The troubled relationship between wages and productivity – a CEE/SEE perspective

1. The troubled relationship between wages and productivity – a CEE/SEE perspective Trade union economic experts` meeting PERC Herceg Novi, Montenegro, 18-19 October 2018 Bela Galgoczi (bgalgoczi@etui.org) European Trade Union Institute - ETUI

2. Structure Productivity and wages • In spite of the recovery and recent expectations wage growth in Europe still moderate • Across EU: Real wage growth behind productivity growth • Wage shares in CEE/SEE among the lowest in the EU • Not just annual changes, also relative levels matter • Measuring productivity: macro or sectoral level • What are the drivers productivity • In CEE-s huge productivity differences within the economy: in manufacturing (where competitiveness really matters) there is a great productivity reserve

3. With higher inflation real wage growth out of steam .

4. Yearly average gross wages in % of the EU15, 1995-2015 (in nominal EUR terms) I Source: AMECO 2017

5. Average wage (EUR) in % of Germany I

6. Real wage developments, Western Balkans Wage levels in CEE and SEE are still a fraction of that of the EU15. Real wage developments were dynamic up to the crisis, but suffered a serious setback after 2008, some new dynamism in 2016-2017 but weak and short-lived Only Bulgaria and Turkey had dynamic real wage developments in the entire period since 2000. Slovenia and Croatia had wage catch up until 2010, but after real wages stagnated in Slovenia and fell back in Croatia. FYR Macedonia showed a real wage decrease of over 10 % since 2010. It is clear that wage convergence in the Western Balkans region with the exception of Bulgaria was not in place, in certain countries (Croatia, FYR Macedonia) the wage gap with the EU had further widened.

7. Productivity/wage gap With the sole exception of Bulgaria real wage developments in all CEE/SEE countries lag behind productivity growth (in the entire period 2008-2014) The longer period (2000-2016) for a broader group of countries shows that the productivity/wage gap is a wider phenomenon

8. Development of real wages and productivity 2008-2014 • Source: Authors’ calculations based on AMECO.

9. Real wages/real productivity 2016/2000, % I

10. Productivity levels matter, but attention mostly paid to yearly changes only But productivity levels also matter: Labour productivity is defined as the ratio of real value added at factor cost to total employment Labour Productivity - micro and macro level? Standard microeconomic theory suggests that wage increases should remain below the rate of productivity growth in order to increase employment (Borjas, 2010). The focus on changes of wages and productivity fully ignores their levels. The assumption is that whatever the relation of a given level of productivity (value added per worker or hour in Euros) to a given wage level is at a time, any wage increase should be subject to a corresponding increase in productivity otherwise competitiveness and employment would suffer.

11. Productivity levels matter, but attention mostly paid to yearly changes only Problematic to measure productivity in the services sector where wages define productivity: are German bus drivers and cleaners six times more productive than Romanians? But also in manufacturing where productivity appears as value created per worker, the value is defined by the producer or export price: this depends on the `pricing power` The concept of productivity assumes perfect market conditions and a balance of power between the main economic actors Multinationals often set input prices in an arbitrary way (transfer prices)

12. Productivity levels matter, but attention mostly paid to yearly changes only As the graph below shows, productivity levels of CEE countries are higher in terms of the EU15, than their relative wage levels: In 2017 Slovakia had 49% of EU15 productivity, but only 38% of EU15 wages In Eastern Germany this relationship is opposite: as the 2018 report on the German Unification showed, East German average wage levels were at 90% of the western German wages, but East German productivity level was just 75% of the West-German

13. Wage and productivity levels in % of EU15, 1995 and 2017 I

14. Wage shares reflect the distortion in relative productivity and wage levels Wage shares in GDP tend to be lower in CEE (cca 55%) than in EU15 (65%) and the main trend is also downward. Biggest drops in Poland (12p.p.) and Hungary (12p.p.). Exception: wage share in Slovenia is even higher than EU15 and wage share in Bulgaria increased a lot against the main trend. Slovak wage share is lowest (49% of GDP). A polarised picture in recent real wage trends, BUT all CEEs (exc: BG) had lower real wage growth than productivity /2008-2015/.

15. Focus: wage shares in V4 at the bottom of the EU

16. In CEE big productivity differences by sector Wage levels are still a fraction of that of the EU15. BUT higher productivity levels and increases in the exporting manufacturing branches. Wage adjusted productivity in manufacturing for CEEs is substantially higher than EU15 or Germany’s. This means: how much value added is produced by a unit measure of labour costs: in German manufacturing 100€ labour cost makes 132€ value added, in Hungary 212€ This `productivity reserve` gives room for upward wage convergence.

17. Wage-adjusted productivity in manufacturing, 2013 countries, 2009 *apparent labour productivity is defined as value added at factor costs divided by the number of persons employed.

18. In CEE big productivity differences by sector and within sector As we see below, not only are there huge productivity gaps between the manufacturing and services sectors in CEE, but also with that sector. Productivity at foreign firms in the automobile industry tends to be three times higher that at domestic companies of the sector (HU, SK, CZ). Even if it sounds good, wage bargaining cannot realistically target company or sub-sectoral productivity levels. A balanced and sensitive approach in the principle of solidaristic bargaining is necessary. But accumulated productivity reserves allow more dynamic wage demands, in particular at multinational enterprises.

19. Labour productivity and business research & development (BERD) intensity in the automotive industry *apparent labour productivity is defined as value added at factor costs divided by the number of persons employed.

20. Low wage trap: destined to be left behind; specialisation in low value added labour intensive activities > no future Low wages also mean, low R&D and innovation activity CEE are among the laggards in R&D spending and innovation FDI in CEE is also not R&D intensive Low innovation capacity in CEE is a blocking factor of further development and low wage profile contributes to conserve this The role of CEE in international value chains is still dominantly based on cheap labour – a vulnerable position without future perspective Even the automobile industry – a flagship industry of the region – that is otherwise R&D intensive, has low R&D engagement in CEE

21. Concluding remarks and outlook GDP growth below potential, convergence is out of steam Instead abandoning ‚low wage competitiveness‘ model, this is being reinforced It is not too high wages or high wage increases that explain economic weakness and lower than potential growth ALL THIS is NOT SUSTAINABLE!! A new growth model, investment and wage led growth, upgrading of the economy is needed