Thematic Report - The Changing Face of Employment in Ukraine: Challenges and Opportunities
Cover photo: Anna Shvets
Introduction
As of August 2023, a year and a half after the start of Russia’s full-scale invasion of Ukraine, the country’s southern, eastern and northern oblasts remain either frontline combat zones or are experiencing significant, ongoing difficulties in recovering from occupation. In addition to the war’s devastating impact on populations that have been forced to flee, losing both their livelihoods and homes, many businesses have also been severely affected by the conflict.
Many businesses have drastically reduced operations – as of late January 2023, according to independent research, 26.5% have completely or nearly ceased their business activities, while another 50% have scaled back their operations. Micro-businesses have been hardest hit: nearly 40% of micro-businesses have shuttered or are close to doing so, against 9% of small and medium-sized businesses. Between the start of the full-scale invasion and July 31, 2022, almost 80,000 businesses closed. This is nearly triple the figure for the same period in 2020 and 2021.
Businesses that remain open operate in a highly uncertain environment, coping with broken value chains, disrupted logistics, severed export/import connections and weakened end markets. The impact on the job market has been equally severe. The National Bank of Ukraine (NBU) estimated that the unemployment rate in January 2023 was around 26% (3.2 million people) and has predicted a weak labor market due to the war’s long-term effects. Residents are struggling to find additional sources of income amidst soaring unemployment, runaway inflation and salary cuts (by up to 47%). These lead to an increased reliance on government assistance and humanitarian aid, which is much more prevalent among internally displaced persons (IDPs) . According to the International Organization for Migration (IOM), in June 2023, 28% of IDP households relied on various forms of social benefits.
Those regions directly affected by the war are the country’s top industrial and agricultural centers, employing hundreds of thousands of workers in both urban industrial centers – including the major cities in the Dnipropetrovsk, Zaporizhzhia and Donetsk oblasts – and more rural areas, such as the Mykolaiv and Kherson oblasts. Russia’s military blockade of the Black Sea ports of Mykolaiv and Odesa has disrupted the primary export route for both industrial and agricultural production.
In addition, since October 2022, regular Russian shelling of critical energy infrastructure has led to large-scale power outages. This in turn has complicated access to other basic needs such as clean water, heating and healthcare. Strikes on local energy infrastructure have prevented reconstruction work, which severely limits livelihoods.
Prior to the war, nearly a third of Ukrainians lived in rural areas. They were dependent on agricultural production for work; farming was also the source of tax revenues that paid for basic social services, including schooling, healthcare and infrastructure. The war has upended agricultural production across most of the country. Farmers have been forced to salvage their harvests, coping with the challenge of finding new ways of selling products and planning for future growing seasons amidst uncertainty and a lack of information.
The majority of Ukraine’s producers operate small-scale, household-level enterprises, which have been the first and hardest-hit by these shocks. In response, small producers in unoccupied areas are trying to reduce costs and losses primarily by cutting back on the use of fertilizers and pesticides, switching crops and reducing areas under cultivation. A decline in agricultural production will lead to an increase in both on- and off-farm unemployment and increased migration to the cities.
The June 6 destruction of the Kakhovka dam brought with it a new set of challenges. It displaced thousands of people, cost tens of thousands more their livelihoods and deprived millions of access to clean water. The NBU has calculated that the destruction of the Kakhovka hydroelectric power plant (HPP) will decrease the country’s GDP by 0.2% and boost inflation by 0.3%. These figures can be attributed to additional challenges for industrial firms, partial loss of the harvest, damaged or destroyed irrigation systems, loss of property and production facilities in flooded areas, and potential increased migration. Although the flooded area is relatively small, numerous irrigation systems are powered by such hydroelectric plants. In southern Ukraine, irrigation is crucial due to the arid climate, and vegetable farms are heavily reliant on it. The explosion at the Kakhovka HPP deprived 94% of the irrigation systems in Kherson Oblast of water; for the Dnipropetrovsk and Zaporizhzhia oblasts, this figure was 74% and 30%, respectively. In the short term, reduced water consumption will also have a negative impact on metallurgical plants, especially in the major industrial cities of the Dnipropetrovsk and Zaporizhzhia oblasts, as well as on agricultural and food processing companies in the country’s southeast. This will have a knock-on effect on the livelihoods of the local populations in the affected area.
