From the FT this morning:
Growth in jobs rises for German engineers
By Hugh Williamson in Berlin
Published: March 26 2008 01:25 | Last updated: March 26 2008 01:25
Employment in Germany’s engineering industry is expanding at its fastest rate in 40 years, highlighting the strength of Europe’s largest economy as global financial storms intensify.
Jobs in the sector – the backbone of Germany’s manufacturing industry – rose by 27,000 in January, the highest monthly increase since the 1960s, according to figures published on Tuesday by Gesamtmetall, the engineering employers’ federation. Some companies reported losing production because they could not fill vacancies quickly enough.
Production in the sector surged by 10 per cent last year, leading to the creation of 120,000 new jobs, according to Thomas Vajna, Gesamtmetall chief economist.
“We’re pleasantly surprised the boom is continuing,” he said, noting however that production growth was likely to be lower this year, but would still reach about 5 per cent. Jobs growth might exceed last year’s total, with Gesamtmetall predicting 147,000 new recruits this year.
He said that about one in eight of the approximately 6,100 engineering companies were having difficulties in recruiting qualified engineers and mechanics, with this in some cases leading to production cutbacks.
“Many companies misjudged how quickly the economy would recover and therefore failed to take on sufficient trainees,” Mr Vajna said. There also remained a shortage of engineering graduates, he added.
Economy-wide skills shortages have become more acute in recent years even though unemployment still stands at more than 3.6m. The shortages cost Germany up to €2bn ($3.1bn) a year, according to economics ministry estimates last year.
Germany’s economy, the biggest in the eurozone, has so far shown little sign of being affected by the crisis emanating from the US subprime mortgage market. Indications of likely future trends will come on Wednesday with the publication of the closely watched Ifo business confidence survey.
Experts said the positive employment news, coming on top of strong engineering industry profits last year, could lead to significant wage increases when negotiations with the IG Metall trade union open in October. Mr Vajna rejected such projections, arguing that the pay settlement would be for 2009, when growth might be tapering off.
Unions have, in recent months, broken out of years of wage restraint to agree pay increases of between 5 per cent and 11 per cent. Jörg Köther, IG Metall spokesman, said he welcomed the “positive news” on engineering employment, and said the union would present “an appropriate wage claim” in October, without elaborating.
Engineering employment has moved in step with Germany’s economic recovery of recent years, expanding by 183,000 since April 2006.
Wednesday, March 26, 2008
Wednesday, March 5, 2008
OTP To Stop Unsecured Lending in Romania
Portfolio Hungary is reporting the following:
Hungary's OTP Bank has stopped granting unsecured consumer loans in 14 Romanian branches, because, overall, the number of problems with loans was alarming, László Diósi, chief executive of OTP Romania, told Ziarul Financiar on Wednesday
“We just provide home equity loans in those locations. As soon as we see that conditions have improved - in terms of personnel and process - we will resume consumer loans, most likely in March or April," ZF cited Diósi as saying.
The local branch of Hungary's biggest bank ended last year with more than EUR 11 million in losses, the same as in 2006.
At the same time, the quality of the loan portfolio worsened, after non-performing loans increased their volume and accounted for 10%, according to the data provided by OTP to the Budapest Stock Exchange.
"The increase in the share of non-performing loans is also fuelled by a statistical effect, given that we outsource some of the loans to Budapest, and they must be clean," Diósi explained.
He added that that the quality of the loan portfolio has not actually worsened, as the loans in poorer performance categories were put there because of the different reporting standards used.
OTP, one of the banks that announced extremely bold targets when it first entered the market, was forced to halt its territorial expansion, after its network reached 104 branches.
“We will halt the development of the network this year because we need some time to stabilise, as I believe all banks need," Diósi said.
“The high turnover of personnel and the increase in attempted fraud is putting pressure on operations. We will focus on training personnel and financial control operations," he added.
“We believe that the news on worsening loan portfolio quality is already priced in following disclosure of 4Q07 results with rising non-performing loans which accounted for 10% of total loans," Marta Czajkowska, analyst at KBC Securities, has commented.
“However the news on the stopped branch expansion is new and negative in our opinion. Overall, we expect neutral impact on the stock price today."
Hungary's OTP Bank has stopped granting unsecured consumer loans in 14 Romanian branches, because, overall, the number of problems with loans was alarming, László Diósi, chief executive of OTP Romania, told Ziarul Financiar on Wednesday
“We just provide home equity loans in those locations. As soon as we see that conditions have improved - in terms of personnel and process - we will resume consumer loans, most likely in March or April," ZF cited Diósi as saying.
The local branch of Hungary's biggest bank ended last year with more than EUR 11 million in losses, the same as in 2006.
At the same time, the quality of the loan portfolio worsened, after non-performing loans increased their volume and accounted for 10%, according to the data provided by OTP to the Budapest Stock Exchange.
"The increase in the share of non-performing loans is also fuelled by a statistical effect, given that we outsource some of the loans to Budapest, and they must be clean," Diósi explained.
He added that that the quality of the loan portfolio has not actually worsened, as the loans in poorer performance categories were put there because of the different reporting standards used.
OTP, one of the banks that announced extremely bold targets when it first entered the market, was forced to halt its territorial expansion, after its network reached 104 branches.
“We will halt the development of the network this year because we need some time to stabilise, as I believe all banks need," Diósi said.
“The high turnover of personnel and the increase in attempted fraud is putting pressure on operations. We will focus on training personnel and financial control operations," he added.
“We believe that the news on worsening loan portfolio quality is already priced in following disclosure of 4Q07 results with rising non-performing loans which accounted for 10% of total loans," Marta Czajkowska, analyst at KBC Securities, has commented.
“However the news on the stopped branch expansion is new and negative in our opinion. Overall, we expect neutral impact on the stock price today."
Thursday, February 28, 2008
Irish Chain Reaction
From the FT today:
Back in Vilnius, Arunas Adomaitis trained as a classical music conductor. Today the Lithuanian, after stints on building sites, runs Lituanica, a specialist food shop in Dublin’s Ballymun district.
Lituanica is a symbol of the changes engulfing an area that was once a byword for bad town planning. The original residents of Ballymun – established as part of an inner-city slum clearance in the 1960s – have largely moved to better housing elsewhere. Geraldine Brady, at Martin Shortt, the local letting agency, estimates 90 per cent of the occupants of the flats are now non-Irish.
While businesses such as Lituanica have contributed to the revival of areas like Ballymun, the big question now is what would happen to such communities if, as many analysts now forecast, the Irish economy falters in the face of a possible US recession and a domestic property slowdown.
Official forecasts put growth this year at little more than 2 per cent – respectable by European standards but the lowest for Ireland since the early 1990s.
Will the immigrants who lose their jobs pack up and go home – easing Ireland’s unemployment problems, just as their arrival relieved the labour market tightness? Or will they, like Mr Adomaitis, find new work and put down roots in Ireland?
The non-Irish now account for 10 per cent of Ireland’s 4.3m population and they have buoyed the labour supply and bolstered consumer demand.
Their presence has particular relevance for the housing market where, in some areas of Dublin, estate agents report the majority of new mortgage applications have been by non-nationals.
After a 10 year property boom, a cooling of the housing and construction sectors has been long predicted and, according to most economists, badly needed. The economy had become dangerously dependent on the sector, with house building alone responsible for close to a third of the growth in economic output in the past four years, reaching a peak of 13 per cent of gross domestic product in 2006. This compares with a figure of 5 per cent in the US and 4 per cent in the UK.
In the year to November house prices fell by 5.9 per cent, though rents rose 11 per cent suggesting strong underlying demand.
“People sometimes forget the economy didn’t take off because we started building houses. What happened in Ireland was not a construction-led boom in that sense,” says Eunan King, chief economist at NCB stockbrokers.
Mr King has long argued that the story of the Irish economy can be largely explained in terms of its positive demography.
In the 1990s – the early phase of the “Celtic Tiger” boom – it was the delayed effect of improvements in birth and mortality rates that saw the population of working age surge. This in turn attracted increased numbers of foreign multinationals, exploiting the low corporate tax regime and business friendly regulation. Large numbers of expatriate Irish were also lured back home by robust growth.
After a breather in 2001, following the collapse of the dotcom boom, the economy took off again. This time the drivers were low eurozone interest rates and the strong labour supply after Ireland, like the UK and Sweden, opened its jobs market to the new European Union accession states in May 2004.
Mr Adomaitis’s experience follows the classic pattern of what sociologists refer to as “chain migration”. He came on his own initially. His wife then joined him. The second of his two sons was born here. His sister and his wife’s sister have also become part of the extended Ireland-based family. All the signs are that he is committed to staying. The shop he set up, borrowing the money to do so, sells packaged Lithuanian soups and other food imports to the immigrant community.
But Mr King says: “We should perhaps regard this phenomenon as a pool of labour that is available to Ireland, rather than a permanent migrant population in the historic mode of inter-country migration. Thus the issue is not so much will those who are here now stay, but is the incentive sufficient to persuade a continuous inflow to be established?” The key determinant, he believes, is the continuing gap in incomes between Ireland and the accession states.
A study by the Central Statistics Office shows that of those immigrants who registered for work between 2002 and 2005, two thirds were still in employment in 2006. Comparable figures for immigrants from the US, UK and the original EU 15 showed that 70 per cent had since moved on.
There is no evidence as yet that the pace of arrivals has slackened, although there is an expectation that it will slow as fewer construction jobs become available. Mr King, like other economists, predicts a fall in house completions as builders wind-down their operations in the face of slower demand and at a time when there is a large stock of unsold homes.
However, he is optimistic about a likely upturn in the property market. “Anecdotal evidence suggests a sharp cut in supply is in prospect. If that is the case then rents are likely to continue to accelerate, driven by the need for accommodation for the growing population of working age.”
Back in Vilnius, Arunas Adomaitis trained as a classical music conductor. Today the Lithuanian, after stints on building sites, runs Lituanica, a specialist food shop in Dublin’s Ballymun district.
Lituanica is a symbol of the changes engulfing an area that was once a byword for bad town planning. The original residents of Ballymun – established as part of an inner-city slum clearance in the 1960s – have largely moved to better housing elsewhere. Geraldine Brady, at Martin Shortt, the local letting agency, estimates 90 per cent of the occupants of the flats are now non-Irish.
While businesses such as Lituanica have contributed to the revival of areas like Ballymun, the big question now is what would happen to such communities if, as many analysts now forecast, the Irish economy falters in the face of a possible US recession and a domestic property slowdown.
Official forecasts put growth this year at little more than 2 per cent – respectable by European standards but the lowest for Ireland since the early 1990s.
Will the immigrants who lose their jobs pack up and go home – easing Ireland’s unemployment problems, just as their arrival relieved the labour market tightness? Or will they, like Mr Adomaitis, find new work and put down roots in Ireland?
