View from Vienna: Explaining CEE’s meagre wage growth

Since 2013 GDP growth has picked up continuously in the EU member states of Central and Eastern Europe (EU-CEE), reaching an average of above four per cent in 2017. Similarly, unemployment went down stepwise and is now at about six per cent on average. Some countries are approaching full employment. For instance, the Czech Republic is expected to have an unemployment rate of 2.4 per cent in 2018. However, until recently wages have lagged substantially behind productivity growth.

Two exceptions are Romania and Bulgaria. There, wages have risen more quickly, albeit from a much lower starting point and to a large extent thanks to minimum wage hikes. The statutory minimum wage remains one of the few income policy tools in the region. One of the reasons for the meagre wage growth in EU-CEE has been the increased liberalisation and flexibility of labour markets.

Partly in response to the economic crisis of 2008-09, labour market institutions were often transferred from the national and sectoral to the firm level. Collective bargaining mechanisms, which had been already weaker than in Western and even Southern Europe at the onset of the economic crisis, were weakened further. These reforms were accompanied by a falling degree of organisation of both employees and employers, resulting in the decentralisation of wage bargaining.

Uncoordinated wage setting typically leads to an over- and undershooting of wages with respect to productivity developments. Highly corporatist countries such as Austria have a strongly centralised wage bargaining system that acts in a macroeconomic responsible way and performs a long-run productivity-oriented incomes policy. Moreover, these systems are also useful in organising education, qualification and on-the-job training.

CEE countries will need refined policies to meet the challenges in the years to come. Recent labour market tightening in the region is not only caused by higher economic growth. To a large extent, this reflects a combination of natural population decline and negative net migration. Continuous emigration has further exacerbated the decline in population, as the emigration of the youngest and most productive age group has contributed negatively to birth rates.

Forecasts of the change in working age population expect a massive drop by 15-30 per cent over the next decades. Coordinating labour market institutions could help to cope with these challenges and ensure macroeconomic stability and long-run convergence to western European income levels.

The views expressed in this opinion editorial are the author’s own and do not necessarily reflect Emerging Europe’s editorial policy.