Methodology and Constraints
This report is based on primary and secondary data collected in April–July 2023. The Crisis Analysis Team in Ukraine (UACAT) conducted 49 key-informant interviews (KIIs) with small and medium-sized businesses and agricultural producers from across the country (Donetsk, Dnipropetrovsk, Zaporizhzhia, Kherson, Mykolaiv, Odesa, Cherkasy, Vinnytsia, Kyiv, Chernihiv, Zhytomyr, Ternopil, Ivano-Frankivsk and Lviv oblasts), Ukrainian officials at local, oblast and national levels and representatives of national and international non-governmental organizations. Extensive desk research was conducted to support the KIIs, reviewing and analyzing reports by other national and international NGOs and international organizations, the Ukrainian government’s development strategy, reports by the Ukrainian Business Ombudsman Council and media reports.
Key Findings
Heavy industry, trade, agriculture, services and construction are the main economic pillars of those regions most directly affected by the war, and all have experienced difficulties following the start of the full-scale 2022 invasion. Heavy industry, due in large part to its limited ability to relocate, has suffered the most during and after the invasion, leaving many unemployed. Trade and agriculture have also struggled due to the war, while the service industry has been the most successful at adapting to the new circumstances.
Prior to the full-scale invasion, the heavily industrialized and urban Donetsk, Dnipropetrovsk and Zaporizhzhia oblasts (with urbanization levels that range from 77 to 90%) accounted for about 20% of the country’s GDP. Heavy industry, including metallurgy, coking, chemical plants and coal mining, was a leading contributor to the oblasts’ economy.
According to data gathered from applications submitted by IDPs seeking self-employment assistance in Dnipropetrovsk Oblast, 61% of applicants reported that they had suspended their business activities because of the conflict’s escalation. Additionally, 58% of applicants experienced loss or damage to their equipment and/or productive assets, while 26% lost their markets due to the war and displacement. The average monthly income from business activity decreased by 77% compared to pre-war levels.
According to the same dataset, the average monthly household income for applicants who were displaced from Donetsk to Dnipropetrovsk Oblast (47% of total applicants) decreased by 61% to ₴13,200 ($357). Nearly half of all applicants reported that their household’s average monthly per capita income was under the minimum subsistence rate. The average monthly household income decreased by 58% for men, while that of female applicants fell by 63%. Prior to the invasion, women on average earned 35% less than men in Donetsk Oblast.
In Dnipropetrovsk Oblast, a top-level official indicated that heavy industry is currently operating at 30% of its prewar capacity. Zaporizhzhia Oblast’s industrial complex – a primary source of employment and taxes – has suffered the consequences of both Russian military aggression and knock-on political and economic aftershocks. According to regional authorities interviewed in January 2023, most large and medium-sized enterprises were operating at 40–50% capacity. The Zaporizhzhia Ferroalloy Plant, steel manufacturer Zaporizhstal, coke manufacturer Zaporizhcoke and the Dniprospetsstal steelworks have either ceased operations due to logistical issues or reduced their output. These four plants once employed nearly 19,000 people.
Trade, which previously employed 29,000 people or 9% of the pre-invasion workforce in Zaporizhzhia Oblast, has also suffered from disrupted logistics and market chains as well as decreased purchasing power, but its decline has not been as dramatic as that of heavy industry. According to retailers interviewed during KIIs in Dnipropetrovsk Oblast, although consumers switched to cheaper products, the arrival of hundreds of thousands of IDPs and members of the military kept quantities high and profit margins remained at almost pre-invasion levels.
The economies of both Mykolaiv and Odesa oblasts were heavily dependent on trade and export. Before the full-scale invasion, Ukraine’s largest commercial port in Mykolaiv – where in 2019 grain shipment volumes exceeded 12 million tons – generated 80% of the oblast’s revenue. The port was damaged during hostilities and will likely remain out of commission for the foreseeable future. This has affected the ability of Nibulon, one of Ukraine’s largest agricultural companies, and companies like it, to continue employing over 7,000 people.
The service industry is the most thriving sector in Dnipropetrovsk Oblast, which is currently hosting over 600,000 IDPs, tens of thousands of members of the military and the offices of a number of international and national aid organizations. Hotels, restaurants, hairdressing and beauty salons and cleaning services are in high demand. According to KIIs conducted in Dnipropetrovsk Oblast, Covid-19 had a greater negative impact on the service industry than the current conflict. Although smaller service providers have been able to adapt, many need additional funding to start, restore or expand their businesses.
