How much could wages rise in Hungary in 2024?
Average wages in Hungary have increased by 14-15% this year, which is a very high rate. This is partly due to the fact that the minimum wage and the guaranteed minimum wage have risen by 16% and 14% respectively. On the other hand, the price-wage spiral that emerged last year even played a role in this year's wage agreements, so whichever company could manage it, raised earnings substantially. (As can be seen in the chart below, wage dynamics were around 10% between 2019 and 2021, before the huge minimum wage increase and the pick-up in inflation pushed the pace up to over 15%.) However, the surveys also show that not all companies gave double-digit wage increases this year, but as more workers became dissatisfied with the fall in their real wages, many switched in the midst of the inflation crisis if they were paid 10-20% more for similar jobs elsewhere. In the past, blue-collar workers were the most likely to move for such higher wages, but in the midst of the cost-of-living crisis, white-collar workers are not hesitating either. However, it is also true that while more and more people have wanted to change, the recession has reduced the number of vacancies, leaving workers with fewer options.
The underlying trend is that average annual inflation will be close to 18% this year - the median economist forecast is 17.7% - so that average real earnings will fall for the first time in many years. The last time we saw this was in 2012, and before that the 2008-2009 global economic crisis period saw real wages fall. As shown in the chart below, the last almost ten years have seen a rise in real earnings, with inflation remaining at persistently low levels playing a key role.
There were years when prices did not increase at all. However, dormant inflation was revived in 2021 in the aftermath of the Covid crisis, and last year it rose to levels not seen for decades as a result of the energy crisis. This year, international developments, a weak forint, tax increases and other government measures have prevented wage growth from keeping pace with price increases. Falling real wages led to a fall in retail sales, which have not recovered since.
The only beneficial effect of the fall in demand and the recession is that it has now tamed inflation, while also significantly eroding the ability of companies to raise wages, which has ultimately stopped the emerging price-wage spiral. The base effect (high price levels at the end of last year) and the fall in consumption have now reduced the 25% price rise seen at the beginning of the year to below 10%. The good news is that inflation could be even lower at the beginning of next year, but the bad news is that for the time being price developments are not expected to be close to the central bank's 3% target. Rather, inflation could be more like twice the National Bank of Hungary's (MNB) target in 2024, although this would still be one-third the money deterioration that has characterised this year.
With inflation set to fall sharply next year, real wages could rise again even if average gross wage growth slows. And there is a good chance that this will happen, as the latest projections show that average wage growth will fall from 14-15% this year to close to 10% next year. Most macro-analysts' forecasts are partly based on the assumption that the minimum wage will increase by 15% and the guaranteed minimum wage by 10% (exceptionally not from January but already from December this year), so that the real value of minimum wages could rise from the beginning of the year. Employers' organisations are slightly more pessimistic than macroeconomists, expecting average wage increases in the single digits, in the 6-8% range. Nevertheless, there is a good chance that average wage growth will remain around 10% next year, as the upward pressure on wages from the growth of minimum wages (avoiding wage depression) on the one hand, and the increasing labour shortages (as the economy recovers) on the other, could keep wage dynamics high.
Cover photo: Getty Images
