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Thursday, September 27, 2007

World Bank Report on Labour Shortages in the EU10

The European Union's 10 eastern members must take concerted action to increase employment participation levels to avoid a serious short-term slowdown in economic growth and important supply-side structural problems in the longer term according to a report published today by the World Bank.

"Addressing the emerging skills shortages is particularly important, because failure to do so will constrain job creation and future economic growth"

You can find the report summarized here, or you can download direct here.

Claus and I will prepare a full summary and review over the weekend, but for now here are some revealing extracts.

The report in fact says the following:

In this atmosphere of short term turbulence it is important not to lose sight of the longer term trends and the fundamental challenges the EU8+2 continue to face. With the exception of Hungary, growth remains high throughout the EU8+2 and in the case of Latvia represents serious overheating. This growth is sustained largely by consumption and investment. With tightening labor markets, large increases in real wages and employment and very rapid credit expansion, a moderate slowdown in growth may in fact be desirable in the countries showing signs of overheating.

They also have this to say, which is IMHO very important, and to the point:

Unemployment has fallen substantially in virtually all EU8+2 countries since 2004 due to strong growth in labor demand. This has given rise to skill shortages and associated wage pressures, often amplified by out-migration of EU8+2 workers. However, employment/working age population ratios remain relatively low.

Really this is the very point that Claus and I have been making. They then continue:

In contrast to the earlier period of weak labor demand it is now the supply side of the labor market that constrains new job creation. Many persons of working age are economically inactive in EU8+2 either because they lack skills demanded by employers, or because of labor supply disincentives, such as early retirement benefits, generous disability schemes, high payroll taxes, and limited opportunities for flexible work arrangements. These effects are concentrated among the younger and older workers, while the participation rates for middle aged workers are similar to those of the EU15. Hence the main challenge facing now EU8+2 is to mobilize labor supply to meet the demand. Addressing the emerging skills shortages is particularly important, because failure to do so will constrain job creation and future economic growth. To increase the effective labor supply EU8+2 countries need to: (a) improve labor supply incentives through reforming the social security systems, (b) improve worker skills through reforming the educational systems and improving domestic mobility; and (c) import labor with skills that are in short supply by opening labor markets to foreign workers. The weights assigned to each policy depend on the nature of the most binding constraint to labor supply, which vary across countries.

also this is very important, even if I am nowhere near as optimistic as the World Bank is about the possibilities of Eastern Europe staying out of the firing line, especially as the eurozone itself is slowing fast.

The effects of deepening financial turbulence would potentially be more serious for the EU8+2, but are more difficult to predict. The greatest risk is that the countries that have large current account deficits – the Baltics, Romania and Bulgaria – are suddenly less able to finance them through capital inflows and are forced into an economic contraction. This is particularly true for countries like Hungary that are highly dependent on more volatile portfolio inflows than on FDI. Banking sector foreign borrowing which is the main financing source in the Baltics is generally less volatile than portfolio flows, but the extreme surge in the Latvian CAD (to 30% of GDP in the 12 months to end July ) clearly cannot be financed in this way in a sustained manner. There are other potential risks as well. A general retreat from mortgage lending provoked by US experience would lead to broad based credit tightening and weaken the booming construction sector in the EU8+2. Moreover, the increased risk sensitivity may cause the unwinding of carry trades making external finance more difficult for higher interest, carry trade destination countries.


In the latest quarters unemployment rates have either continued to fall or have remained fairly stable despite upward seasonal pressures. In several countries unemployment rates declined to historical minima (the Baltic States, the Czech Republic, and Poland). Employment rates in Latvia, and also in Estonia reached the highest levels since the start of transition and are around 68% for people aged between 15 and 64 years, which is close to the Lisbon strategy target of 70%. Nevertheless, further employment increases may be limited because of structural nature of joblessness due to skills mismatches and unwillingness to relocate or retrain, which is particularly relevant for those who stayed out of the labor market longer.

The recent trends have undoubtedly strengthened the power of employees in the wage bargaining process. Real wages have begun to grow rapidly in Poland where their expansion had been moderate so far. The highest growth is occurring in sectors which suffer most from shortages of workers (for example, construction). Rising employment and strong dynamics of real wages are pushing the growth of the wage bill into double digits. Nevertheless, demands of higher wages for public sector employees come into sight in most countries in the region. In Bulgaria and Poland, trade unions are prepared to resort to strikes or the threat of strikes in wage setting negotiations.

In all countries apart from Slovakia and Slovenia, wages are growing faster than labor productivity. Rising unit labor costs provoke central bankers in the region to tighten monetary policies (Poland and the Czech Republic). Apart from inflationary pressures, excessive ULC growth may undermine competitiveness and prospects for sustained long-term output growth and further labor market improvement.


