Low wages haunt Prague and Bratislava

...not so fast - CB chief Jiri Rusnok continued: local wages and prices must first reach those of core eurozone members.

At one level all looks good. Average nominal wages rose 10.7 percent in Hungary in February, the most in nine years, and were up 5.2 percent in Poland, while government statistics show that nominal wages in the Czech Republic rose 5.3 percent in the first quarter.

But, at that rate it would take 15 years for average Czech wages to catch up with those of neighboring Germany, all other things being equal, one economist told Radio Praga this week.

The issue has taken on political salience also after Czech Prime Minister Bohuslav Sobotka made the end of cheap labor a theme in his Social Democrats' campaign at last October elections, while in Slovakia, PM Robert Fico has asked why a worker in a Volkswagen factory in the ex-communist country makes only a third that of his German counterpart for the same work.

So, are heightening demands for pay rises eroding the Central and Eastern European (CEE) region's growth model which has been largely based on cheap labor since 1989, one which has helped attract capital from abroad, including factories operated by Volkswagen and Kia Motors.

Eurozone member Slovakian also targets higher wages

In neighboring - eurozone member - Slovakia, nominal wage growth accelerated to 4.1 percent in 2014, then slowed to 2.9 percent and 3.3 percent in 2015-16. With deflation now ending and ongoing labor market tightening - with some sectors reporting shortages of qualified labor - nominal wages are expected to grow by 3.8 percent this year.

The VW discrepancy

The highest wages at Volkswagen Slovakia, for example, do not approach the lowest pay at VW Germany, even though productivity in both countries is comparable.

The average salary at the plant is 1,800 euros ($2,014), excluding managers' pay, according to the company. Slovakia's average salary is 980 euros per month.

From 2010 to 2016, Slovakia's economic output grew an average of 2.9 percent a year, Bloomberg data show. This impressive growth was possible mainly thanks to Slovakia's increasing specialization as the EU's car assembly hub.

A eurozone member of 5.4 million people, Slovakia is the world's largest car producer per capita. The factory produced a total 388,697 vehicles last year, while just over a million automobiles were produced in Slovakian factories owned by Kia, Peugeot and VW.

Remember strikes?

Workers at Volkswagen Slovakia - which produces the Porsche Cayenne, Volkswagen Touareg and Audi Q7 vehicles - went on strike in June, ended in early July, over unmet demands for a 16 percent pay rise from the country's largest private employer.

Up to 90 percent of the plant's 12,300 employees downed tools after company officials offered the 8.6 percent wage rise, trade union head Zoroslav Smolinsky at the VW plant in the Slovak capital Bratislava, said.

VW spokeswoman Lucia Kovarovic Makayova told the French agency AFP that union demands for a "16 percent salary increase is unacceptable as it would significantly jeopardize competitiveness and the future of the business as well as job stability."

No pay rise, no problem

Wages in Romania in 2015 were about half that of the Czech Republic, which was less than one third the German level, with these gaps increasing since 2008.

Skoda in the Czech Republic - part of the Volkswagen group - pays its employees around a third the German level and this is reflected in higher profits in the Czech plants. 

A European Trade Union Institute (ETUI) study - Why Central and Eastern Europe needs a pay rise - published in May noted that the 2008-9 economic crisis had put an end to two decades of progress on salaries in CEE.

Labor productivity in Poland, Hungary and the Czech Republic continued to rise as employment costs stagnated and fell, it noted.

"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."

Up to 2008, wage convergence with Western Europe was due to direct foreign investment (FDI) and emigration, which reduced the supply of labor and forced up wages.

The report argues that the European Commission wrongly identified the increase in wages in the pre-crisis years as a key problem and encouraged wage moderation.

The European Commission argues that such low pay levels are essential to maintain international competitiveness in the form of low ‘unit labor costs' and warns that even a small increase in wages without a commensurate increase in productivity would lead to lower exports, GDP and employment.

"But, in reality, however, most CEE countries do not have a fundamental (cost) competitiveness problem," the report argued.

The "productivity reserve," or the wage gap that could be closed without harming productivity, varies from 20 percent to 40 percent.

"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," the report noted.