HR expert sees real wages continuing to grow

Index of average net monthly wages in Hungary. Corresponding period of the previous year = 100. (Source: Central Statistical Office)

Average gross monthly wages in Hungary were up by 6% in May compared to the same month a year earlier, a first reading of data by the Central Statistical Office showed today. Meanwhile, net real wages grew at a near-record pace of 7.8% in May, year-on-year.

“The decrease of personal income tax from 16% to 15% starting from 2016 January had an effect of about 1.5-1.6% in real wage growth. On the other hand, the minimum wage was increased from HUF 105,000 in 2015 to HUF 111,000 in 2016, and the amount of tax that can be deducted in the case of families with two children also slightly increased from HUF 10,000 per month to HUF 12,500. These small changes all affected real wage growth,” Nagy-Stellini (pictured) said.

Since inflation has been pretty much around 0% for more than a year – and has even ventured into the territory of deflation – real wages are growing nicely. And the future outlook is pretty rosy as a result.

“As long as inflation stays around 1-2%, and GDP growth can be kept above 2-3%, real wages will likely grow further,” Nagy-Stellini said. “The shortage of labor, especially in manufacturing, IT and SSCs, will also help this increase, as the fastest way to attract people in these sectors is by increasing wages.”

While the trend is positive now, Nagy-Stellini warned, that, in the long run, wages propelled to unprecedented heights can have a negative effect on foreign investment.

“Currently Hungary is seen as very good place to set up factories and SSCs, because of the relatively low labor costs together with the good qualifications,” the analyst explained. “If wages start to increase, after a while, multinational companies may consider cheaper countries, but this depends on the priorities of the company.”

Nagy-Stellini said there is reason to hope that rising wages would be sufficient to compensate for the huge shortage of labor Hungary is facing already. 

“In Western European countries, the unemployment rate is much higher, and if our real wages get closer to theirs, qualified but unemployed people will likely see more and more opportunity to come and work here,” she said. “Though, in the shorter and medium term, we can further compensate with improvements in education, e.g. dual education, and additional tax decreases.”

Other pundits, such as Gergely Ürmössy, lead analyst at Erste Bank Hungary, agreed that the growth rate of gross wages should keep the pace for the rest of year. This further strengthens the expectation that, this year, the main driver behind GDP growth should be household consumption, he said.

Another crucial aspect is how fast Hungary uses EU funds, but it will also matter through what channels and to what extent uncertainties invoked by the Brexit referendum filter into the Hungarian economy, Ürmössy noted.