of it than it was in 2008 because it is less reliant now on foreign borrowing than it was in 2008. I had a Russian visitor with me in London this weekend who is an executive in a Russian industrial company and he told me that his company has in fact already seen some benefit from the fall in the rouble’s value over the last few weeks.

  • An interesting summary of an interview given by a former Estonian Prime Minister, who says that what Estonia should fear most is not Russian tanks but the loss of the “big and rich” Russian market.

    Could it be that he too has read the article in the Economist?

    • Russiawatchers

      Sad thing is that he only makes this claim whilst already doing something different. Would have been better if he had said it during his term. Still, I would call it progress.

  • Mr. X

    In other news, @ReginaldQuill is shocked, shocked that Islamists in the Syrian National Council want to go after Israel after seizing power in Damascus. Sens. John McCain and Lindsey Graham were not contacted for comment.

    AK: Please stop posting about Reginald Quilt. No-one is interested. See Rule 8.

    • Mr. X

      Ok. Court appointed friendly 🙂

  • Branko Stojanovic

    Falling oil prices are threatening to undermine Russia’s plans to set aside 800 billion rubles ($24 billion) for its anti-crisis mechanism this year, the country’s finance minister said on Saturday.
    “We intended that this money go toward increasing the Reserve Fund, but as oil prices are diminishing, this is not likely to happen,” Anton Siluanov told reporters in St. Petersburg.

    • kirill

      It’s funny how oil price drops are assume to be sustained. The large mix of high extraction price oil on the market will ensure that any large price drop will be followed by a major shortage driven price spike. Tar sands and deep offshore don’t keep flowing if the oil price drops below $70 dollars per barrel. Meanwhile the annual depletion rate at existing oil fields is 6.7% per year according to the IEA.

  • Leon Lentz

    I think US figures are taken before taxes and Russia doesn’t tax salaries, so one should either halve US index or double Russian one. If you add various fees and insurances in US for services which are very cheap or free in Russia, you may get a rough parity.