Higher Wages as a Catastrophe? Hopefully an Impulse for Further Growth

Czech economy relying on low-cost labor is in cul-de-sac. It all comes down to transformation of economy, whose authors, with their drive for cheap currency, had bet on cheap manpower.

Grocery retailer Lidl’s new starting monthly salary for a floor workforce is 28 000 CZK (1100 EUR) and this figure has made some waves. How come a low qualified cashier can make such money? It ought to be said the given sum is before taxes and the net income is around 20 000 CZK (786 EUR).

Let us take a look at starting salary at discount grocery retailers Lidl or Aldi in Germany. Two years ago, a detailed survey of Hans Bockler Foundation, tied with trade unions, found out that it was 2066 EUR, 52 500 CZK, monthly in today’s money. So, should we not be surprised by that figure instead, indicating that Czech workforce takes home half of what their German colleagues do?

Concerns over Steep Salary Growth

The panic spreading among local economists and entrepreneurs ought to be explained. They do worry about nothing lesser than future prosperity. The current economic model does not take into account salaries being half of German level, they should be significantly lower. If they start catching up too fast, that would be bringing us closer to a serious problem, fast. Even the highest authority on all things economic, Jiří Rusnok, the Governor of Czech National Bank (ČNB), has warned against this trend on Czech TV. “If the GDP is growing from 3 to 4 percent, then the same rate should apply to wage growth,” adding that in longer perspective faster growth is not sustainable.

The panic spreading among local economists and entrepreneurs ought to be explained. They do worry about nothing lesser than future prosperity.

To put things in proper perspective even more, let us examine an average salary in Germany and Czechia. Last year, the Czech average gross salary in manufacturing or service sectors was 29 504 CZK monthly, according to the Czech Statistical Office. The German figure stands at 3788 EUR, according to its statistical counterpart. In other words, a Czech took home 29.6 percent of what a German did. What is more significant is that it is on par with figures before the break out of the last financial crisis in 2008. Czech economy depends on export and it can be said that in the last ten years for the exporters, who had their hands full with finding markets for their products, high wages and their growth was the least of their worries.

Dissatisfaction with Low Income on the Rise

Things were still quite calm last year, even though after the cessation of exchange rate interventions by ČNB the Czech crown went up against the euro and the wages grew by 105 EUR. German growth was 85 EUR though, so nothing changed much, at least with regard to parity between the two countries. The decade of wage calm might be soon over though, as Lidl news have signaled. Prognosis of the Finance Ministry works with 4.5 percent of real wage growth, roughly the same as in previous year. Czech currency is estimated to copy similar rise.

Czech workforce would earn little over 30 percent of Germany’s but still less than one third.

If more companies are to follow Lidl’s example and increase wages dramatically or if they are forced into a wage tug of war then all prognoses, not only concerning salaries, will be up in the air.

It does not really matter whether one supports the low wage policy or does not; either way it seems no longer attainable. Popular dissatisfaction with low income is generally on the rise and is increasingly influencing politics. Unemployment has ceased to be a major concern, many people do shopping in near abroad and pay close attention to locals’ purchase power at Aldi or Spar. Leftist government, despite its pro-growth rhetoric, did nothing more dramatic than just lip service and let the Czech-Moravian Confederation of Trade Unions, chaired by Josef Středula, do all the protesting. Employers could very well live with that.

However, all that is about to change. Both leftist parties can either enter into government or support it, but due to their electoral defeat they have to push for wage growth with much more fervor, particularly in the manual labor sector, if they are to remain politically relevant, or even present on the political map at all. If social democrats are to end up in opposition, then they can come up with a set of radical demands, either when it comes to minimal wage or stricter rules for foreign businesses channeling hundreds of billions of pro ts out of the country in dividends, tougher taxation included.

So far the government has been trying to help the businesses by importing cheap labor from Ukraine, with the effect of sabotaging trade unions e orts for wage growth. Yet even with the help of the Ukrainians it is not possible to keep the wages low for good. The exodus of qualified workforce looking for employment at near abroad is steadily increasing. If it is almost impossible to find doctors, nurses, or qualified masons along the borders with Germany and Austria, the reason is obvious. To keep them at home by increasing their income appears to be more effective method than to import less qualified substitutes from Ukraine or Russian speaking countries.

Where Did the Mistake Happen and How to Fix It?

