Labor Shortages Threaten Central European Growth

Central Europe is benefiting from the upturn in the eurozone, its largest export market. With unemployment rates dropping to post-communist lows, increased job security is boosting consumer spending, further enhancing growth.

Ageing populations and mass emigration to the West mean skilled workers are scarce. Central and Eastern European economies are trying to come up with answers to the challenges, but the solution seems to be lying in the improvement of education, although it would bear fruit only in the longer term. Consequently, it seems that potential growth rates will fall in the medium term, portfolio.com reported.

The region is grappling with how to respond to the labor problem. While countries have been raising national minimum wages sharply, political pressure for foreign companies, in particular, to increase pay could grow. 

Thousands of workers at Volkswagen’s huge auto plant in Bratislava, Slovakia, walked out last Thursday, demanding an immediate 16% pay rise. Prime Minister Robert Fico backed the strikers, asking: “Why should a company making one of the highest quality and most luxurious cars, with high labor productivity, pay its Slovak workers half or one-third of the amount it pays to the same workers in western Europe?” 

On Sunday last VW settled the strike with a two-year, 14% pay rise. But the carmaker has not been alone in facing unrest. Central Europe is seeing a wave of wage demands that reflect strong growth and tight labor markets—but also risks undermining the low-wage economic model that has turned central Europe into a manufacturing powerhouse.

South Korea’s Kia headed off industrial action at its Slovak plant in March by agreeing to what its country manager called “the highest increase in basic salaries in our company ever” of 7.5%.

In Hungary, Daimler’s Mercedes-Benz and Volkswagen’s Audi have awarded hefty pay rises since last December after workers staged two-hour “lightning” stoppages. Unions have threatened strikes this month in a pay dispute at Tesco, the British-owned retailer that is Hungary’s third-largest employer.

The Czech Prime Minister Bohuslav Sobotka has warned that multinationals are “taking advantage” of low wages, and called for them to retain more profit at local units to invest in higher pay. He said it would be less risky for competitiveness to encourage immigration. 

“The labor problem has become much more acute in recent years,” says Sandor Baja, managing director for Randstad, the employment services group, in Hungary, Czech Republic and Romania.

Attracting Workers

Poland has offset pay pressures by issuing almost 1.3 million six-month work permits last year alone to Ukrainian migrants, although they are mainly hired for basic roles, as unqualified workers. 

The Czech Association of Exporters wants the government to loosen visa policy to help attract workers from Ukraine, Vietnam and Russia. 

“Opening up to longer-term immigration to address skills shortages could be tricky in a region where the political rhetoric has been sharply opposed, for example, to admitting migrants from Syria,” the agency quoted the Financial Times as saying.

Labor mobility is extremely low in the region, which also does not help solve the labor shortage. Citing a headhunter from Matchtech, the FT report said it is a problem that when people are asked about moving for a job, they say: ‘But this is where I live, this is where my house is.’ 

A final way to address the tight labor market would be to increase productivity through technology, and invest in increasing skills.

Whereas governments across central Europe say they are committed to improving education and training, this is a “slow-burn thing”, warned Tomasz Wieladek, an economist at Barclays.

“The model which the region had in the past is probably not going to be sustainable going forward. The only solution is to raise people’s skill levels, but that’s going to take time. So overall, it seems that potential growth rates will fall in the medium term,” the FT cited him as saying.