1. Wage developments in CEE FES conference Budapest, 30 May 2016 Bela Galgoczi (bgalgoczi@etui.org) European Trade Union Institute - ETUI

2. 2 CEE-s are underperforming Underperformance in terms of GDP and investments; convergence to EU15 out of steam (exc: PL, SK, LT, EE) Two major causes: 1/ EU crisis management practice is particularly harmful to peripheral middle-income economies CEEs (exc: HU, HR) had no public debt problem and CEEs have no cost-competitiveness problem STILL: austerity and a downward pressure on wages is applied (as graphs below will show) 2/ There is also a longer term problem with CEE growth model: Externally financed low wage based growth is out of steam A change towards investment led innovation based growth model with higher value added content is necessary

3. 3 Convergence/divergence in the EU

4. 4 Growth, wages, investments, FDI - all on downward trend /see graphs on next slides/ With the exception of Slovakia and Poland GDP level in 2015 is not much above pre-crisis level In terms of real wage development a bipolar picture also in CEE, but apart from Bulgaria wages lag behind productivity (so wage moderation takes place) Both public (exc: HU, HR) and private debt is lower in CEE than EU average and much lower than in crisis countries Investments in all CEE at much lower level than before the crisis (exc: PL) Foreign direct investments (FDI): downward trend Share of FDI in total investments: also down Role of EU transfers: upward trend, in HU near 6% of GDP and close to 100% of public investments= EU money

5. Change in real GDP in CEE countries, 2008 to 2015 (%) ● Source:Calculated from AMECO database, GDP at 2010 constant prices. Note: 2015 figures are estimates.

6. 6 UP to the crisis: 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 graph below shows that while NULC-s grew by around 35% in Greece and Portugal, in some CEE countries it showed an increase between 80 and 90% CEE countries outside the Eurozone tend to have (real effective) appreciating exchange rates

7. Total nominal unit labour costs 2000-2014, 2000=100.0 ● Source:Authors’ calculations based on AMECO. ●I●I

8. 8 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) Wage levels are still a fraction of that of the EU15. BUT higher productivity levels and increases in the exporting manufacturing branches. Wage adjusted productivity in manufacturing for CEEs is substantially higher than EU15 or Germany’s. This `productivity reserve` gives room for upward wage convergence.

9. Wage-adjusted productivity in manufacturing, 2012 countries, 2009 Source: Eurostat (2016) NACE_Rev._2 *apparent labour productivity is defined as value added at factor costs divided by the number of persons employed. Country Apparent labour productivity* Average personnel costs Wage-adjusted productivity (%) (EUR 1000 per employed) EU2854.037.7144.0 Czechia25.716.2158.5 Hungary26.913.1204.6 Greece38.125.6149.1 Germany67.250.3133.5 Poland22.211.8187.4 Slovakia21.914.8147.8 Romania11.56.2184.7

10. Still EU policies push for wage moderation for most CEE-s… The main adjustment tool in the EU crisis management strategy has been wage reduction (not addressing the real cause, but creating harmful side-effects and also not fair) and time horizon is also flawed, result: double-dip recession Policy of internal devaluation:  Direct intervention into wage developments by cutting and freezing public sector and minimum wages (HU, LV, RO)  Structural reforms of wage setting institutions to increase downward flexibility of wages New European Economic Governance:  European Semester/European Imbalances procedure: half of the EU Member states received recommendations  Troika /Memorandum of Understanding

11. Measures in countries under international surveillance, including HU and RO

12. 12 So, are CEE wages too low or too high? The picture is not black and white, substantial differences in wage trends among individual CEE-s: Wage shares in GDP tend to be lower in CEE (cca 55%) than in EU15 (65%) and the main trend is also downward. Exception: wage share in Slovenia is even higher than EU15 and Czech wage share increased a lot against the main trend. Slovak wage share is a mere 49% of GDP. A polarised picture in recent real wage trends, BUT all CEEs (exc: BG) had lower real wage growth than productivity /2008-2014/.

13. Wage shares in GDP, % (1995-2015) ● Source:Ameco

14. Real compensation in the EU 2010-2014 ETUI: Benchmarking working Europe 2015

15. Development of real wages and productivity 2008-2014 ● Source:Authors’ calculations based on AMECO.

16. 16 Concluding remarks and outlook GDP growth below potential, convergence is out of steam Instead abandoning ‚low wage competitiveness‘ model, this is being reinforced It is not too high wages or high wage increases that explain economic weakness and lower than potential growth Austerity and risk avoidance by banks result in low investment activity Foreign direct investments (FDI): downward trend – this a longer term trend Share of FDI in total investments: also down EU transfers provide a large part of public investments ALL THIS is NOT SUSTAINABLE!! A new growth model, investment and wage led growth, upgrading of the economy is needed

17. Gross fixed investment in CEE, as % of GDP, 2004-8 and 2015 ● Source:Calculated from AMECO database, using 2010 constant prices.

18. Investment rate (gfcf in GDP) 2007–2013, %

19. FDI inflow, EUR million (BoP, excl. SPEs)

20. Net realised EU transfers in % of GNI in the bigger NMS (Czech Rep; Bulgaria, Poland, Romania, Slovenia, Slovakia, Hungary)