The non-Irish now account for 10 per cent of Ireland’s 4.3m population and they have buoyed the labour supply and bolstered consumer demand.
Their presence has particular relevance for the housing market where, in some areas of Dublin, estate agents report the majority of new mortgage applications have been by non-nationals.
After a 10 year property boom, a cooling of the housing and construction sectors has been long predicted and, according to most economists, badly needed. The economy had become dangerously dependent on the sector, with house building alone responsible for close to a third of the growth in economic output in the past four years, reaching a peak of 13 per cent of gross domestic product in 2006. This compares with a figure of 5 per cent in the US and 4 per cent in the UK.
In the year to November house prices fell by 5.9 per cent, though rents rose 11 per cent suggesting strong underlying demand.
“People sometimes forget the economy didn’t take off because we started building houses. What happened in Ireland was not a construction-led boom in that sense,” says Eunan King, chief economist at NCB stockbrokers.
Mr King has long argued that the story of the Irish economy can be largely explained in terms of its positive demography.
In the 1990s – the early phase of the “Celtic Tiger” boom – it was the delayed effect of improvements in birth and mortality rates that saw the population of working age surge. This in turn attracted increased numbers of foreign multinationals, exploiting the low corporate tax regime and business friendly regulation. Large numbers of expatriate Irish were also lured back home by robust growth.
After a breather in 2001, following the collapse of the dotcom boom, the economy took off again. This time the drivers were low eurozone interest rates and the strong labour supply after Ireland, like the UK and Sweden, opened its jobs market to the new European Union accession states in May 2004.
Mr Adomaitis’s experience follows the classic pattern of what sociologists refer to as “chain migration”. He came on his own initially. His wife then joined him. The second of his two sons was born here. His sister and his wife’s sister have also become part of the extended Ireland-based family. All the signs are that he is committed to staying. The shop he set up, borrowing the money to do so, sells packaged Lithuanian soups and other food imports to the immigrant community.
But Mr King says: “We should perhaps regard this phenomenon as a pool of labour that is available to Ireland, rather than a permanent migrant population in the historic mode of inter-country migration. Thus the issue is not so much will those who are here now stay, but is the incentive sufficient to persuade a continuous inflow to be established?” The key determinant, he believes, is the continuing gap in incomes between Ireland and the accession states.
A study by the Central Statistics Office shows that of those immigrants who registered for work between 2002 and 2005, two thirds were still in employment in 2006. Comparable figures for immigrants from the US, UK and the original EU 15 showed that 70 per cent had since moved on.
There is no evidence as yet that the pace of arrivals has slackened, although there is an expectation that it will slow as fewer construction jobs become available. Mr King, like other economists, predicts a fall in house completions as builders wind-down their operations in the face of slower demand and at a time when there is a large stock of unsold homes.
However, he is optimistic about a likely upturn in the property market. “Anecdotal evidence suggests a sharp cut in supply is in prospect. If that is the case then rents are likely to continue to accelerate, driven by the need for accommodation for the growing population of working age.”
Saturday, February 9, 2008
Discrimination and Migration in Eastern Europe
The failure of some of the EU’s newest member states to respect their own ethnic minorities is fuelling migration to Britain, new research has revealed.
The research, carried out by GEP — the Global Economic Policy Centre — at The University of Nottingham shows Russian-speaking minorities in Latvia are much more likely to emigrate, because their mother tongue is not officially recognised by the state. Economists say similar problems in other Eastern European countries could be helping to drive the population move west.
GEP economist, Dr Tom Ivlevs said: “If the EU and A8 countries want to limit migration they should be looking to tackle this problem by introducing more efficient minority integration policies in Eastern Europe so these people feel less discriminated against.”
The A8 countries are those Eastern European nations that joined the EU in 2004: the Czech Republic, Estonia, Latvia, Hungary, Poland, Lithuania, Slovakia and Slovenia.
Dr Ivlev’s research in Latvia showed that rather than being forced to learn the state language, many Russian-speaking Latvians would prefer to move to another country offering better prospects — and learn a language like English instead.
New analysis of survey data from December 2005 showed that nearly one in ten of Latvia’s 2.3 million population expected to emigrate. Dr Ivlevs found that among these, in the productive 35-44 year age group for instance, Russian speakers were more than twice as likely as Latvians to want to emigrate.
Dr Ivlevs said: “To a large extent, the example of Latvia can be generalised to other A8 countries where there are significant minority communities.
“A minor discrimination of any character, be it ethnic, linguistic, racial or religious, may lead to higher rates of emigration in minority representatives —and in certain cases the most skilled ones.”
He said all new EU member and accession states are required to ensure the integration, respect and non-discrimination of ethnic and linguistic minorities.
“In Latvia, minority schools are subsidised by the state and these support and encourage the learning of ethnic minority languages like Russian but at the expense of the state language. The problem is that only one language is recognised in the labour market — especially in the public sector — and that is Latvian. When these students graduate they are often highly skilled but find their mother tongue is not recognised in the workplace which leads them to be disadvantaged and increases their motivation to emigrate.”
The country, one of the A8 nations that joined the EU three years ago in its largest single expansion since its founding in 1957, is among the poorest in the Union. Some 41% of the population is made up of ethnic minorities, many of them former immigrants who arrived from Russia and other former Soviet republics between 1945 and 1991, and their descendants.
Dr Ivlevs believes Latvia has suffered a “minority brain-drain” — and that similar nations have suffered the same fate.
Dr Ivlevs warned: “This analysis is relevant to almost all Central and Eastern European countries that have recently joined the EU or expect to become a member in the future.”
Historically, the populations of these countries have comprised people with different ethnic, linguistic or religious origins. Some six million out of 75 million — or eight per cent — of A8 Europeans speak a minority language in their country.
Dr Ivlevs said: “In the two newest members of the EU — Bulgaria and Romania — ethnic minorities make up between 10 per cent and 15 per cent of the population, suggesting that given the opportunity a significant number will want to move to Britain and other Western European states.”
A recent study at The University of Nottingham revealed ethnic minority discrimination in Eastern European states is a major cause of emigration to Western countries.
A new research study indicates some of the newest European Union (EU) member states in Eastern Europe are fueling emigration to Britain and other Western countries by failing to respect their own ethnic minorities.
Study Focuses on Latvian Language Issues
The research study, conducted by the Global Economic Policy Center (GEP) at The University of Nottingham, focused on emigration causes in Latvia. Russian-speaking Latvian minorities were found more likely to emigrate because the state does not formally recognize their native language. Apparently, Russian-speaking Latvians would rather move to another country with better working and living prospects, and learn the English language than be forced to learn the Latvian language.
Forty-one percent of Latvia’s population consists of ethnic minorities. Many of these people immigrated from Russia and other Soviet republics between 1945 and the disintegration of the Soviet Union in 1991.
According to data obtained In December 2005, almost one in ten Latvians expect to emigrate. The study found that Russian-speakers in the productive 35-44 age group are twice as likely to consider emigration as native Latvian-speakers.
Latvian Labor Market Limitations
The Latvian labor market, especially in the public sector, only recognizes one language - Latvian. This situation causes problems for graduates of Latvian minority schools, many of whom are highly skilled, but have difficulty finding work due to their inability to speak the Latvian language (they are encouraged to learn ethnic minority languages such as Russian). This language barrier increases the chance that minority graduates will want to emigrate to the West.
Problems in Other Eastern European Countries
Similar problems in other Eastern European countries appear to be the cause of western migration. Bulgaria and Romania, the two newest EU members, have ethnic minorities consisting of 10-15 percent of their populations. Application of the Latvian study suggests that given the opportunity, a significant number of these people will want to emigrate to Britain or other Western European states.
Regarding this potential mass migration, GEP economist Tom Ivlevs recently remarked, “If the EU and A8 counties want to limit migration they should be looking to tackle this problem by introducing more efficient minority integration policies in Eastern Europe so these people feel less discriminated against.
The research, carried out by GEP — the Global Economic Policy Centre — at The University of Nottingham shows Russian-speaking minorities in Latvia are much more likely to emigrate, because their mother tongue is not officially recognised by the state. Economists say similar problems in other Eastern European countries could be helping to drive the population move west.
GEP economist, Dr Tom Ivlevs said: “If the EU and A8 countries want to limit migration they should be looking to tackle this problem by introducing more efficient minority integration policies in Eastern Europe so these people feel less discriminated against.”
The A8 countries are those Eastern European nations that joined the EU in 2004: the Czech Republic, Estonia, Latvia, Hungary, Poland, Lithuania, Slovakia and Slovenia.
Dr Ivlev’s research in Latvia showed that rather than being forced to learn the state language, many Russian-speaking Latvians would prefer to move to another country offering better prospects — and learn a language like English instead.
New analysis of survey data from December 2005 showed that nearly one in ten of Latvia’s 2.3 million population expected to emigrate. Dr Ivlevs found that among these, in the productive 35-44 year age group for instance, Russian speakers were more than twice as likely as Latvians to want to emigrate.
Dr Ivlevs said: “To a large extent, the example of Latvia can be generalised to other A8 countries where there are significant minority communities.
“A minor discrimination of any character, be it ethnic, linguistic, racial or religious, may lead to higher rates of emigration in minority representatives —and in certain cases the most skilled ones.”
He said all new EU member and accession states are required to ensure the integration, respect and non-discrimination of ethnic and linguistic minorities.
“In Latvia, minority schools are subsidised by the state and these support and encourage the learning of ethnic minority languages like Russian but at the expense of the state language. The problem is that only one language is recognised in the labour market — especially in the public sector — and that is Latvian. When these students graduate they are often highly skilled but find their mother tongue is not recognised in the workplace which leads them to be disadvantaged and increases their motivation to emigrate.”
The country, one of the A8 nations that joined the EU three years ago in its largest single expansion since its founding in 1957, is among the poorest in the Union. Some 41% of the population is made up of ethnic minorities, many of them former immigrants who arrived from Russia and other former Soviet republics between 1945 and 1991, and their descendants.
Dr Ivlevs believes Latvia has suffered a “minority brain-drain” — and that similar nations have suffered the same fate.
Dr Ivlevs warned: “This analysis is relevant to almost all Central and Eastern European countries that have recently joined the EU or expect to become a member in the future.”
Historically, the populations of these countries have comprised people with different ethnic, linguistic or religious origins. Some six million out of 75 million — or eight per cent — of A8 Europeans speak a minority language in their country.
Dr Ivlevs said: “In the two newest members of the EU — Bulgaria and Romania — ethnic minorities make up between 10 per cent and 15 per cent of the population, suggesting that given the opportunity a significant number will want to move to Britain and other Western European states.”
A recent study at The University of Nottingham revealed ethnic minority discrimination in Eastern European states is a major cause of emigration to Western countries.
A new research study indicates some of the newest European Union (EU) member states in Eastern Europe are fueling emigration to Britain and other Western countries by failing to respect their own ethnic minorities.
