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Wage developments and wage setting in
Central Eastern Europe (CEE) before and
during the crisis
PERC-ILO regional conference
Moscow
17-18 December 2013
Béla Galgóczi
[email protected]
The context of transformation in CEE
The 1990-1991 systemic change and the following economic
integration of the CEE region into the European and world
economy had far-reaching consequences on wage
developments and wage setting mechanisms
De facto economic integration with free trade, free capital
movements, free-exchange rates started right in the early 1990s, the 2004/2007 EU accession was just completing the
integration process
Full completion with free labour mobility (happened gradually until
2011 for 2004 accession countries; partially available /with
restrictions up to 2014/ for 2007 entrants)
and with the adoption of the Euro: done for Slovenia, Slovakia,
Estonia with the rest of CEE-s to follow, Latvia joins in 2014
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Wage developments in CEE
The main trends and drivers in wage developments:
After an initial drop of wages due to transformation crisis in the
early 1990-s, wages in CEE grew dynamically (see an
illustration for the Czech Republic and Hungary)
Economic integration between regions of huge income and wage
differences induces a levelling out process: strong drive for
wage increases in CEE (channels: through foreign direct
investment and labour mobility), but a considerable wage gap is
still there ( see example Czech Republic, Hungary /1993, 2003/
and wage gap 2010 for all countries
For transformation countries, values are ‚tricky‘: real wage
developments (matter for workers on spot), wages in Euro
(depending also on exchange rate and inflation): matter for FDI,
3and we also have wages in PPP for comparisons
Czech Republic: big initial drop in real wage then dynamic
increase with a moderate decrease of employment level
Czech Republic: GDP, real wages and employment, 1989-2003 (1989=100)
GDP
Real w ages
Employment
130
●
120
110
100
90
80
70
60
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Hungary: after five years of wage drop, dynamic wage
increase, but a large and enduring drop in employment
level
Hungary: GDP, real w ages and em ploym ent, 1989-2003 (1989=100)
GDP
Real w ages
Employment
130
120
110
100
90
80
70
60
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Dynamics of wage increases in three CEEC-s in the first period of
transformation /average monthly wage in Euro/
600
500
400
300
BG (+37,7%)
HU (+129%)
CZ (+229%)
200
100
0
Source: WIIW database 2003, ETUI 2004.
Wage developments and wage setting in transformation
A catch-up of wages, especially in Euro terms (because of
appreciating exchange rate and higher inflation, wages in Euro
terms grew more than in real terms in national currency)
Illustration for the wage catch-up of Hungary and the Czech
Republic in % of Germany (at Euro terms):
Hungary
Czech Rep
Germany
1993
2003
2010
10,5
19,6
34,5
7,1
19,5
44,0
100
100
100
The next graph shows a full overview for Europe for 2010 (yearly
labour compensation in EUR – this includes gross wage+social
security contributions paid by employer after gross wage)
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Thousands
Yearly nominal compensation per employee 2010 (Euro, thousands)
60
50
40
30
20
10
0
EU BG RO LT PL LV HU EE SK CZ HR MT PT SI CY GR ES DE IT UK SE FI FR AT IE BE DK NL LU NO
27
Note: compensation includes wages and employers' social contributions.
Source: Ameco
Up to the crisis: higher wage dynamics in CEE then in both the
core and periphery of EMU
Eurozone
in 2010
Now we examine CEE wage
developments
in the last decade,
what were the drivers and what might be the consequences?
We show real wage developments in CEE countries and in
Germany
Real wages that practically stagnated in Germany grew in CEE
countries characteristically in the range of 35-75% with
Romania outpacing all other countries with an increase of 115%
Then we show the development of unit labour costs for selected
CEE-s, Germany and two crisis countries in the Eurozone,
Greece and Portugal
9
What does this mean for CEE/SEE
10
Change of nominal unit labour costs relative to Germany
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Higher wage dynamics in CEE than in both the core and
periphery of EMU
Eurozone in 2010
Unit labour costs that consider the effect of productivity as well,
are widely regarded as a measure of competitiveness
The claim in the Eurozone is that divergence in nominal unit
labour costs (NULC) led to unsustainable imbalances as the
gap between Germany and countries like Greece and Portugal
widened to unsustainable levels
The above graph showed that while NULC-s grew by around 35%
in Greece and Portugal, in CEE core countries it showed an
increase between 80 and 90% and in the Baltic states between
150 and 230% (here Estonia was shown with 150%)
CEE countries had either fixed exchange rates to the Euro
(Baltics + Bulgaria) or (real effective) appreciating exchange
rates
12
Higher wage dynamics in CEE not necessarily a loss of
competitiveness
Increasing nominal ULC-s normally mean losing on
competitiveness, as we see in case of the EMU periphery
Still in CEE, no comparable loss of competitiveness occurred, as
trade balances, export performance and market share gains
show (see European Commission documents, as Annual
Growth Survey, 2011)
Part of the answer comes from the nature of transformation
economies (wage levels are still a fraction of that of the EU15
as the third graph below shows). At the same time productivity
increases in the exporting manufacturing branches are much
above national average and this `productivity reserve` gives
room for upward wage convergence
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What were the drivers of wage increases in CEE, then?
When looking for the background of this wage dynamism we
cannot point to a single well identifiable factor.
