How was the Ukrainian labour market operating before the Russian invasion? What has been the impact of the war on workers and firms? What can recent conflicts in Central and Eastern Europe tell us about the brain drain associated with refugee crises? Hoping that the war is over soon, what should be done next? In our contribution to the CEPR book, Rebuilding Ukraine: Principles and Policies (Gorodnichenko et al. 2022), we discuss these issues and provide some tentative answers (Anastasia et al. 2022).
Even before the war, the Ukrainian labour market had structural weaknesses. These included a high unemployment rate (9.9% in 2021) and low labour-market participation (ten base points lower than the OECD average), especially for women (56% versus 68% of men in the 15–70 age group). About one-sixth of employment was in agriculture, while one in five people worked in the informal sector. Long-term unemployment also contributed to a decline in effective labour supply: one out of four unemployed people had been receiving government money for more than 12 months.
Matching workers and vacancies was difficult, inducing a shift out of the Beveridge curve (National Bank of Ukraine 2022).
Figure 1
All this was occurring against a demographic background of an aging population and low fertility rates, implying a rapidly shrinking labour force, as noted for example in Gladun (2020). In the early 2000s, Ukraine had one of the world’s lowest fertility rates and was experiencing sizable outmigration (Libanova 2019).
The pandemic made the situation worse. The pandemic-related restrictions imposed in 2020–2021 on trade, transport, and services, as well as uncertainty about the spread of the contagion, induced strong declines not only in the demand but also the supply of labour. Strict quarantines had a negative impact on employment dynamics and incomes: the poverty level in Q2:2020 increased by 24.5% year-on-year (Libanova 2021).
The Russian invasion in February 2022 disrupted the Ukrainian labour market, causing an overall shrinking as well as a huge mismatch – geographic and sectoral – between labour supply and demand.
On the workers’ side, the exodus of human capital was unprecedented: the war forced more than a third of Ukraine’s population (estimated in 2021 at 41 million) to move. About 5.9 million people are currently internally displaced (IOM 2022), while more than 7.9 million are refugees abroad. This is the largest migration crisis in Europe since WWII (UNHCR data), with women and children accounting for almost 90% of the refugees. Nearly 5 million refugees are registered in the EU under the Temporary Protection Directive, a measure that allows them to choose their destination country and work there immediately, producing a more balanced distribution of refugees than in previous waves (see Figure 2). Compared with other conflict-caused migrations, the UNHCR (2022) survey shows that the majority of adult refugees have a higher education (70%) and had a job before leaving (63%), while a sizable share of refugees have already gotten a job and sent their kids to schools in receiving countries.
Figure 2
Businesses also had to move, often in a different direction than workers. Surveys of small and medium-sized Ukrainian enterprises show that, as of November 2022, about one-third of firms had completely or almost completely stopped production, while another 50% had reduced capacity (see Figure 3). The indirect effects of the war must also be considered, including the disruption of value chains, infrastructural damage to workplaces and transportation routes, and changes in product demand.
Figure 3
The experience of Central and Eastern European countries involved in conflicts in the recent past (Bosnia-Herzegovina, Georgia, Kosovo, etc.) tells us that war has long-term negative effects on the health and human capital of the labour force, and that it is very difficult to reintegrate those who left to escape the conflict and then decided to return after the war. On the long-term consequences of war, see also Koczan and Chupilkin (2022).
Thus, reconstruction should combine a mix of emergency measures dealing with the legacies of the war and structural reforms addressing the pre-existing inefficiencies of the Ukrainian labour market. Looking ahead to when the war is over, four main avenues of policy intervention are warranted.
Investing in human capital for the future
The pandemic and the war have created huge gaps in educational attainments, as schools have frequently been forced to close, resorting at best to distance learning. Remedying the gaps in education accumulated over the last three years should be a priority in the reconstruction of Ukraine (with programmes such as tutoring, mentoring, after-school activities, summer camps, etc.).
At the same time, the war destroyed millions of jobs, some of which will not come back. Therefore, retraining workers will be crucial, facilitating their reallocation to the sectors that will likely be the most active in the post-war period (construction, engineering, health, IT).
Making better use of existing human capital
It will be important to encourage women’s participation in the labour market, while simultaneously supporting childbearing (i.e. strengthening childcare infrastructure). The spread of youth unemployment can be tackled drawing on the German tradition of tertiary education (Fachhochschule).
Integrating internally displaced people into local labour markets will pose another challenge. These people have lost both physical capital and their social networks. Repeated transfers (to avoid poverty risk) and one-shot transfers (to facilitate access to credit and stimulate business restarts) should be put in place, along with subsidized employment (i.e. in public works) and job-search assistance programmes. For those who moved to regions that lack jobs with their specialties, re-training programmes can be very helpful.
