In real terms Poles earn more than their neighbors

The issue of wage levels and income inequality is becoming hot topic in discussions concerning the Polish economy. International comparisons indicate that average wages in Poland are higher than what would be expected on the basis of the GDP per capita levels.

The most commonly used measure of wages is the arithmetic mean, usually referred to as the average wage (total amount of remuneration divided by the number of employees converted into full-time jobs). The median wage, that is, the central value dividing the population into two equal parts, is also used increasingly frequently. The fact that the median salary is lower than the average (arithmetic mean) salary results from the logarithmic-normal distribution typical for this economic category. To put it in simple terms — there are always more people with an income below the average than people with an income above the average. For this reason, many people do not trust the official statistics, as in their surroundings they almost exclusively find people whose wages are below the official average.

Information concerning the average wages and salaries in the sector of enterprises employing more than nine people is provided by the Polish central statistical office, Statistics Poland, on a monthly basis. Meanwhile, information on average wages and salaries in the national economy (including the public sector) is provided on a quarterly basis, and information on median wages is reported every two years. Information regarding employment and wages in micro-enterprises, that is, companies employing fewer than ten people, is also presented with a lag. The currently available information on the median wages and on the wages in the sector of micro-enterprises relates to 2016. For over a dozen years the median wage has remained at the level of just over 80 per cent of the average wage.

Micro-enterprises are required to submit only simplified statistical reports. According to Statistics Poland, in 2016 there were over 2 million micro-enterprises. At the end of the year these entities employed almost 4 million people. Most of them were self-employed individuals, who report the remuneration required by the income tax regulations, and not the real income. Some micro-enterprises do not record all their sales and revenues, so their wage statistics are not very reliable. In view of the current labor shortage, it seems unlikely that several million people would accept remuneration well below the national average, but also below the median value, without trying to find a different job.

In 2015 there were almost 1.5 million people employed in enterprises with foreign capital (over 23 per cent of those employed in the enterprise sector) and their average gross monthly wage amounted to PLN5,956 (EUR1,382), which was 44 per cent above the average wage in the enterprise sector.

Polish wages in comparison with the EU member states

According to some economists, the key evidence that wages in Poland are too low is the low share of wages in GDP. Poland’s wage share is indeed below the average in the European Union (EU), and has been decreasing in the long term. However, in Poland this ratio is higher than in the Czech Republic and Slovakia and only slightly lower than in Hungary.

It is difficult to look at the share of wages in GDP as a significant measure showing the situation in the economy and the real income levels of society. The share of self-employed persons in Poland is among the highest in the EU. In 2016, it reached 20.6 per cent (the EU average is 15.8 per cent), and a large percentage of the self-employed in Poland are the owners of agricultural holdings (and their families) whose income in its entirety is not included in the wages. The share of unregistered employment (in the shadow economy) is also larger than the EU average, resulting in the relatively low employment rate recorded in Poland.

When comparing the wages in Poland with wages in other EU member states, we should consider both the levels resulting from the conversion of the current EUR to PLN exchange rate, as well as the levels taking into account the purchasing power in particular countries.

The international comparisons of gross wages and salaries are useful from the point of view of employers (as they show the labor costs), but employees are more likely to compare their net wages. This is because the tax wedge, that is, the difference between the total labor cost and the remuneration received by the employee, is different in particular countries.

In 2015, GDP per capita in Poland (which, to put it simply, serves as a measure of labor productivity) was 2.6 times lower than the average in the EU and 2.8 times lower than the average in the Eurozone. These ratios are calculated based on the current exchange rate of the EUR to the PLN. In 2015, in Poland the net remuneration of a single childless person was 2.7 times lower than the EU average and 2.8 times lower than the average in the Eurozone.

Compared with Germany — our largest and closest partner — labor productivity in Poland was 3.33 times lower, and the net remuneration was 3.15 times lower. Poles were earning slightly more than what would result from the relationship of labor productivity (GDP per capita) between the countries.

The net remuneration of a single employee in Poland was the highest among the countries of the Visegrad Group, and was also higher than in Lithuania and in Latvia. In the case of an employee who had a dependent spouse and two children, the net remuneration in the Czech Republic and Slovakia was higher; however, that difference was much lower than the difference in labor productivity. GDP per capita in the Czech Republic was 42 per cent higher than in Poland, and the remuneration was only 17 per cent higher, while in the case of Slovakia, labor productivity was 30 per cent higher and the net remuneration of a person with a dependent wife and two children was just 2 per cent higher.

