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.

Finally:

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.

Hungarian Central Bank Cuts Interest Rate

Hungary's central bank have just cut their benchmark interest rate for a second time this year. The rate-setting Monetary Council, led by bank President Andras Simor, cut the two-week deposit rate by a quarter of a percentage point to 7.5 percent after having left it unchanged since June.

Hungarian inflation, which is the European Union's second-fastest after Latvia, has slowed ever so slightly of late, after reaching a six-year high in March. In fact the annual inflation rate fell to 8.3 percent in August from 8.4 percent the month before, reaching the lowest level since January 2007. The central bank last month said it expects the pace of price increases to slow further.The Banks is rather caught at the moment in a deep sea between the rock of falling domestic demand and the hard place of having 80% of the outstanding mortgages in swiss francs, and thus needing to defend the forint. Stubborn inflation would occuply the middle ground in this panorama. According to the Bank press statement:

"Our 3 percent inflation target is attainable in 2009, if the increase in agricultural, food and energy prices doesn't lead to second-round effects... the bank....expects inflation to gradually moderate in the next two years. The Monetary Council sees room to lower the benchmark rate."

Forward-rate agreements show that investors have already stepped up their expectations of rate cuts in the next five months. They now expect more than 50 basis points, compared with less than 25 basis points a month ago. We must now wait and see what effect all of this has on the forint.

Migrants and Hungary

The BBJ ran this article this morning:

EC: Hungary needs more immigrants


Thanks to an aging population, Hungary will have to get ready to attract a great amount of immigrants over the next years – the European Commission said.

The EC added that migration is the solution for the EU as a whole, as it is facing acute shortage of workforce in the near future. The Commission also pointed out that Germany, Italy, Hungary and Latvia will be hit by the heaviest shortage of qualified workers. In the next 20 years the EU – currently the home to 18.5 million non-European immigrants - will need an additional 20 million immigrants to ensure its work force.

The article is covering a speech by Justice, Freedom and Security Commissioner Franco Frattini which is well summarised here. Among other things - and over and above the fact that Hungary was specifically singled out as having a specific problem which needs addressing - Frattini said the following:

"Countries with rapid economic growth in recent years, such as Spain and Ireland, have clearly benefited from the in-flow of skilled workers from both within and outside the EU. Across the EU all skill levels are required. The challenge is to attract the workers needed to fill specific gaps. Working together makes the EU stronger not just when dealing with problems such as illegal migration and border management, but also in seizing the opportunities which migrants embody. Common action at EU level also gives member states a stronger voice on the international stage, bearing in mind that there is competition between different countries and regions of the world for skilled migrants, especially with high qualifications."

Now I have recently been advocating increased migration as one of the ways to reduce the massive wage pressure that is building up in Latvia and the Baltic economies generally. I also have a post here on the more general underlying demographic issues in Hungary here.

The strange thing is perhaps that at the present time all of this seems to be a bit "unworldly" in the Hungarian context, since with the dramatic slowdown which is taking place Hungary is presently the only EU 10 economy where there is NOT a serious labour shortage developing (although there may, even in Hungary, be skill shortages in some specific areas). But we need to think in the longer term here, and look to an eventual economic recovery, and try to consider the specific problems Hungary will be facing given its demographic profile. So changes are needed. Changes in paperwork, changes in regulations, and above all changes in the way people see this particular problem.