Judit Adler–Erzsébet Viszt
Wages and Labour Costs
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Development levels: increasing
divergence in Eastern Europe
It was hoped that the most important economic consequence of the changeover will be an upward adjustment of income levels to those prevailing in the developed countries. In the past ten years, however, the growth pattern in the countries of the former Soviet bloc has shown great differences. Some succeeded in maintaining a course of steady growth, others fell even further behind. As regards per capita GDP, Poland recovered the 1989 level by 1995, something that Slovenia managed to do only in 1998. Albania and Bulgaria, albeit very likely past the nadir, have not even approached the pre-political changes level. The ongoing economic crisis in Russia is manifest in the fact that 1999 GDP is not even 60% that of 1989.
Hungarian GDP grew slowly between 1994 and 1997, and then accellerated after 1997. In 1999 total GDP reached the pre-changes level. However, in spite of the favourable growth rate, there was no improvement in the nineties in the economic situation in comparison with the developed countries. As regards per capita GDP (on the basis of purchasing power parity), it is a third of that of the US, and around half of that of the EU countries. The Polish level is well below that, 61% of the Hungarian figure. The level prevailing in the Czech Republic was 22% higher than in Hungary. Gigantic differences were also present in the other associated countries: the level in Slovenia at the top being three times that of Bulgaria at the bottom. It should be stressed, however, that the scatter is also high within the EU. Wealthiest Luxembourg is two and a half times as rich as Greece, the poorest. But even the poorest EU countries are much richer than Hungary (Spain 1.5 times as rich, Portugal 1.4 times, Greece 1.3 times).
Particularly in the countries in transition, and the less developed EU memberstates, there is a considerable difference between comparisons based on foreign exchange rates and those based on purchasing power. There are still significant differences in price levels and price structures between the economies, regardless of major price adjustment processes. The Hungarian relative price level is roughly half of that of the 29 OECD countries which, in turn, is well below that of the least developed EU member country. There are also considerable differencies with the EU: the Scandinavian countries there take the lead, and the price levels in the Iberian countries are, relatively, the lowest. It is true, how-ever, that the calculation of development levels within the EU does not depend as much on which of the two parities are taken as a basis as on the countries awaiting access. In the associated countries, including Hungary, development levels calculated in these two ways tend to get ever closer to each other as a result of the appreciation of the forint in relation to the euro. Hungarian pricelevels are getting ever closer to those prevailing in member countries of the EU.
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In 1998 OECD first published international comparative data referring to wages and labour costs which included Hungary amongst the 29 OECD countries (The Tax/benefit... [1998]). This article includes a numerical comparison—in keeping with a similar methodology—according to a more recent publication (Taxing Wages [1999]). The data refer to manual workers in the processing industry, with annual average wages given both in the national currency and in dollars (calculated on the basis of both foreign exchange and purchasing power parities. The account therefore refers to around 20–25% of those in employment—differing from country to country—depending on the share of the processing industry and the productivity of labour. These labour costs are decisive when it comes to the competitiveness of exports. In Hungary, in 1998, the monthly gross wages of manual workers in the processing industry amounted to 109.1% of the average earnings of manual workers in the economy, 58.1% of white collar wages, and 78.3% of the average incomes of the total of those in employment.
Manual workers in the EU earned an average annual gross income $26.575 (foreign exchange parity), of which the Hungarian figure amounts to 11.4%.2 According to these data, Hungarian wage-levels amount to 9% of German ones and less than 40% of those in Portugal, the country with the lowest wage levels in the EU (Fig. 2). Endre Gács, using similar statistical methods on 1996 data, established that Hungarian wages amounted to around a tenth of the EU average (Gács [1999], The tax benefit... [1998]). Our results barely differ. In other words, there was no significant change between 1996 and 1998 in this respect. According to our calculations, however, this applies not only to the EU: Hungarian wage levels are only 60 to 70% of those in the Czech Republic or Poland, i.e. of CEFTA countries on a similar developmental level, which are competitors on the world market.
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The gap between Hungarian and average EU income levels is greater than as regards respective GDPs. (The same is true, within the EU, for France and Portugal, but there the scale of backwardness is smaller). Calculated on an exchange rate basis Hungarian incomes amount to 10% of the EU average, only 30% given purchasing power parity. Labour costs that include all charges borne by employers amount to around 40% of the EU average calculated on the basis of purchasing power parity. Improved performance alone will not produce higher wages. Other conditions are lower charges on live labour and a growth of the ratio of wages within total employees' incomes which, at present, are made up of many differing elements. Lower charges on wages must not imply any threat to the financing of public expendigture, therefore such charges can only be reduced if economic growth creates the necessary resources, or else if the black and grey economies diminish and more people contribute to the exchequer. This can be achieved by boosting the ratio of legally performed work.
The EU does not prescribe the wage levels of associated future member countries, the less so since EU competitiveness is boosted by lower average wages. If one adds that these low wages are paid to a relatively well qualified labour force, this implies a double advantage for the EU as an integrated market.
The relatively low level of wages is at the same time a disadvantage for the EU, since it reduces domestic purchasing power. Large differences in wage levels produce various kinds of social tensions. In some count-ries unemployment is high. Trades unions which protect jobs and wages are powerful there. Taking Spain and Portugal as an example, 60 to 70% of EU wage levels is acceptable for a country at the time of joining. There is, however, no formal prescription of any sort in this respect, nor is there any evidence that migration may be closely connected with wage levels.
In Hungary the GDP growth rate is considerably higher than the EU average; the number of those employed will, however, not increase by much. Productivity in the economy as such and in the processing industry will not grow at the fast rate experienced since 1993, but still faster than the EU average. This will lay the foundations for a relatively dynamic growth rate in real incomes.
Foreign and domestic pressure to raise wages will certainly grow as part of approaching the EU. The demand for upward levelling will get stronger in wage disputes. Furthermore, if average wages in Hungary and the EU differ too much at the time of joining, there may well be a request to limit the mobility of Hungarian labour. In addition, EU policy prescribes that minimum wages must amount to at least 68% of average wages. Starting with 2001 this ratio will amount to 40 to 45% .
Even if conditions of access made it possible, it is unlikely that any large number of Hungarians will seek work abroad. A differing employment structure and the minimal knowledge of foreign languages on the part of Hungarians act as barriers.
At this moment it is difficult to predict what the effect of EU access will be on wages in the state financed sphere, primarily in education and the health services. For domestic reasons too major pay rises can be expected there.
Hungarian wages are low by international standards, something which justifies raising them. This, however, will unfavourably effect the comptetitiveness of the Hungarian economy. This could to some degree be counterbalanced by the government if charges paid by employers and employees were reduced. Since the differences in wage levels are, however, great, the advantages in competitiveness due to low wages are likely to persist for some time, bearing in mind how long a process the upward levelling of wages is. There is no doubt, however, that the competitiveness of those firms will improve in the future which will be capable of revaluating competitive strategies based on low wages, placing greater emphasis on other factors, such as state of the art technologies, and an improvement of human resources, employing modern management techniques etc., also adjusting to the fact that the scope of price strategies will be more restricted.
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Judit Adler and Erzsébet Viszt
are both research managers at the GKI Economic Research Institute.