Collective bargaining structures in CEE are rather weak, CB
coverage rates (exception Slovenia) are low (see graph)
Autonomous collective bargaining was a new phenomenon in
CEE after the systemic change in 1989-1990
Trade unions in the state socialism regime we acting as
`transmission belt` of the policy of Communist Parties (although
with a weakening trend in the 1980-s). The democratic change
swept away this structure and structures for autonomous
collective bargaining were created
This was a top down process in contrast to the decade long
organic development in post-War Western Europe
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Collective bargaining
Structures and institutions of collective bargaining (CB) were
shaped by the transformation in 1989-1990. National level
institutions had become dominant (national level interest
representation bodies with trade union, employers
organisations and the representatives of government).
This process led to a different structure of CB than in Western
Europe, where bilateral (employer/trade union) bargaining on
the branch level is dominant. This level remained weak in CEE
with relatively strong national level tri-partite negotiations and
company level negotiation on the other hand.
A general framework for collective bargaining is set on the
national level (minimum wage and a national wage
recommendation) and this is applied on company level (in case
if there is trade union organisation)
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Collective bargaining and the wage drift
Since trade unions are not represented in the majority of
enterprises and branch level bargaining is patchy (exception
Slovenia), collective bargaining in CEE is on a very weak and
further eroding basis (see coverage rates and trends in next
graph)
The weak role of CB in wage setting can also be demonstrated
by a persistent positive wage drift between bargained and
actual wages in CEE countries
The following two graphs give an illustration of the positive wage
drift Slovakia (second highest CB coverage in CEE) and
Germany with a negative drift
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CB coverage rates in EU and their change in a decade
- CEE at lower end
17
Bargained wages and reality: Slovakia
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Main drivers of wage increases
What drove wage increases then:
minimum wage policy in certain cases (HU, CZ, also in Baltic
states): in these cases great increases in national minimum
wage (MW) were decided (often inspired by the government) to
ease social tensions, with an intention also the push wage
scale up and for the state collect more revenue (social security
contributions of individual entrepreneurs are often linked to the
MW) – see next graph on minimum wages in Europe (2010)
FDI (in core CEE) and bubble economy (construction boom
through credit expansion in Baltics+);
labour market bottlenecks due to migration (Baltics, RO)
these all mean dominantly market forces and some policy
measures
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Loss of competitiveness?
Key indicators for selected Central Eastern and Southern European countries
(Germany being the reference), 2010
Country
Gross
annual
wage
per
employed,
business
sector
(EUR, PPS)
Wage level in
business
sector at PPS
in
%
of
Germany
Labour
productivity,
total economy,
Germany = 100
Real effective
exchange rate,
%
difference
from long-term
average
Czech
Rep
15,575
38.5
68.5
41.5
Hungary
16,737
41.4
67.1
13.0
Greece
31,784
78.7
93.6
12.8
Germany
40,364
100.00
100.00
-5.8
Portugal
20,371
50.4
70.7
8.7
Slovakia
16,316
40.4
75.2
54.2
Source: European Commission, 2011; Eurostat
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Downward pressure through the mechanism of the
‘European semester’
Amendments towards more flexible conditions for atypical work
in CEE
○
Extending maximum lengths of periods for Fixed term work
(CZ, PL, RO, SL)
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○
Extending the number of renewals (SK, PL)
○
Creation of ‘new’ types of contracts for target groups (i.e.
young workers) with less protection (CZ, PL, SK)
○
Amendments to Temporary Agency Work (CZ, LT)
New pressures on wages and labour standards
Redundancy rules
○ Lowering the severance pay entitlement (CZ, PL)
○
Altering the periods of notice in a less favourable way (SK)
○
Simplifying procedures in case of collective redundancies by
altering the thresholds (LT)
Working time
○ Increasing the maximum lengths of shift periods (general trend)
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○
Increasing the amount of potential hours overtime to be
negotiated in to the salary (CZ)
○
Extend possibilities for overtime and night work (PL)
Changing IR and CB systems
Decentralisation of collective bargaining
○
○
○
○
○
Deviate downwards from higher level collective bargaining /
statutory rules (SK)
Amendments to representativeness criteria (SK, RO)
Moving TU prerogatives to works councils (HU, SK) or to
workers representatives (PL)
Diminishing role of social dialogue institutions (RO, HU)
In Hungary national level social dialogue hollowed out
Country specific recommendation of the European semester
(2012)
• Reform collective bargaining / wage setting systems (17 out of
27 member states)
• Increase attractiveness and availability of more flexible forms
of working arrangements (CZ, SI)
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Conclusions
There are new risks for the wage convergence process in Europe
that clearly took place in the period up to the crisis.
Paradoxically it is less the effects of the acute crisis in 2009 and
2010 that marked a turning point, but it is more the across the
board austerity policy in Europe and the macroeconomic
surveillance mechanism, called the European Semester.
According to these policy recommendations that also appear as
hard constraints for national policy makers, wage increases in
the past were seen as not sustainable and Central Eastern
Europe, similarly to the southern periphery of the Euro area a
loss its competitiveness is part of the ‘diagnosis’. A downward
wage correction is thus on the agenda.
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Conclusions
The transformation and the economic integration of CEE into the
EU had major impact on wages and wage setting mechanisms
We showed the dynamic wage and ULC increases in CEE
countries over the last decade and concluded that although
these go much beyond the ULC increases at the periphery of
the EMU, this did not result in a major loss of competitiveness
for these countries
The causes of the 2009 CEE crisis were of different nature (than
in some EMU members now) and this is why the general
medicine offered by the IMF and the Commission to use wage
cuts as the basis of adjustment for all countries is
counterproductive
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