Economy
Labour shortage not to make living more expensive in Hungary - cenbank
According to the baseline projection of the MNB, as a result of rising wage growth, household consumption will pick up over the forecast horizon, but the inflationary pressure from the labour market will remain moderate
“In our forecast we expect the inflationary effect coming from the labour market to remain moderate in spite of the strengthening corporate wage cost increases. This may be attributable to the fact that, compared to the pre-crisis period, the earlier strong correlation between wage increases and inflation has weakened significantly," the MNB said.
In addition, in the recent period other costs associated with the production - such as commodity prices and interest expenditures - decreased significantly, so companies can have room for the management of higher wages, the central bank argues.
"Firms that operate in very competitive environments may refrain from raising prices, particularly if their margins are high and they can absorb the rise in ULC. Looking at firms' gross operating surplus positions on aggregate, this seems to be the case in Poland, though not in Hungary."
Although earlier mainstream theories claim that if the increase in companies’ wage cost permanently exceeds that of productivity, it may lead to a deterioration in their competitiveness, the central bank claims that “according to recent research the role of quality features appreciated in terms of competitiveness, especially labour skills."
In parallel with strong labor market mobility between countries the low level of wages quickly leads to scarcity of skilled labour and through this to reducing competitiveness. According to this theory, competitiveness is lowered - indirectly - by low wages.
The MNB’s next sentence is somewhat contradictory, though. It says that “accordingly, in recent years the role of wage level moderated in terms of competitiveness."
Wages have a key role in competitiveness. In times of amble labour reserve low costs were beneficial for economic growth, but now when the labour market is so tight this is already a disadvantage, considering that manpower is getting scarcer not only in Hungary but also in other EU countries that are much richer than Hungary.
In such environment wages should rise and they have been. Additionally they are likely to keep on rising for a little longer. How competitiveness can be maintained will depend on how efficiency can be improved, and an ever bigger role will be played in this by skilled labour (and the related quality education), technological innovations and developments.
“In our forecast we expect the inflationary effect coming from the labour market to remain moderate in spite of the strengthening corporate wage cost increases. This may be attributable to the fact that, compared to the pre-crisis period, the earlier strong correlation between wage increases and inflation has weakened significantly," the MNB said.
In addition, in the recent period other costs associated with the production - such as commodity prices and interest expenditures - decreased significantly, so companies can have room for the management of higher wages, the central bank argues.
In parallel with generally low inflation expectations companies can improve their profitability with more efficient production and increasing sales instead of price increases.
This looks differently from London
Analysts at Morgan Stanley thing the contrary. In a research note released at the end of August, Pasquale Diana and Georgi Deyanov said that “with commodity prices seemingly having found a floor and unit labour cost growth accelerating well ahead of core inflation, EM Europe inflation risks appear to be tilting to the upside for 2017 and beyond."Whereas Polish and Czech firms appear to have some margins to absorb the pressure from unit labour cost, Hungarian firms seem to be under greater pressure, as their profit share is already the lowest in the region
, they added.The economists at MS believe that due to weakening competitiveness (i.e. when ULC rises faster than productivity) companies will be forced to raise prices, especially in Hungary."Firms that operate in very competitive environments may refrain from raising prices, particularly if their margins are high and they can absorb the rise in ULC. Looking at firms' gross operating surplus positions on aggregate, this seems to be the case in Poland, though not in Hungary."
Competitiveness and mainstream theories
MNB staff also pointed out that as a result of the tightening labour supply and low inflation, real wages have risen strongly in recent years, while the increase in productivity remained subdued.Although earlier mainstream theories claim that if the increase in companies’ wage cost permanently exceeds that of productivity, it may lead to a deterioration in their competitiveness, the central bank claims that “according to recent research the role of quality features appreciated in terms of competitiveness, especially labour skills."
In parallel with strong labor market mobility between countries the low level of wages quickly leads to scarcity of skilled labour and through this to reducing competitiveness. According to this theory, competitiveness is lowered - indirectly - by low wages.
The MNB’s next sentence is somewhat contradictory, though. It says that “accordingly, in recent years the role of wage level moderated in terms of competitiveness."
Wages have a key role in competitiveness. In times of amble labour reserve low costs were beneficial for economic growth, but now when the labour market is so tight this is already a disadvantage, considering that manpower is getting scarcer not only in Hungary but also in other EU countries that are much richer than Hungary.
In such environment wages should rise and they have been. Additionally they are likely to keep on rising for a little longer. How competitiveness can be maintained will depend on how efficiency can be improved, and an ever bigger role will be played in this by skilled labour (and the related quality education), technological innovations and developments.
