Labor shortage – threat to the economic growth in the CSE region

The shrinking labor supply that is reported by entrepreneurs from the Central and Southeast European (CSE) countries may soon have a negative impact on economic growth in the region. In the countries of the so-called old EU, this problem is still less important.

Since the beginning of 2017, the countries of CSE have been benefiting from the world’s economic recovery, especially in the Eurozone countries, which are the greatest production and trade partners of the CSE region. The strengthening export demand, as well as the steadily improving business sentiments both in the industrial sector and in services (in February 2018 the European Commission’s (EC) composite Economic Sentiment Indicator reached its highest historical level) have translated into a successive improvement in the labor markets.

The growing demand for labor has resulted in a rapid increase in employment. In the second half of 2017, the number of persons employed in 11 economies of the region reached the highest level since the systemic transformation.

Shrinking labor supply

The labor demand is not diminishing. The entrepreneurs in the CSE countries are still reporting willingness to recruit new employees. At the same time, the steady increase in employment, as well as the adverse demographic changes, have led to a significant decrease in the number of persons who would be able to work. The unemployment rate has fallen in all countries of the region. At the turn of 2017 and 2018, it reached the lowest historical levels or was close to the post-transformation minimum, often dipping below the rate of natural unemployment. This has been most visible in the Czech Republic where the unemployment rate is the lowest among all 28 member states of the EU, but a similar situation was in Hungary, Poland and Romania.

The mismatch between supply and demand in labor markets in the region may be seen, among other things, in the growing number of vacancies. The increase in the vacancy rate (calculated as the ratio of the number of reported vacancies to the number of occupied and unoccupied jobs) is primarily visible in the private sector, both in the industry and market services. The shortage of employees was most noticeable in the countries with the lowest unemployment rates: the Czech Republic, Estonia and Hungary.

In the last of these countries, the tensions in the labor market were partially eased by government’s withdrawal from the public works scheme that was introduced in 2010. The program aimed at activating the long-term unemployed and in the current situation these persons are able to find a job in the corporate sector on market conditions.

It seems that the shortage of employees is currently one of the most important problems faced by entrepreneurs in the region. This is indicated by the results of surveys carried out by the EC. In most of new EU member states (except for the Baltic States), the entrepreneurs see the problems with finding employees as the biggest obstacle to further increasing their output.

It is worth noting, that their opinions significantly differ from the ones of companies from the so-called old EU, where this problem, although already noticeable, still seems to be less important.

Tight labor market is leading to wage increases

High demand for employees, along with the increasingly limited supply of labor, has been one of the crucial factors driving the increases in wages in the countries of CSE in recent months. Marked wage growth took place already in 2016, and in 2017 this process accelerated along with the increasing ‘tensions’ in the labor markets. It is worth noting, however, that the growing demand for labor was not the only driver of wage growth.

In addition, minimum wages have also increased significantly in recent years. In Bulgaria, the Czech Republic and Hungary, they have increased by over 30 per cent since the beginning of 2016, and in Romania the increase exceeded 80 per cent. The wages in the public sector have also clearly increased following the post-crisis period of stagnation. An exception here, is Poland. That may also explain a relatively slower rate of wage growth in the entire economy compared to other countries of CSE.

Threat to economic growth

It seems that the shrinking labor force observed in recent quarters is a problem that may deepen in the coming years and may negatively affect the growth of production potential of the economies of CSE. Since the 1990s, the countries of the region have recorded one of the lowest birth rates in the world. As a result of the decrease in the number of births, the working-age population in the region has been gradually decreasing since 2005. Demographic forecasts indicate that this decline will be deepening in the coming years.

Emigration is an additional factor leading to a decrease in the number of potential employees. Although this trend has slowed down in recent years thanks to return migration and the influx of workers from Eastern Europe, some countries (such as Bulgaria, Romania, Croatia) still observe a strong outflow of people heading abroad.

The increase in wages resulting from the growing tensions in the labor market also entails a threat to economic growth in the medium and long term. Indeed, the rising wages are an important factor stimulating household consumption. What is more, in the longer term increase in wages may slow down and possibly even reverse the negative migration trends and in this way they may have a positive effect on labor supply in the region. The process of wage convergence to the countries of Western Europe can also be easily explained, as in 2015 the average wages ranged from about 1/3 of the German pay – in Slovenia and Estonia to a little more than 10 per cent of it –  in Bulgaria.

On the other hand, however, the increase in wages far exceeding the increase in labor productivity – and such a situation we have been observing in the CSE countries since 2016 – may threaten the price competitiveness and investment attractiveness of these economies. That has been pointed out, among others, by the EC and the International Monetary Fund (IMF).

It seems that in order to counteract the negative demographic trends, the priority long-term policies aimed at employment growth should focus on improving the quality of education and especially the quality of training courses for employees – that would enable the latter to adapt to constantly changing labor market requirements. These policies should also focus on reversing the negative migration trends or on active employment support programs aimed at the social groups which are almost absent on the labor market.

Although the employment rate in the CSE countries is gradually rising, it is still lower than in Western Europe and particularly in the Nordic countries. This is mainly due to the lower labor market participation of women, elderly people or national and ethnic minorities. Professional activation of these groups seems to be the most effective method for increasing the number of employees.

Marcin Grela is an economic expert at Poland’s central bank, Narodowy Bank Polski, the Economic Analyses Department. The article does not represent the official position of Narodowy Bank Polski.

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