HEATMAPS: Unemployment is mostly defeated but pay is not high enough

HEATMAPS: Unemployment is mostly defeated but pay is not high enough
The fight against unemployment in CEE is almost won.
By Ben Aris in Berlin January 9, 2019

This is the second in a series of articles featuring heatmaps of the main macroeconomic indicators that allow direct comparisons between the countries of New Europe. They are part of a package that includes bne IntelliNews' OUTLOOK 2019, detailed country reports looking at the prospects for 2019 in each of the countries we cover. See a complete list of the OUTLOOK reports here. In addition, bne IntelliNews publishes detailed monthly country reports on a selection of the most important countries in our patch. See the OUTLOOK country list page for more details.

 

Transition from the socialist system has come at an enormous cost for most of the countries in Central and Eastern Europe (CEE): unemployment and poverty, but fight against unemployment is now almost won. 

After the old system collapsed, factories closed and once prestigious jobs in the centrally planned systems became worthless. Millions of people were thrown on their own resources and struggled to simply survive. Many did not as death rates soared and life expectancy plunged across the region.

Two and half decades on and most of the bigger countries have managed to rebuild their economies on more market orientated and modern lines. Russia, for example, has gone from a centrally planned basket case to a more or less normal country, albeit with some big problems.

The first of the heatmaps on unemployment paints a fairly rosy picture. Once again Central Europe is far ahead of the rest of the region with low unemployment rates. This region has been booming to such an extent that all the countries are suffering from labour shortages and opened their doors to migrant workers from the more disadvantaged countries to the east – especially Ukraine.

In Czechia the unemployment rate fell to a 21 year low of 2.8% in October, breaking the previous record low of 2.9% reported in June, the Czech Labour Office reported on November 8. But unemployment is also at near record breaking lows in Poland and Hungary too. Poland is currently hosting some 2mn Ukrainians and job adverts for work in Poland are now to be seen in the capitals of Kyiv and Tbilisi, according to bne IntelliNews correspondents.

The exception is in the Baltics where unemployment is higher as these economies are doing less well, however, thanks to the region’s EU membership many young people have emigrated to other European countries which has altered the make up of the labour market and distorts the numbers.

The situation in the Western Balkans and the Caucasus is much more difficult as these countries remain backward and are struggling to create enough work for their young populations. Bosnia and Kosovo have been particularly hard hit following the wars in the 90s. Moreover, the workforce in these countries remains untrained and unskilled so migrating north to Central Europe is not an option, as workers can’t compete with their more skilled Eastern European peers.

The shock of Armenia’s velvet revolution and decades of mismanagement have left elevated unemployment levels in that country too. Georgia also went through a colour revolution and despite great strides, and a booming tourist industry, also suffers from high unemployment.

Eurasia reports much lower levels of unemployment, but these numbers are deceptive as the political system has barely changed from the Soviet-era and the various dictators in charge of these countries have carried over the full-employment agenda of their predecessors, as a way of maintaining their grip on power. The official Belarusian unemployment numbers are especially suspect and don't tally with independent measures of employment.

Ukraine’s turn to the west has been hyped as a break with the past, but the unemployment numbers belie how little progress has been made and the labour market remains closer to those of Central Asia and Belarus than to Poland or Hungary. Unemployment remains uncomfortably high but the state has gone out of its way to maintain the traditional factory and mining jobs that act as a social safety net in what is now the poorest country in Europe.

Finally Russia finds itself halfway between the two worlds. Unemployment is currently at 4.8%, close to a post-Soviet record low. Russian President Vladimir Putin has also made sure to maintain many of the old state-owned company jobs in the so-called mono-towns that are a legacy of Russia’s central planning and vast geography. However, about a third of the country’s 83 regions are flourishing – especially in the European part of the country – and attracting investment. Cities like Kazan in the autonomous region of Tatarstan are reporting reversed migration as workers (especially young families) return to Kazan from the megalopolises of Moscow and St Petersburg; wages are lower in Kazan than in the twin capitals, but so is the cost of living and these regional cities are increasingly boasting a good standard of living, well supplied with work, more affordable housing, universities, schools and hospitals, as well as better weather.

 

Per capita GDP and wages

The first problem of providing enough jobs has been solved in most of the countries in the region, but the second problem of paying workers the same as the more developed markets in western Europe has not been.

The second heatmap compares the per capita GDP in purchasing price parity (PPP) terms and also includes in the last columns a comparison of average wages in each country in dollar terms.

What immediately jumps out from this chart is the boom in CEE: incomes in per capita terms have risen rapidly and in ppp terms are on a par with the lower end of the other EU members. Once again we can say the transition period in Central Europe is basically over as these countries have largely caught up with their peers in the EU. However, amongst the rest the spread is very wide indeed, ranging from a high of $35,010 in Czechia to a low of $2,897 in Tajikistan.

In each region there are stark difference between the winners and loses. In the Balkans, Slovenia and Croatia stand out as success stories that have built up prosperous economies, while Moldova remains flat on its back.

The story is the same in Central Asia where Kazakhstan’s per capita GDP is streets ahead of its peers and almost on a par with Russia and Turkey. And in Eastern Europe Russia is well ahead of its peers in the rest of the region and on a par with the bottom end of the EU members of the region.

However, these per capita GDP numbers are distorted by oil and mineral businesses in some of these more successful countries outside of Central Europe. This becomes clear when you compare the income levels.

Average wages in Russia are currently (October 2018) $605, which is almost half the level of most of Central Europe, while wages in Kazakhstan are $414, which is a third of the same. Likewise, Azerbaijan, another oil producer, has disproportionately high per capita GDP compared to its neighbours.

One way to refining this comparison is to calculate the ratio of the per capita GDP to the average wage. We took Poland as the basis of the comparison as it has a large and well-balanced economy that shares some of the legacy traits with the rest of the region. Using Poland as the benchmark, the relationship between per capita GDP and average wages in the rest of Central Europe is roughly the same (the ratio is 23).

The over/under potential ratio suggests that workers in the countries that produce raw materials are not participating in the wealth their countries are producing. In Russia wages should be increased by 78%, or an additional $471 a month to bring average salaries to $1,100 a month, if the wealth of the country were shared in the same proportions as in Central Europe. The same is true in Kazakhstan, Azerbaijan, Iran and Uzbekistan where wages should all be at least doubled, or more.

Finally the situation in the Balkans is the opposite. All these countries are poor (except Croatia and Slovenia), but the average incomes are actually higher than the per capita GDP suggests they should be. Indeed the incomes in the Balkans are higher than those in Central Asia and Eastern Europe.

 

 

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