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Huge wage rises signal new phase in central Europe’s transformation

Huge wage rises signal new phase in central Europe’s transformation

Thirty years after the fall of the Berlin Wall, the countries of central Europe are eager to move to a new phase in their remarkable transformation from communist basket cases to vibrant market economies fully integrated in to European business supply chains.

Poland’s conservative prime minister last week said he wanted to “close the chapter” of cheap labour and low wages that has turbocharged the Polish economy, and fed the Germany industrial powerhouse, since the country joined the EU in 2004. Speaking just days before Sunday’s general election, Mateusz Morawiecki promised to raise the country’s minimum wage by an extraordinary 78 per cent by 2023.

Poland has imposed sharp hikes in the minimum wage before but the level, relative to average earnings, is already quite high by European standards. The planned increase from 2,250 zlotys a month to 4,000 zlotys ($1,030) would push it up to about 60 per cent of the average wage, the highest in the OECD club of mostly rich countries.

Wages are rising sharply elsewhere. In the Czech Republic, where unemployment stands at a measly 2 per cent, gross wages rose on average by 8 per cent last year while output per worker inched up only 1.5 per cent. Workers at Skoda, the Volkswagen-owned automaker that alone accounts for 7 per cent of Czech gross domestic product, were awarded a 12 per cent wage increase.

Audi workers in Hungary secured an 18 per cent pay rise this year after a short strike at a plant that is the largest producer of engines in Europe disrupted production at the carmaker’s factories in Germany. Nominal hourly labour costs have increased by more than 10 per cent in the last year in Hungary, Slovakia, Romania and Bulgaria.

Parts of central Europe are running out of workers because of low birth rates and high emigration. It has become the number one impediment to business expansion and economic growth. It raises the question of whether the relatively low-cost manufacturing that has been an important contributor to the competitiveness of wealthier industrial Europe, and especially Germany, is running out of road.

Economists argue that rising wage costs are a standard market mechanism that will increase overall wellbeing by pushing workers away from weak firms to more profitable ones that can pay more.

“If you look at the productivity gap between micro firms and large firms in the region, it is far bigger than in western Europe,” says Mateusz Szczurek, of the European Bank for Reconstruction and Development. “And there is a huge population of zombie firms that are just profitable enough to survive but are keeping labour from more productive use.”

It is the combination of rapid demographic change and drastic minimum wage increases that could, in Poland’s case, prove “extremely disruptive”, driving smaller businesses to the wall, Mr Szczurek says. “Creative destruction could be destructive before it becomes creative,” he says.