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Interaction between the Internal and External Labour Markets

Priority areas of development: economics

Due to a variety of economic and institutional factors, human resource management (HRM) underwent a profound and large-scale transformation in Russian companies during the economic reforms of the 1990s and 2000s. These changes were not obvious, and neither were the results. When we examine HRM policy in the context of the interaction between the internal and external labour markets, we can more fully expose and more accurately explain the nature and characteristics of this transformation.

Participants in past projects within the HSE's Basic Research Program undertook initial studies on the interaction between the internal and external labour markets, and the transformations taking place in the sphere of labor relations. These studies retain their scientific and practical significance due to new global challenges and local changes in labor relations that are occuring at the enterprise level. Thus, research on the interaction between the internal and external labour markets has been continued, with a focus on the transformation of human resource management (HRM) within Russian companies.

The purpose of the research was to develop recommendations for HRM policy, employment policy, and labor market policy, based on an analysis of transformations in company HRM. The object of the research was Russian enterprises and their HRM.

The research is based on the following data:

  • World Bank Enterprise Surveys (2002-2012), used to estimate the extent to which various factors contribute to the amount of costs borne by employers in connection with the fulfillment of employment protection legislation and the impact of those costs on company HRM policy;
  • An original survey of Russian enterprises on the interaction between the internal and external labour markets (2009-2012) was used to estimate the extent to which the internal and external labour markets serve as a mechanism of HRM flexibility;
  • The factors behind company demand for non-standard labour contracts (fixed-term employment contracts and agency work contracts);
  • Data from the Russian Longitudinal Monitoring Survey of the Higher School of Economics (RLMS-HSE)[1] (2004-2011) and the Russian State Statistics Service was used to estimate the impact of additional vocational training.

Thus, the project covered a number of interconnected topics on various company HRM issues. Similar methods and standards were used to study these topics as was a wide range of up-to-date econometrical methods and economic models. The obtained results, which were empirically tested and approved, contribute to the various research work that has been conducted on HRM in Russian companies. 

As a result of the research, we discovered that employment protection costs vary across Russian employers. Ceteris paribus, costs are higher for larger companies, industrial companies, private companies, and companies that actively fire or hire workers. Employment protection costs rise when legislation on temporary workers tightens, the minimum wage increases, legislation on working time loosens, and productivity rises (GDP per capita).

The magnitude of the costs of employment protection influence employer decision-making when a mechanism for HRM flexibility is being selected. Twice as many Russian companies are using an external mechanism for HRM flexibility as opposed to an internal mechanism. With the exception of small businesses, which are using both mechanisms at the same time, companies are employing external and internal mechanisms of HRM flexibility as substitutes.

It is believed that the more Russian companies use external mechanisms for HRM flexibility, the less likely they are to provide their employees with on-the-job training. Such companies are open to the impact of external markets and their HRM policy is focused more on hiring external workers who can hit the ground running, than on raising the qualifications of their own personnel. But, our findings show that companies actively providing on-the-job training are using non-standard labour contracts more often, and that the return on the investment in on-the-job training is positive and comparable to the return on a university education. Thus, Russian companies are using fixed-term (student) labour contracts for the selection of external candidates and to adapt to fluctuations in demand, by dividing workers and positions into two segments: primary jobs and secondary jobs. The return on 'in-house' training is greater for high-skilled workers, who go through training more often and occupy primary jobs. The internal labor markets in such companies are more segmental than other companies' internal labour markets.

The results of this project were published in journals and collections of articles (six articles and four preprints), discussed at seminars and conferences in Russia and abroad, and used as educational materials.

Federal and regional authorities can implement the results of this research to develop policy measures within the framework of employment and industrial policy. The results can also be used by the Ministry of Labour and Social Protection (Mintrud) to develop policy measures within the framework of “Population Employment” and “Labor Relations Policy”; and by the Ministry of Economic Development (Ministry of Economics) to monitor, analyse, and develop socio-economic policy measures for the Russian Federation, and for certain industries. Furthermore, the results can be implemented by companies to improve their HRM policy.


[1] The RLMS-HSE is conducted by the National Research University Higher School of Economics and ZAO “Demoscope” together with Carolina Population Center, University of North Carolina at Chapel Hill, and the Institute of Sociology RAS (more at http://www.hse.ru/en/rlms/).


Травкин П. В. Дополнительное профессиональное образование в России: влияние на заработную плату работников // Вестник Воронежского государственного университета. Серия: Экономика и управление. 2013. № 1. C. 111-118. 
Смирных Л. И. Соотношение внутренней и внешней гибкости труда на российских предприятиях, in: Системное моделирование социально-экономических процессов: труды 36-й Международной научной школы-семинара, г. Воронеж, 29 сентября – 4 октября 2013 г.. Воронеж : Издательский дом ВГУ, 2014. С. 43-52. 
Smirnykh L. I., Woergoetter A. Why Do Russian Firms Use Fixed-Term and Agency Work Contracts? (2) / Organisation for Economic Co-operation and Development. Series ECO/WKP "OECD Economics Department Working Papers". 2013. No. 1014. 
Smirnykh L. I., Woergoetter A. Why Do Russian Firms Use Fixed-term and Agency Work Contracts? / Institute for the Study of Labor. Series IZA DP "Discussion Paper". 2013. No. 54. 
Solntsev S. Senior management labor market: from economic growth to crisis. The case of Russia / Высшая школа экономики. Series MAN "Management". 2013. No. 10.