Study Focuses on Latvian Language Issues
The research study, conducted by the Global Economic Policy Center (GEP) at The University of Nottingham, focused on emigration causes in Latvia. Russian-speaking Latvian minorities were found more likely to emigrate because the state does not formally recognize their native language. Apparently, Russian-speaking Latvians would rather move to another country with better working and living prospects, and learn the English language than be forced to learn the Latvian language.
Forty-one percent of Latvia’s population consists of ethnic minorities. Many of these people immigrated from Russia and other Soviet republics between 1945 and the disintegration of the Soviet Union in 1991.
According to data obtained In December 2005, almost one in ten Latvians expect to emigrate. The study found that Russian-speakers in the productive 35-44 age group are twice as likely to consider emigration as native Latvian-speakers.
Latvian Labor Market Limitations
The Latvian labor market, especially in the public sector, only recognizes one language - Latvian. This situation causes problems for graduates of Latvian minority schools, many of whom are highly skilled, but have difficulty finding work due to their inability to speak the Latvian language (they are encouraged to learn ethnic minority languages such as Russian). This language barrier increases the chance that minority graduates will want to emigrate to the West.
Problems in Other Eastern European Countries
Similar problems in other Eastern European countries appear to be the cause of western migration. Bulgaria and Romania, the two newest EU members, have ethnic minorities consisting of 10-15 percent of their populations. Application of the Latvian study suggests that given the opportunity, a significant number of these people will want to emigrate to Britain or other Western European states.
Regarding this potential mass migration, GEP economist Tom Ivlevs recently remarked, “If the EU and A8 counties want to limit migration they should be looking to tackle this problem by introducing more efficient minority integration policies in Eastern Europe so these people feel less discriminated against.
Monday, January 28, 2008
Eastern Europe to feel credit squeeze
In the financial times today:
The turmoil in financial markets is turning into a nerve-racking test for the economies of central and eastern Europe and the former Soviet Union. Economists have said the fast-growing region faces a slowdown following the financial shockwaves reverberating around the globe.
But the precise impact is uncertain, especially on weaker economies. Even in the stronger countries there may be hidden dangers lurking within particular companies, notably banks, as the Société Générale debacle has highlighted.
“These countries will be hit,” said Pradeep Mitra, the World Bank’s chief economist for the region. “There is no way out of it.
“They are fundamentally strong enough to resist . . . but some are more vulnerable than others.”
The differences are registering in the financial markets. As investors reconsider their strategies, they are becoming more risk averse. Some have turned against emerging markets, including the ex-communist region. Others are discriminating more between countries. According to the European Bank for Reconstruction and Development, financing costs for less developed countries in the former Soviet Union and the Balkans have risen since last summer by far more than in the advanced states of central Europe.
The spread on five-year credit default swaps (a measure of risk) has widened by 26 basis points for the Czech Republic since last June and by 44 basis points for Poland. But for Serbia and Ukraine the increase is 151 basis points; for Kazakhstan it is 218 basis points.
Erik Berglof, the bank’s chief economist, said: “There has been a repricing of risk,” with credit costs rising most sharply in countries that are perceived to be the most vulnerable to external shocks.
The bank has trimmed its forecast for the region’s 2008 gross domestic product growth from 6.1 per cent to between 5 and 5.5 per cent.
Given the recent unprecedented credit-fuelled growth surge, this slowdown could be welcome in countries trying to cope with inflationary pressures, including Ukraine, Kazakhstan and Russia, and those facing labour shortages, such as Poland.
The benefits could be even greater in economies facing yawning current account deficits, notably the Baltic states, Romania, Serbia and Bulgaria. As Leszek Balcerowicz, the former Polish central bank governor, told a business conference this month: “We should welcome some amount of a slowdown, especially in the Baltic states, which have been growing the fastest . . . We don’t have the information that would make us predict a hard landing. Based on the current information a soft landing in the countries which have been growing fastest is more likely.”
EBRD economists argue that even though the Baltic states and some other countries have large imbalances by global standards, they are less vulnerable than other emerging economies because they benefit from the extra economic security offered by European Union membership. Investors assume greater risks than elsewhere because membership brings clear development perspectives and outside financial scrutiny.
However, things could still go wrong, either at the national or corporate level. Hungary offers a salutary warning of a country that ran into economic difficulties in spite of earlier establishing itself as a frontrunner in economic reform. Successive governments allowed fiscal deficits to balloon to above 9 per cent of GDP in 2006 before Ferenc Gyurcsány, the prime minister, bit the bullet and ordered sharp cuts that have slowed GDP growth, with the loss of public sector jobs and more unemployment.
In the past year, attention has focused on the Baltics because of their particularly high inflation rates, headed by Latvia, with 14.1 per cent at the year end, the EU’s highest. But they may be less vulnerable to shocks than they appear because they began to see trouble well before the global credit crunch and have taken action. As Ilmars Rimsevics, the Latvian central bank governor, said: “We have been tested constantly for the past 12 months.”
The Balkans are also a concern. Bulgaria has the largest deficit, at over 20 per cent of GDP for 2007. Romania’s inflation rate is lower than its two neighbours but economists worry its fiscal policies are looser – and may be relaxed further with parliamentary elections due this year. International investors have voted with their wallets and driven the currency down 20 per cent against the euro from last year’s peak.
Farther east, the oil-rich governments of Russia and Kazakhstan run huge current account and budget surpluses and have public reserves to protect their financial institutions. But their international borrowing costs are rising and their stock markets suffering in the global battering.
Ukraine, an energy importer, may be more vulnerable. Even though it has kept its current account and budget deficits under control, it may struggle to cool the economy. A weak government may not be able to impose belt-tightening policies. Meanwhile, in spite of reforms, the large energy sector remains opaque and could provide cover for concealing bad debts. As elsewhere, the unknown threats to financial stability could be at least as dangerous as the threats that economists already have under watch.
The turmoil in financial markets is turning into a nerve-racking test for the economies of central and eastern Europe and the former Soviet Union. Economists have said the fast-growing region faces a slowdown following the financial shockwaves reverberating around the globe.
But the precise impact is uncertain, especially on weaker economies. Even in the stronger countries there may be hidden dangers lurking within particular companies, notably banks, as the Société Générale debacle has highlighted.
“These countries will be hit,” said Pradeep Mitra, the World Bank’s chief economist for the region. “There is no way out of it.
“They are fundamentally strong enough to resist . . . but some are more vulnerable than others.”
The differences are registering in the financial markets. As investors reconsider their strategies, they are becoming more risk averse. Some have turned against emerging markets, including the ex-communist region. Others are discriminating more between countries. According to the European Bank for Reconstruction and Development, financing costs for less developed countries in the former Soviet Union and the Balkans have risen since last summer by far more than in the advanced states of central Europe.
The spread on five-year credit default swaps (a measure of risk) has widened by 26 basis points for the Czech Republic since last June and by 44 basis points for Poland. But for Serbia and Ukraine the increase is 151 basis points; for Kazakhstan it is 218 basis points.
Erik Berglof, the bank’s chief economist, said: “There has been a repricing of risk,” with credit costs rising most sharply in countries that are perceived to be the most vulnerable to external shocks.
The bank has trimmed its forecast for the region’s 2008 gross domestic product growth from 6.1 per cent to between 5 and 5.5 per cent.
Given the recent unprecedented credit-fuelled growth surge, this slowdown could be welcome in countries trying to cope with inflationary pressures, including Ukraine, Kazakhstan and Russia, and those facing labour shortages, such as Poland.
The benefits could be even greater in economies facing yawning current account deficits, notably the Baltic states, Romania, Serbia and Bulgaria. As Leszek Balcerowicz, the former Polish central bank governor, told a business conference this month: “We should welcome some amount of a slowdown, especially in the Baltic states, which have been growing the fastest . . . We don’t have the information that would make us predict a hard landing. Based on the current information a soft landing in the countries which have been growing fastest is more likely.”
EBRD economists argue that even though the Baltic states and some other countries have large imbalances by global standards, they are less vulnerable than other emerging economies because they benefit from the extra economic security offered by European Union membership. Investors assume greater risks than elsewhere because membership brings clear development perspectives and outside financial scrutiny.
However, things could still go wrong, either at the national or corporate level. Hungary offers a salutary warning of a country that ran into economic difficulties in spite of earlier establishing itself as a frontrunner in economic reform. Successive governments allowed fiscal deficits to balloon to above 9 per cent of GDP in 2006 before Ferenc Gyurcsány, the prime minister, bit the bullet and ordered sharp cuts that have slowed GDP growth, with the loss of public sector jobs and more unemployment.
In the past year, attention has focused on the Baltics because of their particularly high inflation rates, headed by Latvia, with 14.1 per cent at the year end, the EU’s highest. But they may be less vulnerable to shocks than they appear because they began to see trouble well before the global credit crunch and have taken action. As Ilmars Rimsevics, the Latvian central bank governor, said: “We have been tested constantly for the past 12 months.”
The Balkans are also a concern. Bulgaria has the largest deficit, at over 20 per cent of GDP for 2007. Romania’s inflation rate is lower than its two neighbours but economists worry its fiscal policies are looser – and may be relaxed further with parliamentary elections due this year. International investors have voted with their wallets and driven the currency down 20 per cent against the euro from last year’s peak.
Farther east, the oil-rich governments of Russia and Kazakhstan run huge current account and budget surpluses and have public reserves to protect their financial institutions. But their international borrowing costs are rising and their stock markets suffering in the global battering.
Ukraine, an energy importer, may be more vulnerable. Even though it has kept its current account and budget deficits under control, it may struggle to cool the economy. A weak government may not be able to impose belt-tightening policies. Meanwhile, in spite of reforms, the large energy sector remains opaque and could provide cover for concealing bad debts. As elsewhere, the unknown threats to financial stability could be at least as dangerous as the threats that economists already have under watch.
Monday, January 21, 2008
Japan's Labour Market
From the FT this morning:
Japan ‘should adopt European labour model’
By David Pilling in Tokyo
Japan should use legislation to create a better balance between labour flexibility and security, according to the European Union’s employment commissioner.
Vladimir Spidla said Japan could learn from European experience of what he called “flexicurity”, a combination of flexibility and security.
Japan’s stable employment model, built on high growth after the war, has come under severe strain since its economic bubble burst in 1990, with the number of part-time workers rising from about a fifth of the total to nearly a third.
Robert Alan Feldman MS GEF post July 2007.
Aging Will Suppress Wage Growth Until
July 13, 2007
By Robert Alan Feldman | Tokyo
Labor markets are challenging the Bank of Japan (BoJ). While labor markets tighten and suggest eventual inflation pressure, actual wages per hour — which explain about 80% of actual inflation (a simple regression of CPI increase on wage per hour increase suggests that wages per hour explain 80% of the variance of core CPI. The usual caveats about econometrics apply) — are dropping. Because of the interaction of labor market rules and demographic factors, this downward pressure on wages from labor supply is likely to continue until 2011. Against this backdrop, it will be difficult for the BoJ to justify an aggressive pace of rate hikes. After 2011, as labor markets tighten severely, a faster pace of rate hikes may become likely.
