Analysis

The dynamics of labour costs changes in Central and Eastern Europe are a reflection of a wider process of convergence of levels of economic development, productivity, prices and living standards between formerly divided parts of the continent. The same forces that helped Italy, Finland, Greece or Spain narrow the gap to Europe’s most developed countries are now powerfully in force in CEE, raising GDP, productivity, living standards and the cost of labour.

Convergence has two dimensions: convergence of real (price-differentials adjusted) levels of income and productivity and price convergence in which costs and price structures are increasingly similar.

Poland, which has a per capita income roughly half of the EU-15 in real (adjusted for purchasing power) terms, has also only half the price level for the GDP of the EU-15. Accordingly its income per capita at current exchange rates is roughly a quarter of Western European EU member states. To achieve complete convergence Poland not only needs to double its real GDP per capita but will also need to double its price level.

For earnings and labour costs, real convergence equals growth of the real value of earnings and labour costs in the local currency accompanied by real appreciation of the local currency against the Euro. Those two processes combine to give high rates of increases for Euro converted earnings and labour costs.

Increases in real earnings and resulting increases in labour costs are embedded in the growth of productivity, especially in the industrial sector. It is also the growth of productivity in the tradable goods sector (practically: manufacturing) that lays the foundation for price convergence.

For the decade 1997–2006 the productivity of labour in the industrial sector increased at an annual average rate of 3.5–11.8% for CEE countries in the report. Growth rates were highest in Ukraine, followed by Estonia, Hungary, Lithuania and Poland. All of those countries have doubled their industrial productivity of labour since 1996.

Similar gains in Western Europe were much lower, with German and British productivity increasing 3% annually and increases of less than 1% a year for Italy, Spain and Portugal. High-performing Finland achieved 5.2% annual increases in efficiency.

Average annual rate of growth of efficiency in industrial sector, CEE and selected EU countries 1997-2006