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Rapid increase of labor costs in CEE in 2008

  According to a forecast recently released by Database Central Europe (DCE), in 2008 strong growth of labor costs continued throughout CEE.

However, stagnating nominal wages and depreciation of local currencies should reverse that trend this year, thus improving the region’s competitiveness. Measured by average gross earnings, labor costs expressed in euro increased in thirteen countries of the region monitored by DCE, at between 8% and 24% year to year.

The increase has been strongest - at 20% and over - in the Czech Republic, Russia, Bulgaria, Latvia, Poland and Lithuania. Gross earnings increased least in Hungary, Slovenia and Croatia, at a rate of 8-9%. In Ukraine, Slovakia, Estonia and Romania, euro earnings in 2008 increased by 12-18%. Average gross monthly earnings are highest in Slovenia at €1398, followed by Croatia with earnings at €1043.

The Czech Republic, Poland, Estonia register earnings of above €800 with Hungarian earnings at €791. Earnings in Latvia, Lithuania and Slovakia reach €600 to €700 a month. Earnings in Romania and Russia are close to €470 and they are lowest at around in Bulgaria and Ukraine at €267and €230 respectively.

In US dollar terms, gross earnings increased more than in euro as the average exchange rate of the euro to the dollar strengthened. The increase reached 15% (Hungary) to 33% (Czech Republic). The growth of euro earnings in the case of the Czech Republic, Slovakia and Poland was due to an increase of nominal earnings in local currencies and to a similar degree due to appreciation of currencies against the euro.

For Romania, Russia and Ukraine, the yearly average exchange rate of their currencies against the euro declined, thus limiting gains from the growth of nominal earnings. For the remainder of the region’s countries, the exchange rates were neutral as their national currencies were pegged to the euro or, in the case of Hungary, happened to remain stable year on year.

Taking into consideration differences between inflation rates in the euro zone (3.3%) and most of the region’s countries, even stable nominal exchange rates meant that local currencies were appreciating in real term and in the case of Russia and Ukraine nominal depreciation was outpaced by inflation differentials.

In fact when the difference is adjusted for inflation, only the Romanian lei (RON) has depreciated against the euro. Dynamic increases of average earnings brought earnings in leading countries of the region close to the level of newly industrialized countries of Asia; however, with the exception of Slovenia earnings remain lower than in the poorest ‘old’ EU member state - Portugal.

The above results are based on yearly averages. During the year growth rates of nominal earnings have been steadily falling as the financial crisis took its toll and economies slowed. Across the region the closing months of 2008 brought marked declines of industrial production and exports. As a result growth of nominal earnings in 2009 should be much lower than in the previous year.

Consequently, average exchange rates at the start of 2009 are significantly weaker than the yearly averages of 2008, thus pushing down the cost of wages in euro terms. This applies to the Czech Republic, Hungary, Poland, Romania, Russia and Ukraine. (press release, Napi Gazdaság)