Economy relying on cheap labor is suddenly in a dead end street. An effective way out of this predicament is not to go directly against the wall. Solutions can be found only if the cause of the current mess can be identified. It is necessary to go to the very beginning of economic transformation, whose authors, trying to weaken the Czech crown, had bet on low-cost manpower. A Czech laborer takes home as much as a Hungarian or a Pole, despite being more qualified and having come from a long industrial tradition. A double exchange rate would have been more appropriate, which would have brought Czech wages closer to those in Slovenia—a more natural alignment.

Czech reformers probably aimed at beating German and Austrian competition with the massive help of wage dumping. They did manage to make life harder for them here or there, yet in a closer look it is clear that Germans an Austrians did not stay idle to be swept aside by cheap Czechs, even on a regional level. Their companies took advantage of their strong financial condition and exported poorly paid jobs to Czechia or further east. Whatever jobs they lost they managed to make up in a more robust service sector, with focus on highly-paid industrial services—design, marketing, and sales.

Economy relying on cheap labor is suddenly in a dead end street. An effective way out of this predicament is not to go directly against the wall.

The Czechs offered themselves as cheap laborers, so they can hardly complain now that foreign investors took them by their word. It is worth to visit south and west regions along the border. Across the frontier the development is far more tangible.

Everyone Is Expecting an Impulse from the West

The bet on cheap Czech labor seemed to pay off, at least in the beginning. In 1995, the Czechs earned 10 percent of German salaries. A decade later it was 20 percent, followed by three years of the fastest economic growth since the beginning of the transformation, and local wages peaked at 30 percent. The growth then stalls and ratio remains unchanged. Real numbers offer even bleaker outlook. In 2008, the difference was 2200 EUR, last year it was 2700 EUR.

Economists and managers are close to a panic attack when taking into account a possible wage growth copying 2005-8 trend.

It appears only logical to leave the policy of low wages, yet it is not easy to find an alternative. To repeat German and Austrian maneuver which let the Czechs have poorly paid jobs? Then one needs to find someone offering aggressively such services.

It sounds almost comical. Countries like Poland, Hungary, or Czechia insist on keeping their national currency in order to keep the wages low by weakening the exchange rate and thus maintaining competitiveness.

It is clear though, beyond any doubt, that something must change. A good piece of advice has come from Gunther Schnabl, an economist from Leipzig with focus on Southeast Asian economies. He took notice of the fact that although the Eastern Europeans go through a similar modernization process, they behave quite differently from the Southeast Asians. “Eastern Asia is not oriented solely on Japan, there is a significant trade between China and Malaysia, Malaysia and Singapore, Singapore and Philippines, Philippines and Malaysia. There is a real division of labor among them, whereas Eastern Europe is focused solely on the West. Trading relationship between Czechia and Hungary, Hungary and Bulgaria are on a relatively low level,” Schnabl pointed out in an interview for aktualne.cz daily. In other words, there is no independent model for economic growth in Czechia, Hungary, or Bulgaria and everyone expects an impulse from the West. The offer of cheap labor fits into this model.

Low Wages as a Part of National Identity

It sounds almost comical. Countries like Poland, Hungary, or Czechia protect this passive position as a part of their national identity. They insist on keeping their national currency in order to keep the wages low by weakening the exchange rate and thus maintaining competitiveness. At the same time they rely on investment and subsidies that are meant to bring their compa- nies up to the same perceived technological level of the West. State program of incentives has only limited impact. “If there is a strong influx of capital during a short period of time, then after quality investment projects quickly follow the less desirable ones. That is given, automatic. When there is a sud- den reversal of interest rates, it quickly becomes apparent which investment was good and which less so. Inevitably, recession follows,” Schnabl warns against hasty incentives in investments.

From this perspective it is possible to view the strengthening Czech crown and the pressure on wage growth as an opportunity. Czechia gets rid of really cheap labor jobs and can keep only quality sectors. Strong companies can overcome their dependency on the West and expand to Poland, Hungary, and Bulgaria. Economic policy can support service sector, particularly with higher added value—medical business, software development, financial services. Wage growth presents a window of opportunity to make up for a delay caused by focus on cheap labor.

Petr Holub

graduated from the Faculty of Mathematics and Physics of Charles University and interned at the Sociological Institute of Academy of Sciences of the Czech Republic. He has been working as a journalist since 1992, currently at aktualne.cz and MF Dnes. He cooperates closely with the Czech Radio. His focus is economic aspects of politics and transition of society after the fall of communism. He lives in Prague and České Budějovice.

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