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Hungarian Gov’t Plans to Dramatically Increase Wages by 2022; But is This Increase Economically Sustainable?

By Gabor Sarnyai // 2018.05.18.

The negotiations between the Orbán government, business and employer organizations over the next seven-year’s wage agreements have not taken place yet, therefore the official expectations of wage growth for the next year are still unknown. However the new convergence programme, introduced this week, shows few details on how the government will make its calculations until 2022.

The government’s plans are certainly ambitious. In the public sector, it claims, wage income will increase by 10.8% this year, then by 9.9% next year, then 9.3%, 8.5%, and 7.9% over the three following consecutive years. For all employees, this means slightly lower income growth: 9.5% from next year and 7.7% to 7% in the following years. If these figures turn out to be true, this means the average wage growth for all employees may reach 50 percent by 2022.

It is already known that the social contribution tax will fall by 2 percentage points per annum from the current wage agreement until 2022, from the current 19.5% down to 11.5%. In addition, the personal income tax may potentially also be reduced to single digits. This plan was mentioned several times by Mihály Varga, the Minister of National Economy.

But the question arises – why would big international companies choose Hungary if it loses its biggest comparative advantage, lower labour costs? Economist Gábor Regő, from the think-tank Századvég, argued that

Wages are only one part of competitiveness. A significant wage increase (about 40 percent in net wages) was implemented between January 2014 and January 2018 as well. However labour market indicators are becoming better and better, thus, it did not result in a sacrifice in employment rates. As the labour force can move freely among EU member states, in the long run such high wage differences cannot be sustainable, and we cannot compete with low wages forever. If Hungary does not resume wage increases, emigration will continue to Western countries. Of course wage increases do not stand alone: they are accompanied by tax cuts, thus labour costs rise at a lower rate. Hungary must develop in other areas of competitiveness: administration, education, a skilled labour force and so on. If these other factors improve, international investors will continue to choose Hungary – as we see in the growing trend of foreign investments as well.

We also asked Regő whether structural changes can be expected in the economy, as well as if other types of investments might be coming to Hungary which would be more labor-intensive or expect more added value from employees? The expert highlighted that,

in order to reach a higher wage level, increasing the wage share is not enough in the long run. The number of jobs with higher value added has to be increased, and R&D and innovation has to be improved. In my opinion, it should be among the main targets of the new government, and multinational companies have to take part in it as well: not only the production, but also other parts of the value chain should be transferred to Hungary. Yes, in order to reach a higher wage level, increasing the wage share is not enough in the long run.

We also asked Péter Ákos Bod, an economist from Corvinus University and former president of the Hungarian National Bank, about wage increases in the public sector. He believes this wage growth is a compensation, because Hungarian wages are lagging behind not only those of Western Europe, but also those its Central European neighbors as well. In addition, the economist argued that government’s announcement can also be seen as an attempt to fulfill an election promise. Bod also noted that another interesting issue is productivity, which in a normal free market environment usually grows first, then wages follow it. In this case the opposite occurred. First the government raised wages, then they announced that it’s necessary to work more efficiently for it.

However, another job market problem has arisen,which is connected to the issue of wage levels. Yesterday, pro-government daily newspaper Magyar Idők reported about recent factory closures that occurred due to employment shortages. The newspaper assumes many foreign-owned companies will move their production to neighbouring countries like Serbia and Ukraine because of  lower labour costs there. In addition, workforce shortages prevent companies from extending their production capacities, therefore they are more likely to leave the country. This process has already resulted in 3,000 lost jobs, according to Magyar Idők.