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In search of a silver bullet to fight automotive labor shortage

Analysis

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The Hungarian automotive sector prides itself on record numbers, but the 50 largest companies in the industry here pay low wages, even by regional standards. Cutting employer social security contributions and altering the education system will be needed to tackle the consequential labor shortage, analysts say.

Production in the local automotive industry is on such a steep growth curve that its volume has now surpassed pre-crisis figures by 70%. The sector’s weight is further underlined by the fact that its contribution to the GDP accounts for 4.3%, while output was not less than HUF 7.1 trillion in 2015, as highlighted by an analysis by the Budget Responsibility Institute Budapest (KFIB), an NGO. More than 80,000 are employed by the sector, but finding and keeping talent remains an ongoing problem. 

Low wages take most of the blame. Gross salaries at the 50 biggest firms in Hungary fall short by some 30% in comparison to neighboring countries. Net wages lag behind even more, up to 40%, due to heavy levies on wages in Hungary. And this lack of generosity is barely justifiable considering that productivity of the top 50 domestic firms is on a level playing field with that of regional competitors.

“The difference is most obvious and sensitive against Slovak wage levels, since automotive companies in Slovakia are attracting a growing number of employees from this country which intensifies the labor shortage,” says Balázs Romhányi, managing director of KFIB.

At the same time, payment standards in Hungary differ substantially in terms of profession, sector, company size and region. Therefore, local problems cannot be solved by government interference, the KFIB paper notes. Increasing the minimum wage or the salaries of public servants or an overall wage increase in the private sector by decree would have a negative effect.

On the other hand, cutting social security contributions could have a positive impact only if carried out wisely. The key, the KFIB says, is to focus on relieving employers of the contributions they must make since, as a result, gross salaries could grow for those jobs where it is justified by labor market supply and demand, without endangering the competitiveness of the given company.

The analysis, in turn, argues that cutting employee contributions would do more harm than good. Partly that is because it would push up net wages everywhere, including in labor market segments where there is a substantial oversupply and for the low-skilled, and partly because it would not allow any differentiation in increases for different professions.

The overall conclusion of KFIB’s argument is that, in the long run, the structural problems of the labor market can be tackled only by altering the education system.

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