BoJ’s conundrum
The BoJ has argued that tighter labor markets will eventually lead to higher inflation, and therefore that rate hikes are necessary now, before inflation accelerates. Since the BoJ started making this argument about two years ago, however, the growth of compensation per hour has actually decelerated, from a January 2006 peak of +1.2% Y/Y to the trough of -0.4% Y/Y in February 2007. Even with a mild improvement since then, the rolling one-year average of wage/hour growth remained negative in May, at -0.1% Y/Y, and the latest tick is downward (the latest single month figure, for May 2007, is -1.5% Y/Y).
The labor market appears to be violating basic laws of economics. Even while the economy is growing, and unemployment falling (for both males and females, young and old), wages per hour are falling. What is going on? The simple part of the answer is that supply of labor is rising faster than demand. The hard part is identifying the sources of this increase in supply. The dominant reason, in my view, is the interaction of labor market rules and demographics.
Labor market rules
The issue with labor market rules concerns the difference between (a) the mandatory retirement age for a worker at a given company and (b) the age at which the worker actually leaves the labor force. The former age is known as teinen in Japanese, and is the age at which a lump-sum retirement bonus is paid by the company. The latter is intai, and marks the age at which a person becomes a pure pensioner. A very large portion of workers continue to work betwen teinen and intai, but usually at wages much lower than just prior to teinen. (Recent surveys suggest that workers rehired by companies to do the same job in the same place take pay cuts of about 30%.)
The boomers
The demographic problem concerns the teinen for the first cohort of baby boomers. There were 1.6 million live births in 1946, but 2.6 million in 1947. This latter pace of births continued until 1950. The 1947 cohort is beginning to reach teinen age (which is often 60 but differs by company) this year. The share of workers in the 60-64 age group has risen constantly over the last two decades, but sharply between 2001-04. The modest drop of this share in 2005-06 was largely due to the sharp drop of births in 1945-46, and therefore the rise of the 60-64 group share should resume. In addition, more and more people are staying in the workforce after age 65. To the extent that 65+ workers earn even lower average wages than 60-64 aged workers, this shift in composition of the labor force puts further downward pressure on wages.
Where next for the 60-64s?
Looking forward, what is the supply of workers in the 60-64 age group? The answer depends on the interaction of falling participation rates (relative to pre-60 levels) and rising numbers in this age group. Let’s assume that participation rates decline from an average of 76% at age 59 to 21% at age 65. (These figures apply to males and females together. The assumed path for participation rates, starting at age 60 and going to age 65 is: 71%, 65%, 58%, 48%, 35%, 21%. This assumed path is the average of a linear path and a reverse S-curve path. This blend best calibrates estimates from the formula to actual outcomes in 2004-06.) Given the sizes of the cohorts, the supply of workers in the 60-64 age group rises from 4.4 million in 2006 to a peak of 5.9 million in 2011. Extra gains in the labor force will come from higher participation of over-65s as well.
Of course, many other labor supply factors will also affect wages. Upward pressure on wages will come from the shortage of young workers, the fall of participation for the very young (15-19), and tightening enforcement of rules on part-time workers. Downward pressure on wages comes from higher immigration and the increased labor participation of middle-aged and young women.
Market implications
On balance, the large rise of workers in the 60-64 age group will likely sustain major downward pressure on both wages and, by extension, prices for several more years. Since low wage pressure means low price pressure, it will be hard for the BoJ to justify aggressive rate hikes.
Although unemployment has fallen to less than 4 per cent as the economy has recovered since 2002, structural changes to the labour market have sparked a sense of crisis. Most commentators regard part-time workers as being a poorly paid, poorly trained underclass.
“I am convinced that this model of flexicurity that we have developed in Europe could be a model in Japan,” Mr Spidla told the Financial Times.
He said part-time workers – who in Japan are sometimes known by the semi-disparaging term “freeters” – found it too difficult to move into stable employment.
During Japan’s economic downturn in the 1990s, companies hung on to existing employees but stopped hiring new ones, creating an entire generation with little opportunity to enter full-time employment.
The problem is exacerbated by Japan’s inflexible hiring practices in which companies generally take on graduates and expect them to work for the company for years, or even for their entire career. However, this system is eroding and applies more to big companies than to small ones.
Mr Spidla said that policy makers should not underestimate the ability of legislation to overcome such “cultural obstacles”.
He pointed to eastern Europe, which in 15 years had moved from a communist system to one that was compatible with European Union law.
The commissioner said that individual companies could also play a role. He highlighted efforts at Toshiba, an electronics and nuclear power company, to shorten the working day and promote a better work-life balance.
“In Japan, long working hours is a tradition. But Toshiba has decided systematically to step back from that.”
and the Economist earlier this month:
Sayonara, salaryman
Once the cornerstone of the economy, the paternalistic relationship between Japan's companies and their salaried employees is crumbling.
WHEN they were young they might spend the night at the office, sleeping under their desks. For years they would go out drinking with colleagues and clients, returning home sozzled at 3am before rising at dawn to head back to the office. They accepted boring jobs or postings to provincial backwaters without question. And they did it all simply because the company asked them to. The thought of finding another employer never crossed their minds.
That is how the “salaryman” became the paragon of modern Japan, the white-collar hero who fashioned the world's second-largest economy from the ashes of war. But he is becoming a figure of the past. This has enormous implications in a country in which the company is the dominant institution in people's lives, affecting not only Japan's world of work but also wider Japanese society.
The change in the labour market gathered pace in the 1990s, as Japan's economic woes forced companies to scale back employees' benefits dramatically. Increasingly, many firms hired new staff on short-term or part-time contracts rather than treating them as members of the corporate family. Japanese businesses, harried by foreign competitors, have gained from having a more flexible workforce. Moreover, mergers and acquisitions are starting to become more common, so firms cannot offer the traditional long-term assurances to employees even if they want to. Lastly, a big generational shift is taking place. Today's young professionals refuse to make work the centre of their lives or to accept the hardships and corporate paternalism of earlier decades.
These labour-market forces manifest themselves in several ways. They affect gender equality, as more women enter the workforce. They touch on immigration, as foreigners are called in to do jobs that the Japanese reject. They are changing the role of older people, as many pensioners rejoin the workforce. And they have distributional consequences too. Japan is one of the most egalitarian of the world's rich societies, yet it now has one of the largest shares of “working poor”—people who have jobs but can barely make ends meet. Wages have fallen by around 10% (in nominal terms) over the past decade.
The demise of the salaryman brings all these issues into stark relief. Though the term was coined in the 1920s to reflect the new managerial class that oversaw the country's industrialisation and modernisation, it became an ideal only after the second world war. Becoming a salaryman denoted success, enshrining solid middle-class status.
More importantly, it meant stability. Employment was more or less guaranteed until retirement. Wages were low at first but increased predictably until the pension arrived to see the salaryman through his silver years. Training was provided. Perks abounded. The firm looked after the employee and his family. In return, the salaryman devoted his life to the firm. A university graduate did not choose a career; he chose a company.
A night on the town
Today's older salarymen are stoical about the changes. They see that they are the last of their breed, but feel neither nostalgia for their past nor frustration at the younger generation's rejection of their ways. In private moments, indeed, the old guard question the sacrifices that led them to put work ahead of family and conformity ahead of their own interests. In a survey by a global consumer-products company, many salarymen expressed frustration at how their lives had turned out.
One night in Shimbashi, a grey, worn district of Tokyo near a big train station that feeds salarymen to the suburbs, three men in their mid-50s are huddled around their sakes and cigarettes at an outdoor bar. Akira, Sho and Hiroyuki (“Harry”) joined their firm around 30 years ago. Each wears a pin of the conglomerate's logo on his lapel. They reminisce about their lives as salarymen and the changes that have taken place, recounting their experiences ever more richly as the sake flows.
When Akira got married, he recalls, he invited his bucho, or division chief, to the wedding, as all salarymen did. And during the reception the boss made a speech to the bride, as he always did. “Your new husband is a very good worker,” he began. “He is important to the company. So please understand that he may need to work many long hours.” All the guests nodded silently. “And when he is at home, please take care of him.”
Akira says that his bride—the marriage was largely arranged by their families—was not upset by the bucho's remarks: her role of housewife was taken for granted. “But later she thought something must be wrong with the system,” he confides. Akira would return home in the small hours stumbling drunk; dutifully she would wait up, angered. The dinner is put away and the bath is cold, she might say. As he grew older, he no longer stayed out so late. But he did not share her reservations about his evening activities. “In Japan entertaining clients is a part of the job,” he explains.
A salaryman arrives in the office at 9am and ends his working day late, often around midnight. He does not dare leave the office before his supervisor—and managers stay late to show their loyalty. Is any work going on? Rarely. But long hours remain the norm.
A few times a week, at around midnight, the boss may assemble the team and go out on the town. Then the “working” day does not end until around 2am, in a bar; the journey home takes another hour or two. Drinking deep into the night was long considered part of the job; companies set aside a budget for it. But the funds were slashed during the “lost decade” and have not been replenished. Now employees bear the cost themselves.
Late-night carousing is becoming less common these days: younger colleagues treat the hours after work as their own, not the company's. Nobu, an ambitious 31-year-old salaryman, is one such. He chose a job at an American company in part so that he could work reasonable hours. He didn't count on having a manager of the old school, who kept the team in the office or in the bars. “My first year, I didn't get more than three or four hours of sleep a day,” he says. Changing jobs was not an option. “I didn't want to quit—because it was so tough,” he says. “Then I would have 'lost'.” When he got a new manager, Nobu was able to relish his free time.
The constant sleep deprivation results in a peculiar characteristic of Japanese life: sleeping in public, be it on a train or in a meeting, and its social acceptance. Nightly drinking leads to a special camaraderie, salarymen argue. This translates into better company performance, they say, because it is easier to reach a consensus—the way almost all decisions are made in Japanese companies.
Yet the rough living and working takes its toll. There is even a term, karoshi, or “death by overwork”, which has been legally recognised since the 1980s (although most victims have been industrial workers rather than salarymen). Cases of mental illness in the workplace are soaring. The country's suicide rate is among the highest in the world.
Older salarymen can appreciate the younger generation's preference for more humane hours. The government is even pushing the idea of “work-life balance” (it uses the English term). “The times have changed,” says Harry. “Shoganai,” concludes Sho, meaning “it can't be helped.”
Capitalism with a human face
Much is made in the West of the distinctive features of Japanese capitalism. First, cross-shareholdings protect companies from unwanted takeovers. Yet since 1990 the proportion of all company shares owned by business partners has fallen from around half to around a quarter. Second, a “lifetime commitment” between company and worker—usually simplified to “lifetime employment”, although it is much more than that—means that employees have more stability in their careers. This too has ebbed as the number of “regular” workers, who enjoy company benefits, has declined and the number of temporary and part-time employees has increased.
