Central and Eastern Europe trapped in low wage spiral

Productivity in Central and Eastern European countries is higher than in the West. [Nataliya Hora/Shutterstock]

Low wages have been harming Central European economies since the crisis. According to a recent study, salaries fell to below 30% of the German average while productivity grew steadily. EURACTIV’s partner La Tribune reports.

The conclusion of the study carried out by the European Trade Union Institute (ETUI), entitled Why Central and Eastern Europe needs a pay rise, is unequivocal: the economic crisis put an end to two decades of progress on salaries in Central and Eastern Europe.

According to figures collected by researcher Béla Galgóczi, the productivity of workers in Poland, Hungary and the Czech Republic continued to rise as employment costs stagnated and fell, reviving social competition with the West and locking Central and Eastern Europe (CEE) into a low-cost spiral.

For the ETUI, the mistaken economic policies launched after the crisis are to blame for this reversal in social progress.

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“From the mid-1990s up until the crisis in 2008 […] wage convergence was spectacular,” the report said. “In the wake of the crisis, however, wage convergence either experienced a sudden halt or slowed down substantially.”

Mistaken political recommendations

Until 2008, wage convergence was underpinned by direct foreign investment and emigration, two factors that reduced the supply of labour and forced up wages. This dynamic ended with the crisis. But according to Galgóczi, it was made worse by European intervention.

“European crisis management policies only directly interfered in the wage-setting mechanisms of a number of countries (Latvia, Hungary and Romania) but the effects of wage moderation were spread all over the region,” Galgóczi wrote.

For the Hungarian researcher, the European Commission wrongly identified the increase in wages in the pre-crisis years as a central problem and encouraged – or obliged – wage moderation. But the EU executive never satisfactorily made the link between high wages and competitiveness in these countries.

“In reality, however, most CEE countries do not have a fundamental (cost) competitiveness problem”, the report states. In fact, the of GDP represented by wages is on average 7% lower in the CEE countries than in the West.

A large “productivity reserve” that does not benefit workers

In Poland and the Czech Republic, two countries that did not have big public debt or deficit problems, the “productivity reserve”, or the wage gap that could be closed without harming productivity, varies from 20% to 40%.

Manufacturing productivity in these countries is far higher than in Germany, for example, but just half the productivity gains made in Poland between 2008 and 2015 have been reinvested in wages.

“Wages are not only low compared to Western Europe but […] also tend to be lower than what the economic potential of these countries would allow for,” Galgóczi wrote.

Central and Eastern Europe would do better to break out of this spiral of social dumping, which “keeps the region locked into a subordinated and dependent role in the international division of labour”. Instead, the CEE countries should try to relaunch the strategies of wage convergence that Hungary, Poland and the Czech Republic had implemented with some success until the mid 2000s.