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

bgalgoczi@etui.org

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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 1990-s, 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, and 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

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Czech Republic: GDP, real wages and employment, 1989-2003 (1989=100)

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1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

GDP Real w ages Employment

Hungary: after five years of wage drop, dynamic wage increase, but a large and enduring drop in employment

level

 

Hungary: GDP, real wages and employment, 1989-2003 (1989=100)

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1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

GDP Real w ages Employment

Dynamics of wage increases in three CEEC-s in the first period of transformation /average monthly wage in Euro/

Source: WIIW database 2003, ETUI 2004.

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BG (+37,7%)

HU (+129%)

CZ (+229%)

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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):

1993 2003 2010

Hungary 10,5 19,6 34,5

Czech Rep 7,1 19,5 44,0

Germany 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)

Source: Ameco

Yearly nominal compensation per employee 2010 (Euro, thousands)

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EU27

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

Note: compensation includes wages and employers' social contributions.

Th

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sa

nd

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Up to the crisis: higher wage dynamics in CEE then in both the core and periphery of EMU

Eurozone in 2010Now 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

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What does this mean for CEE/SEE

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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

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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

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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)

○ 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)

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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)

○ Increasing the amount of potential hours overtime to be negotiated in to the salary (CZ)

○ Extend possibilities for overtime and night work (PL)

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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