Less understood is the seniority-wage system, a third pillar of Japanese business. Salaries are based on length of service rather than performance. Employees are paid very little for most of their careers. Moreover, there is little difference between the salaries of the highest- and lowest-paid staff of the same age: generally around 25%. (An old joke among salarymen is that Japan is the only country where socialism worked.) From around 50 until the mandatory retirement age of 60 (now rising to 65), salaries grow quickly. At retirement a bonus of around three times the final annual salary is paid in a lump sum. And a steady pension kicks in—it comes partly from the state, partly from the company.
As a means of fostering solidarity in the workplace and an egalitarian society, this system is eminently practical. Yet from the perspective of individual incentives, responsibility and performance, it is inefficient and unfair; exceptional work is unrewarded, other than by a modest bonus and a bow.
The rationale for the system is that it matches a salaryman's income to his household's expenses. So when the fellow is in his 30s, the family does not require much. When he reaches 50 and the kids leave for university, his salary is commensurate with his increased bills. And when he retires, he can count on being taken care of by the company. Like so many things, however, the system is starting to fray. Some companies have introduced a bifurcated structure that grafts performance-based pay onto the traditional seniority system.
Other forms of employee care are also on the wane. University is largely a recreational interlude between the intense “cram-schools” needed to get on a degree course and the drudgery of office work to come; it is not a time for gaining professional skills. So on the first day at work, employees are often ushered into a classroom that creates a Mitsubishi man, a Matsushita man, and so forth. (Among the courses is “business etiquette”, in which new hires learn how to exchange business cards following strict protocol and practise their bows.) But as baby-boomers retire and temporary workers replace the full-time veterans, training is drying up.
For years, the three salarymen in Shimbashi placed their savings in the company's bank, which paid interest at twice the rate of an ordinary bank. The activity, a relic of the early 20th century, allowed the company to raise capital without turning to a bank by becoming a bank itself. But the practice was discontinued around 2000 when regulators feared that if these large companies were to fail, not only the employees' jobs and pensions, but also their savings, would be wiped out.
In addition the company provides housing. Of the three salarymen in Shimbashi, two live in company apartments on which the rent is subsidised, so they pay only around one-third of the market rate. Moreover, salarymen take their holidays at company-owned resorts, which cost half the normal price. These perks help explain the sprawl that is one of the curiosities of Japanese companies. A big firm may have more than 1,000 subsidiaries, from restaurants to property, partly to secure an in-house supply of a wide range of benefits to employees. (Such units also make good places to park mediocre managers for a few years before retirement.)
How much holiday?
Though the companies may own numerous onsen, or hot-spring resorts, dotted across the country, the amount of holiday is becoming a sore point with employees. Most salarymen take only a small fraction of their annual paid holiday, since to use it all seems to raise a question over the employee's devotion to the firm. For example, Sho says that he has 20 days' holiday a year. But when pressed, he admits that he takes only five. He says he does not feel badly, since it is only right to work a lot—but his robotic response and body language signal his reservations.
The consequences of breaking the unwritten code can be severe. Even a star performer who uses the full holiday may be denied pay rises and promotions. Leaving the company is treated as betrayal. All trace of the person is airbrushed from the workplace. Social norms keep people at their desks: older Japanese sniff about “job-hopping”. And the seniority-wage system means that switching jobs can be expensive. Until recently, pension contributions were company-based; portable individual-retirement accounts did not exist. And firms were not really equipped to absorb mid-career executives, preferring to hire them fresh out of university and keep them until retirement. Leaving a company meant unwinding a dense web of relationships.
Even so, much of this is changing, as younger salarymen push back. Preferring to delineate company time and personal time, more are taking their holidays. New employees are switching jobs too (see chart 2). Nobu, for instance, says that when he graduated, half his classmates joined leading Japanese companies (the others chose smaller firms or Western ones). But only around half are still in those traditional salaryman jobs. In 1960, he reckons, 90% of the class would have gunned for the top jobs. Almost all of them would have stayed with the same firm until retirement.
The structure of work, with its perks and paternalism, has had the effect of locking people into place. It creates a static environment for labour rather than a fluid one. Why? It is an important question: business efficiency is about the optimal allocation of resources, and a sclerotic labour market hampers companies' performance and restricts workers' choices.
Like many things in Japan, the answer goes back a long way. An official at the Ministry of Labour traces it to the Edo period, beginning in the 17th century. Important trading houses, some of which still exist, were founded then. They considered employees as family. But economic historians place a more recent date on the static workforce. When Japan modernised at the end of the 19th century, it needed to import technology from abroad. This new technology created a need for skilled labour in a then highly itinerant workforce. So companies got into the habit of housing and training their employees. And the investment in training meant that companies did everything they could to keep their workers.
This paternal relationship was frozen in place during the second world war, when the Japanese government leaned on companies to lock in employees as a way to guarantee production. After the war the Americans gave Japanese workers the right to unionise. This reinforced the illiquidity. Unions prized job security and supported a pay structure based on age, not merit.
Today the legacy is clear. The salarymen in Shimbashi recall enormous sacrifices as well as bountiful benefits. Both are waning. The salaryman system has buckled under the strains on the Japanese economy. Yet its decline is in turn adding to those strains. As the population ages and falls, by 2030 just two workers will have to support every pensioner. But temporary and part-time employees are paid around 40% less than regulars. Half of them make no pension contributions, placing a burden on the system today and creating a huge fiscal time-bomb.
Japan is changing, but slowly. On a commuter train outside Nagoya, in the centre of the country, five high-school girls giggle at a barrage of questions about their lives. Chihiro, who wants to be a hairdresser when she grows up, says her father usually returns home around midnight. Her mother disapproves, to no effect. He works, by chance, for the same conglomerate as the men in Shimbashi. Chihiro, asked if she also wants him home earlier, replies “shoganai”, echoing the salarymen. But when she grows up and gets married, will she let her husband do the same? Chihiro and her friends shriek: “No way!”
Nobu, the young salaryman, likes his job but plans to start his own business one day. The older men in his office struck compromises that he is not prepared to endure. “After 1945, we were left with nothing, so we had to work together, with the same goal and as one team. We were a success, and Japan grew,” he says. “But this organisation doesn't work any more. It has stayed the same for too long. The system has rusted.”
Japan ‘should adopt European labour model’
By David Pilling in Tokyo
Japan should use legislation to create a better balance between labour flexibility and security, according to the European Union’s employment commissioner.
Vladimir Spidla said Japan could learn from European experience of what he called “flexicurity”, a combination of flexibility and security.
Japan’s stable employment model, built on high growth after the war, has come under severe strain since its economic bubble burst in 1990, with the number of part-time workers rising from about a fifth of the total to nearly a third.
Robert Alan Feldman MS GEF post July 2007.
Aging Will Suppress Wage Growth Until
July 13, 2007
By Robert Alan Feldman | Tokyo
Labor markets are challenging the Bank of Japan (BoJ). While labor markets tighten and suggest eventual inflation pressure, actual wages per hour — which explain about 80% of actual inflation (a simple regression of CPI increase on wage per hour increase suggests that wages per hour explain 80% of the variance of core CPI. The usual caveats about econometrics apply) — are dropping. Because of the interaction of labor market rules and demographic factors, this downward pressure on wages from labor supply is likely to continue until 2011. Against this backdrop, it will be difficult for the BoJ to justify an aggressive pace of rate hikes. After 2011, as labor markets tighten severely, a faster pace of rate hikes may become likely.
BoJ’s conundrum
The BoJ has argued that tighter labor markets will eventually lead to higher inflation, and therefore that rate hikes are necessary now, before inflation accelerates. Since the BoJ started making this argument about two years ago, however, the growth of compensation per hour has actually decelerated, from a January 2006 peak of +1.2% Y/Y to the trough of -0.4% Y/Y in February 2007. Even with a mild improvement since then, the rolling one-year average of wage/hour growth remained negative in May, at -0.1% Y/Y, and the latest tick is downward (the latest single month figure, for May 2007, is -1.5% Y/Y).
The labor market appears to be violating basic laws of economics. Even while the economy is growing, and unemployment falling (for both males and females, young and old), wages per hour are falling. What is going on? The simple part of the answer is that supply of labor is rising faster than demand. The hard part is identifying the sources of this increase in supply. The dominant reason, in my view, is the interaction of labor market rules and demographics.
Labor market rules
The issue with labor market rules concerns the difference between (a) the mandatory retirement age for a worker at a given company and (b) the age at which the worker actually leaves the labor force. The former age is known as teinen in Japanese, and is the age at which a lump-sum retirement bonus is paid by the company. The latter is intai, and marks the age at which a person becomes a pure pensioner. A very large portion of workers continue to work betwen teinen and intai, but usually at wages much lower than just prior to teinen. (Recent surveys suggest that workers rehired by companies to do the same job in the same place take pay cuts of about 30%.)
The boomers
The demographic problem concerns the teinen for the first cohort of baby boomers. There were 1.6 million live births in 1946, but 2.6 million in 1947. This latter pace of births continued until 1950. The 1947 cohort is beginning to reach teinen age (which is often 60 but differs by company) this year. The share of workers in the 60-64 age group has risen constantly over the last two decades, but sharply between 2001-04. The modest drop of this share in 2005-06 was largely due to the sharp drop of births in 1945-46, and therefore the rise of the 60-64 group share should resume. In addition, more and more people are staying in the workforce after age 65. To the extent that 65+ workers earn even lower average wages than 60-64 aged workers, this shift in composition of the labor force puts further downward pressure on wages.
Where next for the 60-64s?
Looking forward, what is the supply of workers in the 60-64 age group? The answer depends on the interaction of falling participation rates (relative to pre-60 levels) and rising numbers in this age group. Let’s assume that participation rates decline from an average of 76% at age 59 to 21% at age 65. (These figures apply to males and females together. The assumed path for participation rates, starting at age 60 and going to age 65 is: 71%, 65%, 58%, 48%, 35%, 21%. This assumed path is the average of a linear path and a reverse S-curve path. This blend best calibrates estimates from the formula to actual outcomes in 2004-06.) Given the sizes of the cohorts, the supply of workers in the 60-64 age group rises from 4.4 million in 2006 to a peak of 5.9 million in 2011. Extra gains in the labor force will come from higher participation of over-65s as well.
Of course, many other labor supply factors will also affect wages. Upward pressure on wages will come from the shortage of young workers, the fall of participation for the very young (15-19), and tightening enforcement of rules on part-time workers. Downward pressure on wages comes from higher immigration and the increased labor participation of middle-aged and young women.
Market implications
On balance, the large rise of workers in the 60-64 age group will likely sustain major downward pressure on both wages and, by extension, prices for several more years. Since low wage pressure means low price pressure, it will be hard for the BoJ to justify aggressive rate hikes.