In Mykolaiv Oblast, small retail and service sector businesses have resumed operations as of early 2023. Sixty percent of companies have already restarted production, but at a significantly diminished capacity. Some 70–80% of local hotels, restaurants and cafés have reopened, as well as 50% of commercial enterprises.
The Labor Market and Vocational Training Opportunities
The shortage of qualified labor, which existed prior to the invasion, is becoming increasingly acute. Due to the displacement of skilled workers, primarily women, and mobilization needs (up to one million men nationwide), there is a shortage of blue-collar workers. Findings suggest that skilled workers are in high demand everywhere, including drivers (especially tractor and truck drivers), electricians and mechanics. Potential employees stated that they needed professional training for such jobs.
State officials and businesses told UACAT that IDPs are less likely to attend vocational training as it requires a time commitment and a certain amount of savings. According to the IOM, only 15% of IDPs plan to remain and fully integrate and 66% want to return to their original regions. This observation was confirmed in western Ukraine. In Lviv, for example, of the 2,500 people who have applied for tractor operator courses, only 63 are IDPs, or about 2.5%. Changing specializations is time-consuming and IDPs often do not want to commit to this. IDPs are more likely to accept jobs with lower-level qualifications in order to earn a living in the short term, and displaced men are more likely to find jobs than women. According to a study by the IOM, 45% of men stated that regular wages were the main source of their household’s income, compared to 34% of women.
Business Relocation
The majority of Ukrainian businesses in affected regions did not relocate, and this is especially true for small and micro-businesses, which are more likely to be owned by women. Overall, 80% had not relocated as of January 2023, according to the DIIA. Similar numbers were observed by Kyivstar Business Hub, which concluded that only 6% of small firms and 8% of micro-businesses relocated (compared to 15% of all large firms). Only a few companies with over 500 employees have moved, and some of these have only partially relocated. According to Ukraine’s Ministry of the Economy (Berezhna, Tetyana. 2023. “За рік війни в більш безпечні регіони релоковано 800 підприємств.” [During the year of the war, 800 enterprises were relocated to safer regions] Minister of the Economy of Ukraine. March 2, 2023.), the majority of relocated businesses moved to western Ukraine, with Lviv Oblast receiving nearly a quarter of these.
As the frontline becomes increasingly stable, Ukrainian businesses are gradually losing interest in relocation. In March 2022, 1,266 enterprises filed relocation applications requesting government assistance. By June of the same year, the number of applications had fallen sixteen-fold. From January to March 2023, only a single application was received for relocation from the combat zone to Ternopil Oblast, two to Ivano-Frankivsk Oblast and eight to Lviv Oblast. Many businesses have returned to their original locations as the security situation stabilizes, a trend that can be expected to continue. According to local authorities in Lviv Oblast, approximately 20% of relocated firms have returned, especially those from Kyiv Oblast. In Ivano-Frankivsk Oblast, the return rate is 30%. In Ternopil city, most companies have returned to their previous places of activity, though some still use Ternopil for warehousing. According to local authorities, more than 30% of relocated businesses are prepared to remain in Lviv Oblast. Concurrently, a City Institute survey revealed that only 20% of IDPs plan to stay on permanently in Lviv Oblast.
Agricultural Livelihoods
Prior to the full-scale invasion, Ukrainian agriculture officially employed three million people, or nearly 20% of the country’s labor force. As there are no official records of informal employment, the figures are likely much higher, and this sector indirectly provides livelihoods for many more Ukrainians in rural areas. UACAT’s findings indicate that, due to traditionally lower income levels, with less assistance provided to such remote locations, rural populations are more in need of help.
Small and medium-sized producers – including individual households or family farmers – are responsible for 50% of the country’s agricultural production. There are more than four million households (each with an average of 2.8 hectares of land under cultivation) that produce food both for their own needs and to sell. They cultivate 38% of the agricultural land in Ukraine and produce almost 41% of the country’s gross agricultural product. They dominate livestock production (with the exception of poultry). In 2018, there were 30,441 medium-sized farms with an average arable land area of 105 hectares, which together cultivated some 13% of Ukraine’s arable land, while generating 9% of total agricultural production.
