Price-wage spiral began in Hungary, but wages are a turning point

In August, average earnings growth accelerated to 16.6% from 15.3% in the previous month, according to a report by the Central Statistical Office (KSH) on Monday. The stats office says "the increase in average earnings was mainly driven by raises to the minimum wage and the guaranteed wage minimum, as well as by already scheduled and additional wage increases."

Rises in the minimum wage and the guaranteed wage minimum are not new phenomena, they have been driving up wages throughout the year, but in the last month or two it appears that companies have been forced to raise wages again as labour shortages and price rises have become more pronounced. This indeed is the start of a price-wage spiral, as companies are forced to pay more to employees again because of prices are going up. But they are likely to cover this by raising their own prices further, which is an option only up to a point.

In August, the average gross earnings of full-time employees were HUF 497,200. Average net earnings were HUF 330,600 excluding tax benefits and HUF 342,900 including them.

Wage growth in the business sector picked up to 16.2%, a very marked increase from 14.9% in the previous month. It appears that companies have increased wages substantially in response to intensifying labour shortages over the summer.

Wage increases were even more pronounced in the public sector. After 12.4% in the previous month, the annual rate has climbed to 16.5%.

Average gross regular earnings (gross earnings without premiums and one-month bonuses) are estimated at HUF 472,200, up 15.6% from a year earlier, indicating that aside from one-off benefits, the increase in regular earnings is also pushing up wages.

Median gross earnings reached HUF 402,200, up 15.6% from last year. Median net average earnings, taking into account discounts, were HUF 280,200, 17.5% higher than in August of the previous year. (Median earnings are calculated by sorting earnings into series. Half of the workers earn more than the median wage, and half earn less.)

But with inflation also at a record high, the rise in consumer prices is erasing almost all of the wage increase. In August, the rate of inflation was 15.6% yr/yr, according to the KSH, up from below 14% in July, so workers are not feeling much of the wage increase.

In August, real wage growth in both the private sector and the national economy as a whole fell below 1%. Even with the price-wage spiral set in motion, the purchasing power of earnings is set to diminish in the coming months, with inflation at 20% in September. And in the coming months, the consumer price index is expected to rise even further, so that real wages will fall even as wage dynamics have picked up.

Wages may still be driven in the coming months by some companies and public actors giving one-off bonuses to workers in response to the 20% CPI, or raising wages further during the year, but the unfolding recessionary environment may well see wage dynamics slow down in a few months' time. As the minimum wage and the guaranteed wage minimum are also likely to rise less in 2023 than this year (when they went up by 20%), this could also put downward pressure on the pace of wage growth. However, the price-wage spiral that has started is not easy to break: both corporate and household inflation expectations are high, which may be reflected in prices and wages in the period ahead.

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