Protecting the most vulnerable groups
In such a difficult environment, losing a job can have serious consequences (see Djankov and Blinov 2022 for a preliminary assessment of job loss trends during the war). Thus, unemployment benefits should be reformed by expanding partial unemployment insurance: measures that allow recipients to combine benefits with low-income jobs.
War veterans could number as many as a million people when the conflict ends. Evidence suggests that returning to civilian life is not easy: ad hoc measures will have to be put in place (tax credits for those who hire them, training subsidies, etc). Though large-scale early retirement is not feasible in light of the demographic transition, limited bridging schemes to retirement can be envisaged through an extension of unemployment benefits for some older workers with obsolete skills.
Particular attention should be paid fragile workers. The number of people physically injured by the war continues to grow, and the psychological legacies of the conflict will be severe. In the reconstruction process, job opportunities and infrastructure suitable for people with disabilities, together with psychological support programmes, should be provided.
Promoting the return of ideas, if not people
The major population loss Ukraine has suffered may not be temporary. The longer the war goes on, the greater the likelihood that refugees will remain in host countries even after the conflict is over. Nevertheless, significant interactions between refugees and the labour force in Ukraine are possible: remote working and geographic proximity (the largest share of the refugees, according to UNHCR data – 1.6 million of those registered for temporary protection – are in Poland) can alleviate the magnitude of the brain drain associated with the migration of skilled workers. The largest increase in exports from the former Yugoslavia has been registered in the sectors with the highest percentage of refugees in Germany (Rapoport 2023). The pandemic has expanded remote work: this may be an additional way of bringing back to Ukraine some of the human capital lost during the conflict and not physically repatriated.
These policies should be carried out with technical and economic support from the EU. Indeed, in the aftermath of war, the EU’s role in Ukraine’s recovery will be essential to many different fields (see for example Rogoff and Movchan 2022 on trade and foreign direct investment). The process of Ukraine’s accession to the EU can stimulate, as in past EU enlargements, a major improvement in the quality of institutions in Ukraine. Some policies will also need to be financed by the EU, via the extension of programmes such as SURE (temporary Support to mitigate Unemployment Risks in an Emergency). Progress in implementing these policies will need to be continuously monitored, as equipping Ukraine with a dynamic and modern labour market is in the interest of the entire continent.
References
Anastasia, G, T Boeri, M Kudlyak and O Zholud (2022), “The labour market in Ukraine: Rebuild better”, in Rebuilding Ukraine: Principles and Policies, CEPR Press, pp. 283–321.
Djankov, S and O Blinov (2022), “Ukraine’s wages and job loss trends during the war”, VoxEU.org, 17 November.
Gladun (ed.) (2020), Population of Ukraine. Demographic trends in Ukraine in 2002–2019 (in Ukrainian) Населення України. Демографічні тенденції в Україні у 2002– 2019 рр.: кол. моногр. / за ред. О.М. Гладуна; НАН України, Ін-т демографії та соціальних досліджень імені М.В. Птухи. Київ: 2020.174 с.
Gorodnichenko, Y, I Sologoub and B Weder di Mauro (2022), Rebuilding Ukraine: Principles and Policies, London: CEPR Press.
Gradus (2022), Social Screening of Ukrainian Society During the Russian Invasion – the twelfth wave of the study, October.
IOM – International Organization for Migration (2022), Internal Displacement Report — General Population Survey Round 11, 25 November – 5 December.
Koczan, Z and M Chupilkin (2022), “The economic consequences of war”, VoxEU.org, 14 December.
Libanova, E (2019), “Labour migration from Ukraine: key features, drivers and impact”, Economics and Sociology 12(1): 313–328.
Libanova, E (2021), COVID-19: 2020 socio-economic losses and potential risks (in Ukrainian) Лібанова, Е. М. (2021). COVID-19: соціально-економічні втрати 2020 року та потенційні ризики. Вісник Національної академії наук України, (6), 42–46.
National Bank of Ukraine (2022), “Inflation Report”, Labor market and household income, January.
Rapoport, H (2023), “Labour market access for Ukrainian refugees”, VoxEU.org, 9 January.
Rogoff, K and V Movchan (2022), “Reconstructing Ukraine: Trade and foreign direct investment”, VoxEU.org, 18 December.
United Nations High Commissioner for Refugees (UNHCR) (2022), Lives on Hold: Intentions and Perspectives of Refugees from Ukraine #2, September.
