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Too many jobs new world for ‘New Europe’

Not so long ago, Central and Eastern Europe had few jobs and many unemployed. Today, the 10 ex-communist countries that entered the European Union in 2004 have too many jobs and not enough people to fill them.

“Three years ago, we had hundreds, maybe a thousand, of applications for operator positions in Poland,” said Michele Campione, human resources director for Europe at Electrolux AG, the world’s second-largest maker of household appliances. “Now we have to go out and search for people. In three years, the labor market completely changed.” Electrolux entered Poland in 1998 and now runs four factories with a total of 2,000 employees. The company currently has well over 100 open positions as it faces a shortage of both skilled and unskilled workers, said Campione. “The shortage hasn’t impacted on operations, but we have to work harder to recruit,” he said. In Lithuania, it’s not easy to find a plumber, much less a software specialist. Lithuania, whose population is 3.8 million, has seen heavy out-migration of workers to Western Europe, coupled with robust GDP growth and foreign direct investment (FDI) inflows.

Percent of firms reporting that skill shortage is an important obstacle to operation and growth: Latvia 52%, Czech Republic 51%, Lithuania 49%, Hungary 40%, Bulgaria 38%, Romania 38%, Poland 36%. (World Bank 2005)

“Qualified project managers have left in droves to Copenhagen or London,” said Jeff Nelson, general director of Strategic Staffing Solutions International in the capital city Vilnius, which helps companies find software developers and managers. “Positions can stay open for a long time.” Before 2004, Nelson recruited Lithuanian specialists to work in Western Europe and the United States. After Lithuania’s EU accession, the situation reversed. He began recruiting Lithuanians working overseas for jobs back home. Nelson is seeing more foreign companies expanding or moving into Lithuania, often to serve as a regional hub. They require dozens of software specialists. “A significant amount of pressure to fill these jobs has led to 20-30% wage increases, and our clients are budgeting to pay for it,” he said. “The message is, come to Lithuania for the highly educated workforce; just don’t expect a low labor-cost proposition.”

Average annual wages increases 2004–2006: Lithuania 11%, Latvia 9%, Estonia 7.9%, Slovakia 4%, Czech Republic 3.9%, Hungary 2.3%, Poland 2%. (World Bank)

The key factors behind the labor shortage are job creation, early retirement policies and out-migration, according to Jan Rutkowski, World Bank lead economist and principal author of the report, “From the Shortage of Jobs to the Shortage of Skilled Workers.” New Europe has grown so fast that its education system hasn’t been able to keep pace. The issue extends to engineering graduates. “The main problem we see is that the local universities produce fewer graduates with the right profile,” said Eva Kulhankova, human resources manager for STMicroelectronics in Prague. ST, which runs a chip-design operation in Prague, has seen a decrease in the number of applicants for IC-design jobs between 2003 and 2006, she said.

FDI in the 10 new member states:
2004 $43.7 billion
2005 $53.1 billion
2006 $59.0 billion
2007 $55.8 billion (forecast)

Kulhankova believes the reason is the increasing number of foreign companies setting up or expanding in the Czech Republic. The smaller number of applicants hasn’t impacted wages or staff turnover, but ST now extends its search for engineers to Bulgaria, Romania and the former Soviet republics, she said. According to the World Bank, one in three expanding companies in the new EU states report that lack of skilled workers is a major obstacle to business growth. “The labor shortage is the most important constraint for FDI and economic growth,” Rutkowski said.

In the 1990s, large state enterprises in Central and Eastern Europe privatized or collapsed, and unemployment rates soared. A turnaround began around 2000, as the states attracted foreign investment and shifted toward free-market policies, creating domestic jobs. In 2004, the 10 states entered the EU and workers started migrating to some Western European countries, such as the UK and Ireland, where salaries can be five times higher. Rutkowski found the labor shortage most severe in the Baltic States (Estonia, Latvia and Lithuania) because of their relatively small populations. Estonia, with a population of 1.4 million, is the country where Skype was developed. But Estonia has been hard hit by a shortage of software specialists.

Skype currently employs 300 software personnel, said Sten Tamkivi, the head of Skype Estonia. He’d like to add 100 people this year, which would put Skype at its size limit in the small country. “It has gotten harder over the years to find people,” he said. “What’s more complicated for us is that we’re hiring the top people with three to five years’ experience, and this pool is most in demand.” Management has responded by importing personnel from the rest of Europe, as well as temporary staff from Taiwan and Japan. Currently, 60 employees are from outside Estonia, Tamkivi said. Skype also opened an office for development activities this year in Prague and has a development team in Stockholm. “By having more locations, we distribute the risk of finding people in time,” he said.

Playtech, an online gambling software developer based in the city of Tartu, opened its own Playtech Academy to train software specialists for its staff needs. “Big employers have to be resourceful or aggressive to maintain the systematic growth,” said Martin Leiger, project manager of Playtech Academy. Electronics manufacturers are feeling the pinch as well. ESM company Elcoteq, which has its second-largest European operation in Estonia’s capital city of Tallinn, has more than 100 job openings. “The unemployment rate is close to zero in Tallinn,” said Heikki Mäki, general manager of Elcoteq in Estonia. “Industry has increased in all areas in Estonia, taking the available workforce.” Elcoteq can manage well through the shortage because personnel can be brought in from its other operations and the company is currently not expanding, he said. But Elcoteq is working on efficiency improvements to offset the 15% annual Estonian wage increases fuelled by the shortage.

Wages are a big issue.

Neighboring Latvia saw a 23% average annual wage increase in 2006, according to the Latvian statistics bureau. Eastern Europe’s labor shortage is spread throughout the region but is location-dependent, said Ottó Sinkó, co-CEO of Videoton, the largest indigenous contract manufacturer in eastern Europe, based in Hungary. “The mobility of the workforce in this part of the world is substantially lower and, as a consequence, the regional differences could be very significant,” Sinkó said. “This is not like China, where manufacturers build worker dormitories and job-hopping is big.” Videoton, which employs 8,000 in Hungary, is set up in cities outside of the capital, Budapest, where the labor market is tightest. In Kaposvár, southern Hungary, one of the company’s plants employs 1,000. Staff has grown 20% annually with little trouble, Sinkó said. Videoton also runs a factory in central Bulgaria, far enough away from the investment boom in the capital, Sofia. The operation employs 1,300, and Videoton has managed to expand staff by about 25% annually. Wages are up, but only by a manageable 8% annually. “The labor shortage did not limit our growth, but finding employees has become more challenging since [Bulgaria’s] EU entry,” Sinkó said. “In Bulgaria, this was expressed more by a wage increase than availability.”

Location is often the key, even in the world of software. According to a 2006 report by McKinsey & Co., “The Overlooked Potential for Outsourcing in Eastern Europe,” companies will find an ample number of software/IT specialists, if they look beyond first-wave locations, such as Budapest and Prague. “Midsize cities with little or no offshoring activity but large talent pools” are likely to offer labor-cost advantages for the next decade, the report said. (