Although unemployment has fallen to less than 4 per cent as the economy has recovered since 2002, structural changes to the labour market have sparked a sense of crisis. Most commentators regard part-time workers as being a poorly paid, poorly trained underclass.
“I am convinced that this model of flexicurity that we have developed in Europe could be a model in Japan,” Mr Spidla told the Financial Times.
He said part-time workers – who in Japan are sometimes known by the semi-disparaging term “freeters” – found it too difficult to move into stable employment.
During Japan’s economic downturn in the 1990s, companies hung on to existing employees but stopped hiring new ones, creating an entire generation with little opportunity to enter full-time employment.
The problem is exacerbated by Japan’s inflexible hiring practices in which companies generally take on graduates and expect them to work for the company for years, or even for their entire career. However, this system is eroding and applies more to big companies than to small ones.
Mr Spidla said that policy makers should not underestimate the ability of legislation to overcome such “cultural obstacles”.
He pointed to eastern Europe, which in 15 years had moved from a communist system to one that was compatible with European Union law.
The commissioner said that individual companies could also play a role. He highlighted efforts at Toshiba, an electronics and nuclear power company, to shorten the working day and promote a better work-life balance.
“In Japan, long working hours is a tradition. But Toshiba has decided systematically to step back from that.”
and the Economist earlier this month:
Sayonara, salaryman
Once the cornerstone of the economy, the paternalistic relationship between Japan's companies and their salaried employees is crumbling.
WHEN they were young they might spend the night at the office, sleeping under their desks. For years they would go out drinking with colleagues and clients, returning home sozzled at 3am before rising at dawn to head back to the office. They accepted boring jobs or postings to provincial backwaters without question. And they did it all simply because the company asked them to. The thought of finding another employer never crossed their minds.
That is how the “salaryman” became the paragon of modern Japan, the white-collar hero who fashioned the world's second-largest economy from the ashes of war. But he is becoming a figure of the past. This has enormous implications in a country in which the company is the dominant institution in people's lives, affecting not only Japan's world of work but also wider Japanese society.
The change in the labour market gathered pace in the 1990s, as Japan's economic woes forced companies to scale back employees' benefits dramatically. Increasingly, many firms hired new staff on short-term or part-time contracts rather than treating them as members of the corporate family. Japanese businesses, harried by foreign competitors, have gained from having a more flexible workforce. Moreover, mergers and acquisitions are starting to become more common, so firms cannot offer the traditional long-term assurances to employees even if they want to. Lastly, a big generational shift is taking place. Today's young professionals refuse to make work the centre of their lives or to accept the hardships and corporate paternalism of earlier decades.
These labour-market forces manifest themselves in several ways. They affect gender equality, as more women enter the workforce. They touch on immigration, as foreigners are called in to do jobs that the Japanese reject. They are changing the role of older people, as many pensioners rejoin the workforce. And they have distributional consequences too. Japan is one of the most egalitarian of the world's rich societies, yet it now has one of the largest shares of “working poor”—people who have jobs but can barely make ends meet. Wages have fallen by around 10% (in nominal terms) over the past decade.
The demise of the salaryman brings all these issues into stark relief. Though the term was coined in the 1920s to reflect the new managerial class that oversaw the country's industrialisation and modernisation, it became an ideal only after the second world war. Becoming a salaryman denoted success, enshrining solid middle-class status.
More importantly, it meant stability. Employment was more or less guaranteed until retirement. Wages were low at first but increased predictably until the pension arrived to see the salaryman through his silver years. Training was provided. Perks abounded. The firm looked after the employee and his family. In return, the salaryman devoted his life to the firm. A university graduate did not choose a career; he chose a company.
A night on the town
Today's older salarymen are stoical about the changes. They see that they are the last of their breed, but feel neither nostalgia for their past nor frustration at the younger generation's rejection of their ways. In private moments, indeed, the old guard question the sacrifices that led them to put work ahead of family and conformity ahead of their own interests. In a survey by a global consumer-products company, many salarymen expressed frustration at how their lives had turned out.
One night in Shimbashi, a grey, worn district of Tokyo near a big train station that feeds salarymen to the suburbs, three men in their mid-50s are huddled around their sakes and cigarettes at an outdoor bar. Akira, Sho and Hiroyuki (“Harry”) joined their firm around 30 years ago. Each wears a pin of the conglomerate's logo on his lapel. They reminisce about their lives as salarymen and the changes that have taken place, recounting their experiences ever more richly as the sake flows.
When Akira got married, he recalls, he invited his bucho, or division chief, to the wedding, as all salarymen did. And during the reception the boss made a speech to the bride, as he always did. “Your new husband is a very good worker,” he began. “He is important to the company. So please understand that he may need to work many long hours.” All the guests nodded silently. “And when he is at home, please take care of him.”
Akira says that his bride—the marriage was largely arranged by their families—was not upset by the bucho's remarks: her role of housewife was taken for granted. “But later she thought something must be wrong with the system,” he confides. Akira would return home in the small hours stumbling drunk; dutifully she would wait up, angered. The dinner is put away and the bath is cold, she might say. As he grew older, he no longer stayed out so late. But he did not share her reservations about his evening activities. “In Japan entertaining clients is a part of the job,” he explains.
A salaryman arrives in the office at 9am and ends his working day late, often around midnight. He does not dare leave the office before his supervisor—and managers stay late to show their loyalty. Is any work going on? Rarely. But long hours remain the norm.
A few times a week, at around midnight, the boss may assemble the team and go out on the town. Then the “working” day does not end until around 2am, in a bar; the journey home takes another hour or two. Drinking deep into the night was long considered part of the job; companies set aside a budget for it. But the funds were slashed during the “lost decade” and have not been replenished. Now employees bear the cost themselves.
Late-night carousing is becoming less common these days: younger colleagues treat the hours after work as their own, not the company's. Nobu, an ambitious 31-year-old salaryman, is one such. He chose a job at an American company in part so that he could work reasonable hours. He didn't count on having a manager of the old school, who kept the team in the office or in the bars. “My first year, I didn't get more than three or four hours of sleep a day,” he says. Changing jobs was not an option. “I didn't want to quit—because it was so tough,” he says. “Then I would have 'lost'.” When he got a new manager, Nobu was able to relish his free time.
The constant sleep deprivation results in a peculiar characteristic of Japanese life: sleeping in public, be it on a train or in a meeting, and its social acceptance. Nightly drinking leads to a special camaraderie, salarymen argue. This translates into better company performance, they say, because it is easier to reach a consensus—the way almost all decisions are made in Japanese companies.
Yet the rough living and working takes its toll. There is even a term, karoshi, or “death by overwork”, which has been legally recognised since the 1980s (although most victims have been industrial workers rather than salarymen). Cases of mental illness in the workplace are soaring. The country's suicide rate is among the highest in the world.
Older salarymen can appreciate the younger generation's preference for more humane hours. The government is even pushing the idea of “work-life balance” (it uses the English term). “The times have changed,” says Harry. “Shoganai,” concludes Sho, meaning “it can't be helped.”
Capitalism with a human face
Much is made in the West of the distinctive features of Japanese capitalism. First, cross-shareholdings protect companies from unwanted takeovers. Yet since 1990 the proportion of all company shares owned by business partners has fallen from around half to around a quarter. Second, a “lifetime commitment” between company and worker—usually simplified to “lifetime employment”, although it is much more than that—means that employees have more stability in their careers. This too has ebbed as the number of “regular” workers, who enjoy company benefits, has declined and the number of temporary and part-time employees has increased.
Less understood is the seniority-wage system, a third pillar of Japanese business. Salaries are based on length of service rather than performance. Employees are paid very little for most of their careers. Moreover, there is little difference between the salaries of the highest- and lowest-paid staff of the same age: generally around 25%. (An old joke among salarymen is that Japan is the only country where socialism worked.) From around 50 until the mandatory retirement age of 60 (now rising to 65), salaries grow quickly. At retirement a bonus of around three times the final annual salary is paid in a lump sum. And a steady pension kicks in—it comes partly from the state, partly from the company.
As a means of fostering solidarity in the workplace and an egalitarian society, this system is eminently practical. Yet from the perspective of individual incentives, responsibility and performance, it is inefficient and unfair; exceptional work is unrewarded, other than by a modest bonus and a bow.
The rationale for the system is that it matches a salaryman's income to his household's expenses. So when the fellow is in his 30s, the family does not require much. When he reaches 50 and the kids leave for university, his salary is commensurate with his increased bills. And when he retires, he can count on being taken care of by the company. Like so many things, however, the system is starting to fray. Some companies have introduced a bifurcated structure that grafts performance-based pay onto the traditional seniority system.
Other forms of employee care are also on the wane. University is largely a recreational interlude between the intense “cram-schools” needed to get on a degree course and the drudgery of office work to come; it is not a time for gaining professional skills. So on the first day at work, employees are often ushered into a classroom that creates a Mitsubishi man, a Matsushita man, and so forth. (Among the courses is “business etiquette”, in which new hires learn how to exchange business cards following strict protocol and practise their bows.) But as baby-boomers retire and temporary workers replace the full-time veterans, training is drying up.
For years, the three salarymen in Shimbashi placed their savings in the company's bank, which paid interest at twice the rate of an ordinary bank. The activity, a relic of the early 20th century, allowed the company to raise capital without turning to a bank by becoming a bank itself. But the practice was discontinued around 2000 when regulators feared that if these large companies were to fail, not only the employees' jobs and pensions, but also their savings, would be wiped out.
In addition the company provides housing. Of the three salarymen in Shimbashi, two live in company apartments on which the rent is subsidised, so they pay only around one-third of the market rate. Moreover, salarymen take their holidays at company-owned resorts, which cost half the normal price. These perks help explain the sprawl that is one of the curiosities of Japanese companies. A big firm may have more than 1,000 subsidiaries, from restaurants to property, partly to secure an in-house supply of a wide range of benefits to employees. (Such units also make good places to park mediocre managers for a few years before retirement.)
How much holiday?
Though the companies may own numerous onsen, or hot-spring resorts, dotted across the country, the amount of holiday is becoming a sore point with employees. Most salarymen take only a small fraction of their annual paid holiday, since to use it all seems to raise a question over the employee's devotion to the firm. For example, Sho says that he has 20 days' holiday a year. But when pressed, he admits that he takes only five. He says he does not feel badly, since it is only right to work a lot—but his robotic response and body language signal his reservations.
The consequences of breaking the unwritten code can be severe. Even a star performer who uses the full holiday may be denied pay rises and promotions. Leaving the company is treated as betrayal. All trace of the person is airbrushed from the workplace. Social norms keep people at their desks: older Japanese sniff about “job-hopping”. And the seniority-wage system means that switching jobs can be expensive. Until recently, pension contributions were company-based; portable individual-retirement accounts did not exist. And firms were not really equipped to absorb mid-career executives, preferring to hire them fresh out of university and keep them until retirement. Leaving a company meant unwinding a dense web of relationships.
