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Hungary’s Wage Spiral: The More the Better?

Where will the current wage spiral bring us, and can it be beneficial for Hungary – and Hungarians – in the long run?

The hunger for labor is still on the rise in Hungary, while the main bottleneck to growth already appears to be the lack of workers. According to the “conjuncture index” conducted by economic research company GKI and published in April, half of the construction businesses and one-third of the service sector have reported being held back by the labor shortage.  

Following the classic principals of demand and supply, most companies are trying to solve the problem by increasing wages, but their efforts have also been supported by tax cuts. Gross salaries rose by 4% in 2015, by 6% in 2016 and by 13% in 2017, while this year has brought an 8% increase in unskilled minimum wages and a 12% growth in guaranteed minimum wage for skilled workers.

However, with wages growing at most companies, the tendency for the long run is simply to reconstruct the same situation at a higher wage level without solving the recruitment issues. Beyond that, the lack of workforce is deeply rooted in demographic reasons, given that the society is aging while 300,000-400,000 active and enterprising people have immigrated to Western Europe. If there are simply not enough workers here, wage increases are not likely to solve the issue on a large scale.

At the same time, those companies which are not able to produce at a higher efficiency in order to cover the increased wage expenditures will “bleed to death”, as Ferenc Rolek, the vice president of the Confederation of Hungarian Employers and Industrialists pointed out graphically, adding that Hungarian SMEs are the most threatened.

The time spent on finding talents is becoming crucial under the pressure of labor shortage, Gergely Hacsi at Trenkwalder tells the Budapest Business Journal. “Both HR agencies and companies are more flexible regarding the candidates’ skills and experience; however, the current wage spiral partly comes from the limited quality knowledge and skills,” Hacsi points out.

Structural Thinking

Still, all may not be lost. According to Gábor Gosleth of HR company Adecco, while payment is a primal element for first and foremost physical workers, satisfactory working conditions and a couple of words of appreciation are also undoubtedly important for all people, and nowadays good employer branding is inevitably linked to the nice paychecks in order to attract and keep workforce.

“Many companies still do not understand that if there is a hole on my fuel tank, I first stop it leaking and only afterwards go to the fuel station,” Gosleth tells the BBJ, adding that workforce management takes structural thinking. Long-term career options as well as extras like flexible working hours and family days should always be emphasized. (For more on employer branding, see the April 20 issue of the BBJ.)

According to fluctuation expert Katalin Csikós-Nagy, offering the average wages of the given sector should be enough to keep staff, provided salaries are kept on a competitive level not only for the new arrivals but also for the existing workforce. Discrepancies between the wages of experienced and new employees is usually discovered, is extremely demoralizing and often causes the biggest fluctuation wave, Csikós-Nagy warns.

From a national economic point of view, the picture is even more complex. While the two-digit wage increases make people happy and have probably contributed to the governing parties’ overwhelming victory at Hungary’s general elections in April, when this wage spiral might peak and what its long-term effects will be are harder to predict.

“On the whole I can say that if wage growth is accompanied by economic political changes that increase productivity at a corresponding level in order to compensate the higher workforce expenditures, then competitiveness is not threatened. This seems to have happened in 2017-18,” Zoltán Török, senior analyst at Raiffeisen bank says.

He adds that the decrease in social security contributions has played a major role in this tendency. However, tax cuts are a limited tool and, according to Török, wage increases can be sustainable only with more sophisticated policies to increase competitiveness, more effective regulations, and a radical increase in the quality of education.