Official estimates of agricultural laborers are difficult to obtain, as much of this workforce is informally employed. However, agricultural laborers are important and commonly found in seasonal and labor-intensive sectors such as horticulture. For example, a small sample of berry farmers interviewed by UACAT in Kyiv Oblast reported that 75–93% of workers were hired on a seasonal basis. In 2021, agricultural sector workers received an average monthly wage of ₴12,827 ($436), compared with a nationwide average of ₴14,075 ($478).
The agricultural sector employs both men and women, but gender parity varies by sector. Military mobilization and martial law disproportionately affect men and male-dominated sectors. For example, there is a lack of skilled tractor drivers and mechanics, who were the first to be mobilized, as their skills were needed in the army. Their absence has negatively affected nearly all production sectors.
In the fruit and vegetable sectors, women make up the lion’s share of employees. In the grain, rapeseed, sunflower and soy sectors, however, men are in the majority.
The occupation of nearly 20% of Ukrainian territory and ongoing ground hostilities have disrupted grain and oil producers in the country’s most fertile lands in the south and east. A significant part of horticultural production has also been affected.
The blockade of the country’s seaports, which were responsible for up to 90% of Ukraine’s export capacities, has isolated producers from international markets and has had an impact on transportation and export capabilities. Largely underdeveloped railway and road systems have been taken up with military and aid transport, as well as with the needs of other economic sectors and have been unable to meet food producers’ transport needs. Ongoing escalation in the Black Sea following Russia’s withdrawal from the Grain Initiative further threatens agricultural exports from the Black Sea and Danube river ports.
Access to – and affordability of – inputs, fuel and machinery. Disruption of traditional market chains and domestic production, including damage to Ukraine’s largest fertilizer factory, has made it nearly impossible to procure sufficient productive inputs, fuel, machinery and equipment, including seeds, fertilizers and pesticides. In addition, trade has ceased with Russia and Belarus, which were important regional suppliers of fertilizers and machinery. When available, fertilizer and pesticides have become significantly more expensive, resulting in farmers either rationing them or eliminating their use altogether. Destroyed oil refineries across the country have forced Ukraine to procure fuel from Europe, resulting in both fuel shortages and prices that have doubled or tripled. For many households and small producers, this rise in fuel prices has made production unprofitable.
Displacement and loss of income related to shrinking demand. The displacement of over 12 million (primarily middle-class) people collapsed the demand for local agricultural products, including meat, dairy and horticultural products. It has also led to labor shortages in some regions.
Programming Considerations
Access to Financing
Both businesses and local authorities cite financial support as their main need. Grants help businesses to restore operations, buy new equipment, expand, hire new workers and improve product quality. Specific attention should be provided to those most in need, in particular, IDP- and women-led businesses in Ukraine’s eastern and southern oblasts. Supporting small service providers in urban centers will help to address the unemployment problem and revitalize local markets. In the agricultural sector, there is unmet demand for small, long-term loans for operating expenses, and larger loans to replace damaged machinery and infrastructure.
Vocational Education
Vocational education courses for the most in-need professions will help improve the business climate in the most affected areas and reduce unemployment. Close coordination with business associations, technical education institutions and government unemployment centers, together with ongoing monitoring of the job market, will enable programming interventions to adapt based on need. Vocational education for women in what is traditionally seen as male professions – drivers, mechanics – may help reduce women’s unemployment and address the market shortage of qualified labor given the number of men serving in the army.
Analysis of the labor market’s needs and opportunities
Monitoring market demand and opportunities in selected regions will help programming focus on the most pressing issues. Close monitoring of the conflict provides for a better understanding of the prognosis for Ukraine’s reconstruction and rebuilding efforts. Construction could be one of the most labor-intensive sectors in those regions most directly affected by hostilities, and thus will require qualified professionals.
Trade and export assistance for farmers
The domestic market has been upended as concerns consumers, logistics and sales networks, and traditional export channels are now largely inaccessible. Producers need support to identify and access new and evolving sales channels. Some producers have identified the EU as a potential new market but require assistance in meeting EU processing standards. In addition, producers are in urgent need of new storage solutions and facilities.
Diversification of livelihoods and support for relocated farmers
Some farmers will be unable to cultivate their land for many years. This may lead to additional population movements, as they will be unable to support themselves in their current locations. Supporting livelihood diversification away from farming where appropriate and feasible (i.e., for those closer to urban areas) could allow some to remain in place. Meanwhile, farmers who choose to relocate will require financing support as well as technical and business advice if they are to succeed in their new locations.