The new Hungarian wage boom is here, but what is really happening?
Corporate advocacy groups were expecting wage growth of 6-9% this year, while macroeconomic analysts were expecting 10-11%. Surveys of recruitment firms also showed that most companies were looking to raise below 10%, with most looking to raise between 5% and 10%. In comparison, many were surprised to see gross wages rise by 14.6% year-on-year in January.
Most had expected wage dynamics to be more subdued due to the economic downturn last year, the weakness seen at the start of this year, and the fall in job vacancies and rise in unemployment. Subdued wage growth by companies on the one hand, and reduced bargaining power for workers on the other, were the main reasons. At the same time, the upward pressure on wages from the minimum wage and the wage floor (minimum wages increased by 15% and 10% respectively) and the still substantial labour shortages, although moderating, appear to have had a stronger impact on wages. Note that while job vacancies have fallen to around 70,000 from the previous record of 100,000, this level remains as high as we saw in 2018-2019. And labour shortages were already a meaningful driver of wage growth before the Covid crisis.
During the period of labour shortages over the past six to eight years, the years in which there were large central wage increases saw particularly strong (nominal) wage dynamics. On the one hand, a substantial increase in the minimum wage and the wage floor requires that earnings at somewhat higher wage levels (roughly up to the median wage) should increase at a similar rate in order to avoid wage rigidities. It is worth noting that the degree of labour shortages varies across sectors, so this alone would not lead to uniformly high wage dynamics in all sectors and hence the economy as a whole, but when the minimum wage increases significantly, it will also lead to wage increases in sectors where finding workers is not such a problem (i.e. the number of vacancies would not in itself justify a rapid increase).
This year is also special because companies have had to cushion somewhat the increasing activity of workers that we have seen in the job market in recent times. Indeed, last year's record inflation led to a significant drop in real earnings for many, resulting in a large increase in the number of active and passive jobseekers. Whereas blue-collar workers used to change jobs for 10-20% higher wages, in the period of the cost-of-living crisis even white-collar workers were open to leaving their companies for a similar wage increase. Inflation was so severe that people had to cut back even on food at low wage levels, but the middle class also had to tighten their belts and give up many things, holidays and services. (Since one of the basic rules of the labour market is that new workers can only be attracted at higher wages, it is not surprising that there has been a surge in activity.) Companies have had no choice but to respond to rising turnover this year by making substantial adjustments to wages. Thus, only those companies that were in a very unfavourable market situation and those that (somewhat as a consequence of the former) did not have a problem with a reduction in staff due to attrition, as this could lead to redundancies in the company concerned, could have given a wage increase of around 5% this year.
The sectoral breakdown in January also shows that wages have increased most in areas where many people work at or close to the minimum wage and/or where there is a high labour shortage. Education has seen a jump in growth because of the long-standing wage settlement, but the slower growth in healthcare is also disappointing, where previous years have brought high wage levels.
Following the high January wage data, Portfolio asked banking analysts and research firms to predict the extent to which real wages are likely to grow over the year as a whole. After the outstanding wage data at the beginning of the year, analysts raised their average annual wage growth expectations to 12-14%, up from around 10% previously expected. They expect lower annual average dynamics than in January because of the possibility of some slowdown after the spring months and the fact that the minimum wage is not expected to rise in December this year (only next January), leading to a weak wage index in the last month of the year.
With recent expert forecasts suggesting that inflation could rise by 4-5% over the year as a whole, real wages could increase by around 8%. Previously, experts had expected real wage growth of only 4-5%, but as inflation expectations have fallen in the past few months and wage growth forecasts have risen (after the January data), the expected rate of growth in purchasing power of earnings in 2024 has jumped sharply.
Overall, the last time real wages grew as fast as they are expected to do this year was in the early 2000s, and between 2016 and 2019. A common feature of both periods is that minimum wages have increased at a particularly high rate while inflation has remained low. In the years before Covid, the more dynamic rise in minimum wages was accompanied by an increase in labour shortages. Since rapid growth in purchasing power requires low inflation coupled with high wage dynamics, there was no point in raising the minimum wage significantly in 2022 and 2023 if record inflation took away the increase.
Rapid real wage growth is therefore rarely achieved, as firms often respond to high nominal wage pressures (due to central and/or labour shortages) by raising prices. However, they have not had the opportunity to do so at the beginning of this year, as demand remains depressed after last year's record inflation hit household balance sheets hard. So we can reasonably expect real wages to grow at a similar pace this year as in the early 2000s and in the 2016-2019 period. This will also require that the second half of the year does not bring an inflation shock, which is a good possibility given that the public's motives for caution are stronger than anyone had thought.
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