Antal Dániel said...

I have posted somewhere earlier that the once homogeneous Hungarian regional statistics start to get some variance. Last years mobility and demography statistics came as a surprise, formerly there were not too much difference in this relatively small country.

Now here is some evidence from the labor market: only 3,5 % of the active population is seeking a job in Central-Hungary, the figure is a mere 3 % in Budapest. You may call this frictional unemployment, or even a labor shortage. In Northern Hungary the corresponding rate is 17.3 %.

This means that there are some centers of growth and depopulation all over the region. Northern-Hungary is a neighbor of the similarly poor Eastern-Slovakia. In Western-Hungary and South-Slovakia you see very similar patterns, too.

Many people have been saying that the relevant statistical unit will the region in the EU, which is roughly the size of the USA state. I tend to believe this is true.

Edward Hugh said...

"Now here is some evidence from the labor market: only 3,5 % of the active population is seeking a job in Central-Hungary, the figure is a mere 3 % in Budapest. You may call this frictional unemployment, or even a labor shortage. In Northern Hungary the corresponding rate is 17.3 %."

Thanks for this information. I am finding a similar picture across the EU10, in terms of large regional disparities. Before saying more though I would add that Hungary's problem at this point is not really a labour shortage. Hungary is virtually unique in the EU 10 on this.

The ageing workforce component may be more relevant in Hungary though.

Still, there are regional differences which may mean that despite the looming recession there are some very tight labour markets.

Basically these are structural rigidities that are very hard to get round, and are a given - ie a capacity constraint that won't go away.

You can't expect to move a rural Hungarian female of 60 into a bank in Budapest to sell Swiss Franc mortgages. So you have a lot of people with the wrong age, the wrong kind of educational background and in the wrong place to be of a great deal of economic value in this situation.

Given that many of the people concerned are in the 50 to 70 age range, it hardly seems interesting to even try to attract industry into these areas, unless you couple this with substantial population "resettlement" from say parts of Asia, and I think politically no-one is ready to address this in this way at this point.

"Many people have been saying that the relevant statistical unit will the region in the EU, which is roughly the size of the USA state. I tend to believe this is true."

Ok, now I understand what you are trying to say here. I think you are saying we need to get away from the old idea of "nation" and ethnos. Obviously being in a Catalonia which is locked inside Spain I couldn't agree more. A Europe of the regions has long been our battle cry here. But this is much easier to argue for in the smaller countries - like Hungary - than in the larger ones like Poland, Germany and France, where powerful nation states still wield very large sway. The borders are dissolving in reality, but not at the political level.

Mentioning the US, I would just like to mention one other unfortunate historical precedent here. The US closed its doors to migrants in 1922. In 1930 it had the longest and deepest recession in its history. Many economic historians have argued that these two events may not be unconnected, and I tend to agree with them.

Basically the US recession was so long and so deep since the US labour market was unable to rapidly adjust - the sticky wages and prices phenomenon - due to structural distortions in the labour market which were partly produced by the immigration ban.

The comparison with what is now happening in Hungary - with the persistent inflation despite the rapid deceleration in the domestic economy that is taking place - couldn't be more striking.

This pattern can now be repeated over the next few years across the EU 10 as overheating turns into recession across the map. At least this is how I see things. I am not, I'm afraid, optimistic. But we need to watch all this day by day, to see what can be learnt and what can be done.

Antal Dániel said...

Hello Edward,

The Hungarian demography is trickier than you think: in fact there has been a continuous inbound migration since 1988. Romania, Serbia and Slovakia had huge, Croatia and Ukraine had smaller Hungarian-speaking minorities. Many of these people relocated to Hungary since the end of Communism.

The only reason why our population was not decreasing is that we always had a positive net migration, but it was not very visible, because most migrants were ethnic Hungarians. The biggest flows were from Romania, where Hungarians were discriminated and Serbia during the wars. These people arrived and many times stayed in Eastern and Southern Hungary, regions that otherwise have been steadily loosing population to Central Hungary.

It seems that by now most educated, skilled and young Hungarians relocated from the neighbors. Hungary had a selective but quite open immigration policy and did not have to face big cultural problems because the immigrants were easy to integrate. I this partly explains why we had no such tight labor markets up to now.

This process makes the regional aspect even more interesting, because large parts of the population relocated across the border (from Western Romania to Eastern Hungary, from Southern Slovakia to Northern and Central Hungary). This effect has largely changed the supply side of the regional labor markets.

Very similar things are happening in Eastern Romania and Moldova, or between Poland and Ukraine.