Even so, much of this is changing, as younger salarymen push back. Preferring to delineate company time and personal time, more are taking their holidays. New employees are switching jobs too (see chart 2). Nobu, for instance, says that when he graduated, half his classmates joined leading Japanese companies (the others chose smaller firms or Western ones). But only around half are still in those traditional salaryman jobs. In 1960, he reckons, 90% of the class would have gunned for the top jobs. Almost all of them would have stayed with the same firm until retirement.
The structure of work, with its perks and paternalism, has had the effect of locking people into place. It creates a static environment for labour rather than a fluid one. Why? It is an important question: business efficiency is about the optimal allocation of resources, and a sclerotic labour market hampers companies' performance and restricts workers' choices.
Like many things in Japan, the answer goes back a long way. An official at the Ministry of Labour traces it to the Edo period, beginning in the 17th century. Important trading houses, some of which still exist, were founded then. They considered employees as family. But economic historians place a more recent date on the static workforce. When Japan modernised at the end of the 19th century, it needed to import technology from abroad. This new technology created a need for skilled labour in a then highly itinerant workforce. So companies got into the habit of housing and training their employees. And the investment in training meant that companies did everything they could to keep their workers.
This paternal relationship was frozen in place during the second world war, when the Japanese government leaned on companies to lock in employees as a way to guarantee production. After the war the Americans gave Japanese workers the right to unionise. This reinforced the illiquidity. Unions prized job security and supported a pay structure based on age, not merit.
Today the legacy is clear. The salarymen in Shimbashi recall enormous sacrifices as well as bountiful benefits. Both are waning. The salaryman system has buckled under the strains on the Japanese economy. Yet its decline is in turn adding to those strains. As the population ages and falls, by 2030 just two workers will have to support every pensioner. But temporary and part-time employees are paid around 40% less than regulars. Half of them make no pension contributions, placing a burden on the system today and creating a huge fiscal time-bomb.
Japan is changing, but slowly. On a commuter train outside Nagoya, in the centre of the country, five high-school girls giggle at a barrage of questions about their lives. Chihiro, who wants to be a hairdresser when she grows up, says her father usually returns home around midnight. Her mother disapproves, to no effect. He works, by chance, for the same conglomerate as the men in Shimbashi. Chihiro, asked if she also wants him home earlier, replies “shoganai”, echoing the salarymen. But when she grows up and gets married, will she let her husband do the same? Chihiro and her friends shriek: “No way!”
Nobu, the young salaryman, likes his job but plans to start his own business one day. The older men in his office struck compromises that he is not prepared to endure. “After 1945, we were left with nothing, so we had to work together, with the same goal and as one team. We were a success, and Japan grew,” he says. “But this organisation doesn't work any more. It has stayed the same for too long. The system has rusted.”
Thursday, January 17, 2008
Labour Shortages in Eastern Europe
From the Financial Times this morning:
Gone west: Why eastern Europe is labouring under an abundance of jobs
By Stefan Wagstyl, Jan Cienski, Kester Eddy and Thomas Escritt
Jan Liman does not know how to safeguard the future of Meblat, his Warsaw-based kitchen furniture company. He has good sources of timber and plenty of orders. But he is short of skilled workers.
“Two [out of 12] workers have emigrated to Ireland. A third man has resigned saying he was also going to Ireland. Trying to find replacements has been fruitless,” he says.
The Polish entrepreneur’s complaints are echoed across the European Union’s new member states in central and eastern Europe. The squeeze is worst in the construction industry but is also gripping sectors as different as baking and banking. Engineers, technicians and factory hands are all in short supply.
Fuelled by strong economic growth and soaring foreign investment, employment is increasing in availability just as emigration has sucked around 5m workers from eastern to western Europe. According to Eurostat, the EU’s statistics agency, labour costs are growing at their fastest rate since the end of Communism – with a 30 per cent increase in nominal costs in Latvia in the year to last September and rises of more than 20 per cent in Romania, Estonia and Lithuania. In Poland, the largest new member, the rise was just under 12 per cent.
In real terms, average gross wages in Poland rose more than 7 per cent in the first nine months of 2007 and in Romania by nearly 16 per cent, according to the Vienna-based Wiiw research institute.
While unemployment levels in western Europe have stayed at around 8 per cent since 2002, in the east they have slid from 14 per cent to under 9 per cent. In the region’s booming capital cities, almost everybody who wants work has a job. Leszek Wronski, head of the central Europe division of KPMG, the accountant and management consultant, says: “We have a job market controlled by employees.”
For many east European workers, this control is very welcome. For 15 years they watched as company owners won much of the benefit of the post-Communist transition. Now workers are securing a bigger share of the rewards. As Donald Tusk, Poland’s prime minister, told the Financial Times recently: “The lack of labour in Poland is a problem in some industries...But it is also important for people to enjoy the fruits of economic growth.”
However, for governments and companies alike, rising labour costs and growing skills shortages raise big questions about the region’s future competitiveness. Everything from decisions on investment location to education, migration and population policies is coming under scrutiny.
There is no immediate need for panic. Even after the recent pay surges, differences between west and east Europe remain huge. In Germany, hourly labour costs are about €28 ($41.40, £21.15), compared with some €8 in the Czech Republic, €7.50 in Poland and €4 in Romania. Rafal Krasnodebski, a partner at the Warsaw office of PwC, the accountancy and consultancy group, says: “Poland and Slovakia were 70-80 per cent cheaper than western Europe in 2004. Now it’s 60-70 per cent. So it’s still cheaper [there] and likely to be cheaper for a long time to come.”
The region has since 2002 seen a particularly sharp cyclical upswing in gross domestic product growth, averaging more than 5 per cent annually. Yet while east European economies slowly converge with those of western Europe, including in labour costs, the current pay surge contains significant one-off elements. An easing of restrictions on working in western Europe, which accompanied EU enlargement, has allowed millions to emigrate, particularly from Poland and Romania, the two most populous countries. Pay has risen fastest for those in greatest demand in the west. Building workers’ wages last year rose 20 per cent in Poland, 25 per cent in Romania and 35 per cent in Latvia.
Now, with a credit squeeze hampering the US economy and clouding the western European outlook, economists are examining prospects for the EU’s new members. While most see continued solid growth, they expect a slowdown from 6.5 per cent last year to perhaps 5 per cent in 2008. Some governments and central banks in the region are in any case slowing growth by trying to reduce high inflation and current account deficits. Zbigniew Kominek, a senior economist at the European Bank for Reconstruction and Development, the multilateral bank for the ex-Communist countries, says: “The cyclical increase in economic growth will not last indefinitely.”
However, even if labour markets ease a little, there will be no return to the super-abundance of workers of five years ago. The region’s populations are ageing even faster than in western Europe and, with the added effects of migration, the number of working-age people is falling in the Baltic states and central Europe. Eurostat predicts that the population of the new member states will decline from 103.6m in 2004 to under 100.6m in 2015, with particularly sharp drops in working-age people.
So companies and governments must prepare for a long period of tight labour markets. For policymakers, the first task is to raise employment rates. The region is burdened with low rates of participation in the labour market, especially among older people. In Poland, the employment rate at the end of 2006 was just 54.5 per cent, compared with 67.5 per cent in Germany and 77.4 per cent in Denmark, the EU’s highest rate. Among people aged 55-64, the Polish employment rate was just 28.1 per cent, compared with 48.4 per cent in Germany.
The east European numbers are depressed by the use of early retirement and disability awards during the post-Communist restructuring. But political leaders are cautious about limiting access to welfare or initiating other policies that might provoke a backlash. After years of effort, the region is suffering reform fatigue.
Next, policymakers and employers will need to ensure wage labour productivity keeps pace with labour cost increases. According to a report this week by the Conference Board, a US business research organisation, labour productivity in the east is much lower than in the west. In Poland, for example, it was just 40 per cent of German levels. But the difference in unit labour costs is much greater, so employers continue to relocate labour-intensive operations from west to east – as Finland’s Nokia announced this week it would do, closing a German mobile phone plant with the loss of 2,300 jobs and expanding a Romanian factory that will employ 3,500.
However, as Capital Economics, a UK-based research group, warns in a report this week, in Poland and the Czech Republic (though not in Slovakia) recent wage increases have exceeded productivity gains. In Romania, Christian Popa, deputy central bank governor, says further labour market reforms are needed to improve flexibility and so raise productivity. “I believe this is the solution and it’s no quick fix.”
The Lisbon Council, a Brussels-based think-tank, says in a report that governments and employers must redouble efforts to raise productivity through better education and training. “The countries of central and eastern Europe lag western Europe considerably in human capital acquisition and deployment.” The report argues that while the region’s schools are broadly as effective as western Europe’s, there are big gaps in lifetime adult education, including on-the-job training. Older workers, trained in obsolete ways under Communism, face the greatest difficulties.
Companies are also responding to rising wages by demanding more from their workers. In business services, workers are being transferred to higher added-value operations involving direct contact with clients, while simpler functions are moved to China and India. Marketing and financial services groups, driven to pay €100,000 a year or more for experienced executives, are giving them tougher targets.
Even for high-paying international banks, personnel management is a headache. Stephen van Groningen, head of the Romanian subsidiary of Raiffeisen International, the Austrian bank, says: “The situation is unsustainable. People are becoming extremely opportunistic in job hunting. People come to work for the bank and leave after three months. Three months later they want to come back – and in certain cases I have to say yes.”
Lower down the wage ladder, life is tougher for employers, particularly at smaller companies. Agnieszka Jagiela, recruitment manager at 5 a Sec, a Polish dry cleaning chain with 80 outlets, says: “High staff turnover is a constant problem even though we pay close to the national average wage and offer four kinds of bonus.” Construction is booming at a time when workers are in demand across Europe. Diwaker Singh, managing director of Copper Beech, a Romanian property developer, says: “There is a desperate shortage of labour because there are many projects happening and so many emigrants.”
Many employers are responding by improving perks, such as company cars, and trying to retain staff through loyalty bonuses, training schemes and career development. For multinationals this is familiar territory. But for inexperienced local employers it is often new. Marek Masalski, head of Grupa Konsultacyjna, an employment agency in eastern Poland, says: “Some employers are still not fully aware of the importance of non-pay factors in motivating and employing people.”
So far, rising labour costs are not affecting the region’s overall attraction. The EBRD estimates that foreign direct investment into central and south-east Europe last year totalled $44bn (£22bn, €30bn), the fourth strong year in succession. Companies that see eastern Europe as a market as well as a cheap-labour base are glad of the increased spending power that higher pay brings. Also, a lot of current FDI is being generated by multinationals already well established in eastern Europe, notably carmakers, which are bringing their component suppliers into the region.