In Hungary, which had a GDP per capita level similar to Poland in 2015, the net remuneration was significantly lower than in Poland – both for a single person and for a person with a dependent family. The same applies to Lithuania and Latvia – countries with a GDP per capita at a level similar to Poland.

Wages and costs of living

Poland has one of the lowest costs of living among the OECD countries. As a result, our real income, taking into account the purchasing power parity (PPP), is much higher than what would result from converting the currency at the current exchange rate. This applies to both GDP per capita and wages. According to OECD data, in April 2018, the cost of living in Poland amounted to 55 per cent of the costs of living in the United States, 54 per cent of the costs in Germany, 80 per cent of the costs in the Czech Republic, 93 per cent of the costs in Hungary and 77 per cent of the costs in Latvia. The cost of living is higher even in Mexico.

Therefore, if we take into account the purchasing power parity of the PLN, the difference in wages between Poland and the majority of other countries is smaller than if we simply converted the wages at the current exchange rate. In the wealthiest countries of Western Europe, the wages are twice as high in real terms as in Poland, in Germany they are 80 per cent higher, and in Spain and Italy they are about 30-40 per cent higher. In real terms Polish wages are higher than in Greece and Portugal, as well as in the Visegrad countries, including the more affluent Czech Republic.

Poland and its neighbors

What matters from the point of view of the employer are not net but gross wages. They include taxes, social security contributions as well as additional costs associated with hiring and firing workers. What is important for foreign entrepreneurs as well as for exporters are the costs expressed in a foreign currency — that is, in the case of the EU in the EUR. The purchasing power parity of wages is irrelevant from the point of view of international competitiveness, although it has an effect on wage pressure. When the price level in a given country is low, as is the case in Poland, the upward pressure on wages and labor costs is lower. What is more important is the exchange rate of the domestic currency. In the case of the local currency’s depreciation, the labor costs expressed in a foreign currency (EUR) may go down, even if the wages increase.

In April 2018, the average wage in the enterprise sector in Poland was 7.8 per cent higher than a year before, and in the four months of 2018 it was 7.2 per cent higher than in the same period of 2017. However, over the course of one year (from April to April) the PLN lost 1 per cent to the EUR and 13 per cent to the USD. The average wage expressed in the EUR increased during that year by 7 per cent and fell by 6.3 when expressed in the USD. The labor costs in Poland are more than three times lower than in Germany, two times lower than in Spain and over 30 per cent lower than in Greece and Portugal. The hourly labor costs in Poland are lower than in the Czech Republic and in Slovakia, but higher than in Hungary.

Poland’s southern neighbors have higher labor costs and at the same time they have lower net wages and lower wages in relation to their currency’s purchasing power. The reason for that are higher tax burdens and higher health care system contributions in the Czech Republic and in Slovakia. The latter amount to 14 per cent in the Czech Republic and Slovakia — 5 percentage points higher than in Poland.

In the years 2001-2017 real wages in Poland (in PLN) grew at an average annual rate of 2.6 per cent, while in the Czech Republic they grew at the rate of 2.7 per cent, and in Hungary at the rate of 3.2 per cent. In Hungary, the highest increase in real wages occurred in 2002 (an election year) and amounted to over 12 per cent. However, there were also periods of decline in real wages. In Poland, the highest increase took place in 2007 (6 per cent), but during 17 years average real wages only decreased in one year (2012) and only by 0.1 per cent.

In 2017, real wages increased by over 10 per cent in Hungary, by 3.6 per cent in the Czech Republic, by 3.5 per cent in Poland and by 3.2 per cent in Slovakia. The average wage in Hungary amounted to EUR940 (4.3 per cent less than in Poland), meanwhile in the Czech Republic it amounted to EUR1,096 (11.6 per cent more than in Poland), and in Slovakia it amounted to EUR954 (5 per cent less than in Poland).

According to OECD data from 2016, the cost of living in Hungary was 8 per cent higher than in Poland, in the Czech Republic it was 26 per cent higher, and in Slovakia it was 22 per cent higher. Once again, these data confirm that in real terms Polish wages are higher than in the neighboring countries.

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