Central and Eastern Europe has long been considered as relatively cheap place to manufacture sophisticated products like cars and electronic products at a much lower price than in the West. Accelerating wage growth, however, may change this perception. The average nominal wages rose by 10.7% in Hungary in February on an annual basis, which is the highest growth of nine years, according to the national statistical office. The data was presented after a surprising 5.2% increase in wages in Poland, which is the highest growth since June. The trends reflect recent developments in the region.
Although the former communist member states of the European Union are growing faster than Erozone economies and unemployment in many countries has reached a record low, for years the level of pay has hardly reached that in the West. But now the rising claims for higher pay endanger the region’s low-cost growth model that supports the attraction of capital from abroad, including factories operated by car makers Volkswagen and Kia Motors, as well as other industrial giants like General Electric.
The wage growth in the region is beginning to accelerate, fueled by the combination of labor shortages and state policies. The key point is that real wage growth exceeds production growth. The result is that rising pay will start to hit companies’ profit margins.
The governments in the region also support calls for higher wages, often targeting multinational corporations. Czech Socialist Prime Minister Bohuslav Sobotka made the end of the cheap labor one of the key topics of his campaign before the October elections. His Slovak counterpart, Robert Fico, recently asked why a worker at a Volkswagen plant in the former communist country receives only one-third of his German colleague’s pay for the same job. The rising wages may not be an immediate threat to the competitiveness of the region, but development may have the opposite effect, leading to inflation.