Why East Europe’s Wage Boom May Not Be a Job Killer

Surging salaries from Prague to Budapest may not pose the threat to eastern Europe’s cheap labor model that some doomsayers predict.

The main cause for optimism is productivity. While wage increases are currently outstripping efficiency gains, the opposite has been the case for much of the region’s transition from communism.

Average labor costs in the European Union’s 10 eastern members were about a quarter of Germany’s at the end of 2016. Productivity, on the other hand, was two-thirds that of Europe’s biggest economy, according to Bloomberg calculations based on Eurostat data.

“There’s a productivity ‘reserve’ in eastern Europe that justifies wage increases,” said Bela Galgoczy, a Brussels-based economist at the European Trade Union Institute.

That may explain why investors fret less about the salary increases themselves than the reasons behind them, namely labor shortages as fatter pay packets in richer parts of Europe tempt workers to head west.

In Hungary, a report in April revealed that three-quarters of German investors were unhappy with the availability of qualified workers. Despite this year’s 15 percent jump in Hungary’s minimum wage, only a quarter of the 230 executives surveyed said the same about labor costs.

Some companies haven’t been shy to react. German grocery chain Lidl has raised wages for its store and warehouse staff in Hungary by an average of a third since the start of 2016. McDonald’s offers some of its workers free housing.

While the salary boom may indeed challenge eastern Europe’s cheap-labor model, foreign investors still see value for money. JPMorgan Chase & Co. will hire “several thousand” people in Poland for “well paid jobs” such as risk management, Polish Deputy Minister Mateusz Morawiecki said this month.

Meanwhile, workers in the region are getting much more of the wealth convergence the EU promised after the Iron Curtain fell.
Source: Bloomberg