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Wage convergence in Europe has reversed since the crisis: socially unjust and economically damaging

08/05/2017



Béla Galgóczi, Senior Researcher at the ETUI

The average annual gross wage in the Czechia in 1993 was just over EUR 2000, the equivalent of 13% of the German average. By 2008, this figure had risen to over EUR 11000 (35% of the German wage). From the mid-1990s to 2008, wages in the Czechia, Hungary and Poland three or four-fold in comparison to those in Germany, but this trend later reversed.

The figure below shows the wage convergence between Hungary, the Czechia and Poland, and Germany (average annual gross wage in nominal terms (EUR)* and as a % of the German wage), between 1993–2015.

Wage convergence was extremely dynamic until 2008; purchasing power and the living standards of workers were improving, and this was helping to close the wage gap with Western Europe, and Germany in particular.

This was also the golden age of foreign direct investment, when the new industrial base of the region was being built up. When Volkswagen, Audi, Bosch and Siemens initially invested in the early 1990s, wages in the Czechia, Hungary, Poland and Slovakia were only a fraction of those in Germany. Even when wages doubled or tripled, these companies and others continued to invest more and exports soared, proving that wage convergence posed no threat to competitiveness.

However, since the 2008 financial and economic crisis wage convergence with Germany has slowed and then reversed. In the eight years since the start of the crisis wage levels compared to Germany have fallen by 6 % in Hungary, 5% in the Czechia and 3% in Poland, and remained stagnant in Slovakia. Although Hungary was experiencing a debt crisis (not as a result of wage increases), the Czechia and Slovakia had no problems with their public finances, while Poland was not affected by the crisis at all. Nevertheless, the entire region was plagued by an across-the-board freeze on wages.

‘European crisis management policies implemented a policy of wage moderation in the wake of the crisis that was both detrimental and dysfunctional. Now this “involuntary” low-wage profile has become a constraint for future development as it limits growth prospects by containing domestic demand. Even more importantly, it keeps the region locked into a subordinated and dependent role in the international division of labour that is based on low value-added assembly and supplier activities without any future prospects.’

Moreover, in terms of the extent to which workers benefit from the value created by their work, the Czechia, Hungary, Poland and Slovakia are at the bottom of the EU ranking, with wage shares of up to 13 % less than those in Western Europe (see Figure below). Wages in these four countries are not only much lower than in Western Europe or Germany, but they are also lower than their economic basis dictates.

The figure below show the change in wages as a % of GDP (1995–2015)

Low rewards for labour is not only socially unjust, but also economically wrong and detrimental.

Firstly, lower wages result in lower domestic demand and thus in lower economic growth. Secondly, the ‘low-wage trap’ is a danger for middle-income converging economies because it forces them into a vulnerable dependent position in the international division of labour.

Assembly work based on low wages and low added value has no long-term perspective. Given the four freedoms of the single market, it is also in the interest of the EU as a whole to ensure that Central and Eastern European wages (currently the lowest in the EU) get back on track.

Read the full report here: http://www.etui.org/Publications2/Working-Papers/Why-central-and-eastern-Europe-needs-a-pay-rise



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