But among more mobile, cost-conscious investors, there is a clear shift away from hotspots including Prague, Warsaw, Budapest and Bratislava, where labour is short, in favour of locations offering more scope for recruitment. Favoured regions include Silesia in Poland and large parts of Romania, while pioneers are looking further east – beyond the EU, to Ukraine and Moldova.
Textile companies, particularly sensitive to labour costs, have led the way. But other groups are not far behind, such as Genpact, a US business services provider part-owned by General Electric, which started in eastern Europe in 2002 by opening a centre in Budapest. Now it is focusing on Romania, where it launched a Bucharest operation in 2005 and another in the northern city of Cluj last year. Patrick Cogny, chief executive of Genpact in Europe, says lower labour costs, including payroll and income taxes, have been decisive in investing in Romania; now Ukraine and Moldova are on his planning horizon.
Local companies are also heading to cheaper locations. Polish furniture makers have started outsourcing work to Ukrainian and Belarussian partners. Hermes Softlab, a Slovenian software developer, has created 200 jobs in Bosnia, Serbia and Montenegro – one-quarter of its total payroll.
But just as EU accession has made it easier for workers to move west, it has made life harder for would-be migrants from further east. Ukrainians, who enjoyed visa-free travel to Poland, now face bureaucratic hurdles. Moldovans have difficulty entering Romania. Employers want an easing of restrictions. They are also recruiting labour further afield by, for example, bringing in workers from Vietnam, China and North Korea on short-term contracts.
Whatever employers do, governments will sooner or later, as in western Europe, be obliged to consider the controversial question of migration if their region is to extend its rapid economic progress.
Gone west: Why eastern Europe is labouring under an abundance of jobs
By Stefan Wagstyl, Jan Cienski, Kester Eddy and Thomas Escritt
Jan Liman does not know how to safeguard the future of Meblat, his Warsaw-based kitchen furniture company. He has good sources of timber and plenty of orders. But he is short of skilled workers.
“Two [out of 12] workers have emigrated to Ireland. A third man has resigned saying he was also going to Ireland. Trying to find replacements has been fruitless,” he says.
The Polish entrepreneur’s complaints are echoed across the European Union’s new member states in central and eastern Europe. The squeeze is worst in the construction industry but is also gripping sectors as different as baking and banking. Engineers, technicians and factory hands are all in short supply.
Fuelled by strong economic growth and soaring foreign investment, employment is increasing in availability just as emigration has sucked around 5m workers from eastern to western Europe. According to Eurostat, the EU’s statistics agency, labour costs are growing at their fastest rate since the end of Communism – with a 30 per cent increase in nominal costs in Latvia in the year to last September and rises of more than 20 per cent in Romania, Estonia and Lithuania. In Poland, the largest new member, the rise was just under 12 per cent.
In real terms, average gross wages in Poland rose more than 7 per cent in the first nine months of 2007 and in Romania by nearly 16 per cent, according to the Vienna-based Wiiw research institute.
While unemployment levels in western Europe have stayed at around 8 per cent since 2002, in the east they have slid from 14 per cent to under 9 per cent. In the region’s booming capital cities, almost everybody who wants work has a job. Leszek Wronski, head of the central Europe division of KPMG, the accountant and management consultant, says: “We have a job market controlled by employees.”
For many east European workers, this control is very welcome. For 15 years they watched as company owners won much of the benefit of the post-Communist transition. Now workers are securing a bigger share of the rewards. As Donald Tusk, Poland’s prime minister, told the Financial Times recently: “The lack of labour in Poland is a problem in some industries...But it is also important for people to enjoy the fruits of economic growth.”
However, for governments and companies alike, rising labour costs and growing skills shortages raise big questions about the region’s future competitiveness. Everything from decisions on investment location to education, migration and population policies is coming under scrutiny.
There is no immediate need for panic. Even after the recent pay surges, differences between west and east Europe remain huge. In Germany, hourly labour costs are about €28 ($41.40, £21.15), compared with some €8 in the Czech Republic, €7.50 in Poland and €4 in Romania. Rafal Krasnodebski, a partner at the Warsaw office of PwC, the accountancy and consultancy group, says: “Poland and Slovakia were 70-80 per cent cheaper than western Europe in 2004. Now it’s 60-70 per cent. So it’s still cheaper [there] and likely to be cheaper for a long time to come.”
The region has since 2002 seen a particularly sharp cyclical upswing in gross domestic product growth, averaging more than 5 per cent annually. Yet while east European economies slowly converge with those of western Europe, including in labour costs, the current pay surge contains significant one-off elements. An easing of restrictions on working in western Europe, which accompanied EU enlargement, has allowed millions to emigrate, particularly from Poland and Romania, the two most populous countries. Pay has risen fastest for those in greatest demand in the west. Building workers’ wages last year rose 20 per cent in Poland, 25 per cent in Romania and 35 per cent in Latvia.
Now, with a credit squeeze hampering the US economy and clouding the western European outlook, economists are examining prospects for the EU’s new members. While most see continued solid growth, they expect a slowdown from 6.5 per cent last year to perhaps 5 per cent in 2008. Some governments and central banks in the region are in any case slowing growth by trying to reduce high inflation and current account deficits. Zbigniew Kominek, a senior economist at the European Bank for Reconstruction and Development, the multilateral bank for the ex-Communist countries, says: “The cyclical increase in economic growth will not last indefinitely.”
However, even if labour markets ease a little, there will be no return to the super-abundance of workers of five years ago. The region’s populations are ageing even faster than in western Europe and, with the added effects of migration, the number of working-age people is falling in the Baltic states and central Europe. Eurostat predicts that the population of the new member states will decline from 103.6m in 2004 to under 100.6m in 2015, with particularly sharp drops in working-age people.
So companies and governments must prepare for a long period of tight labour markets. For policymakers, the first task is to raise employment rates. The region is burdened with low rates of participation in the labour market, especially among older people. In Poland, the employment rate at the end of 2006 was just 54.5 per cent, compared with 67.5 per cent in Germany and 77.4 per cent in Denmark, the EU’s highest rate. Among people aged 55-64, the Polish employment rate was just 28.1 per cent, compared with 48.4 per cent in Germany.
The east European numbers are depressed by the use of early retirement and disability awards during the post-Communist restructuring. But political leaders are cautious about limiting access to welfare or initiating other policies that might provoke a backlash. After years of effort, the region is suffering reform fatigue.
Next, policymakers and employers will need to ensure wage labour productivity keeps pace with labour cost increases. According to a report this week by the Conference Board, a US business research organisation, labour productivity in the east is much lower than in the west. In Poland, for example, it was just 40 per cent of German levels. But the difference in unit labour costs is much greater, so employers continue to relocate labour-intensive operations from west to east – as Finland’s Nokia announced this week it would do, closing a German mobile phone plant with the loss of 2,300 jobs and expanding a Romanian factory that will employ 3,500.
However, as Capital Economics, a UK-based research group, warns in a report this week, in Poland and the Czech Republic (though not in Slovakia) recent wage increases have exceeded productivity gains. In Romania, Christian Popa, deputy central bank governor, says further labour market reforms are needed to improve flexibility and so raise productivity. “I believe this is the solution and it’s no quick fix.”
The Lisbon Council, a Brussels-based think-tank, says in a report that governments and employers must redouble efforts to raise productivity through better education and training. “The countries of central and eastern Europe lag western Europe considerably in human capital acquisition and deployment.” The report argues that while the region’s schools are broadly as effective as western Europe’s, there are big gaps in lifetime adult education, including on-the-job training. Older workers, trained in obsolete ways under Communism, face the greatest difficulties.
Companies are also responding to rising wages by demanding more from their workers. In business services, workers are being transferred to higher added-value operations involving direct contact with clients, while simpler functions are moved to China and India. Marketing and financial services groups, driven to pay €100,000 a year or more for experienced executives, are giving them tougher targets.
Even for high-paying international banks, personnel management is a headache. Stephen van Groningen, head of the Romanian subsidiary of Raiffeisen International, the Austrian bank, says: “The situation is unsustainable. People are becoming extremely opportunistic in job hunting. People come to work for the bank and leave after three months. Three months later they want to come back – and in certain cases I have to say yes.”
Lower down the wage ladder, life is tougher for employers, particularly at smaller companies. Agnieszka Jagiela, recruitment manager at 5 a Sec, a Polish dry cleaning chain with 80 outlets, says: “High staff turnover is a constant problem even though we pay close to the national average wage and offer four kinds of bonus.” Construction is booming at a time when workers are in demand across Europe. Diwaker Singh, managing director of Copper Beech, a Romanian property developer, says: “There is a desperate shortage of labour because there are many projects happening and so many emigrants.”
Many employers are responding by improving perks, such as company cars, and trying to retain staff through loyalty bonuses, training schemes and career development. For multinationals this is familiar territory. But for inexperienced local employers it is often new. Marek Masalski, head of Grupa Konsultacyjna, an employment agency in eastern Poland, says: “Some employers are still not fully aware of the importance of non-pay factors in motivating and employing people.”
So far, rising labour costs are not affecting the region’s overall attraction. The EBRD estimates that foreign direct investment into central and south-east Europe last year totalled $44bn (£22bn, €30bn), the fourth strong year in succession. Companies that see eastern Europe as a market as well as a cheap-labour base are glad of the increased spending power that higher pay brings. Also, a lot of current FDI is being generated by multinationals already well established in eastern Europe, notably carmakers, which are bringing their component suppliers into the region.
But among more mobile, cost-conscious investors, there is a clear shift away from hotspots including Prague, Warsaw, Budapest and Bratislava, where labour is short, in favour of locations offering more scope for recruitment. Favoured regions include Silesia in Poland and large parts of Romania, while pioneers are looking further east – beyond the EU, to Ukraine and Moldova.
Textile companies, particularly sensitive to labour costs, have led the way. But other groups are not far behind, such as Genpact, a US business services provider part-owned by General Electric, which started in eastern Europe in 2002 by opening a centre in Budapest. Now it is focusing on Romania, where it launched a Bucharest operation in 2005 and another in the northern city of Cluj last year. Patrick Cogny, chief executive of Genpact in Europe, says lower labour costs, including payroll and income taxes, have been decisive in investing in Romania; now Ukraine and Moldova are on his planning horizon.
Local companies are also heading to cheaper locations. Polish furniture makers have started outsourcing work to Ukrainian and Belarussian partners. Hermes Softlab, a Slovenian software developer, has created 200 jobs in Bosnia, Serbia and Montenegro – one-quarter of its total payroll.
But just as EU accession has made it easier for workers to move west, it has made life harder for would-be migrants from further east. Ukrainians, who enjoyed visa-free travel to Poland, now face bureaucratic hurdles. Moldovans have difficulty entering Romania. Employers want an easing of restrictions. They are also recruiting labour further afield by, for example, bringing in workers from Vietnam, China and North Korea on short-term contracts.
Whatever employers do, governments will sooner or later, as in western Europe, be obliged to consider the controversial question of migration if their region is to extend its rapid economic progress.
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