Resilient emerging Europe labour markets to bounce back post-crisis

Resilient emerging Europe labour markets to bounce back post-crisis
By Clare Nuttall in Glasgow February 17, 2021

The rise in unemployment since the start of the pandemic in the Visegrad Four and some of Southeast Europe’s EU members has been minimal thanks to government and EU-level support. Moreover, the large temporary migrant workforce from nearby non-EU countries has acted as a pressure valve, allowing employers to ramp up employment in boom times and simply stop importing labour when things get tough. 

Nearly a year since the first cases of coronavirus (COVID-19) were reported in the Central and Eastern Europe (CEE) region, the unemployment figures for many countries in the region, which had been enjoying a boom fuelled by record low unemployment and rising wages, are higher but not dramatically different from those in the opening months of 2020. 

Pre-pandemic, labour markets had become extremely tight in the Visegrad Four states as well as Bulgaria and Romania. This was the continuation of a process that began shortly after the fall of communism when European automakers and other major manufacturing firms started locating part of their production in the region, drawn in by its proximity to Germany and other major Central European markets, the educated workforces and relatively low costs. Over time, Central Europe became more than a low-cost destination; higher-value manufacturing operations were set up, and it is also strong in business process outsourcing and IT. 

This drove unemployment down to record lows in countries such as Czechia, Poland and Slovakia during the later 2010s, while wages rose steadily, fuelling a consumer boom. Faced with a tightening labour market, firms became increasingly creative in recruiting talent, reaching out to university and even high school students, and fanning out from the capitals to smaller cities and towns, as well as recruiting across borders. 

The boom this created in the years immediately before the pandemic meant countries from the region entered the crisis in a strong position vis-a-vis employment. 

“The good news is that we started from a very tight labour market almost across the board. One year into the crisis, the situation is artificially improved by the support programmes that forced companies to hoard labour. This kept employment relatively high across most of Europe, even while hours worked fell sharply,” says Mateusz Szczurek, associate director and regional lead economist at the European Bank for Reconstruction and Development (EBRD). 

"Times are very different but not so different as one might think, because when you look at the unemployment rates they went up by 1 pp or so in most of the countries,” says Sebastian Leitner, economist at the Vienna Institute for International Economic Studies (wiiw). “Of course vacancy rates went down in all countries, but again, not as much as one might expect.” 

“On aggregate the rise in unemployment rates we expect in the EU countries in CE/SEE is modest, with the regional average unemployment rate inching up from some 3.8-4% in 2019 to around 5% in 2020 and slightly higher to around 5.2-5.5% in 2021, which shall be the peak from our understanding,” says Gunter Deuber, chief economist at Raiffeisen Bank. 

“On aggregate this uptrend looks modest; however, in some cases the rise is well above the regional average increase at around 1pp, mainly Bulgaria, Croatia and partially Slovakia and Romania. That said, the SEE markets are possibly more affected. Outside the EU the situation is more challenging; in Western Balkan countries like Albania or Bosnia the unemployment rate may rise by 2-3 percentage points in 2020/2021 compared to 2019.”

Economists point to the support given through government packages to maintain employment while Romania’s shaky public finances made it difficult for Bucharest to extend the required support, other eastern EU members issued “corona bonds” on favourable terms to finance generous stimulus packages. More is to come under the EU’s €1.8 trillion seven-year budget and recovery package that will give a particularly large boost to the poorer countries in the bloc; Bulgaria and Croatia are expected to receive around 10% of their GDP in the first two years alone. 

Such support has been and remains essential for avoiding a sudden hike in unemployment. “It’s necessary for the governments to keep the short-term work schemes going as long as there is not really a recovery of economic growth. From the individual country perspective, government debts are growing nowadays, so it makes sense to go on supporting them via EU-wide programmes,” says Leitner. 

Migration as a pressure valve

The eastern EU members saw mass emigration on accession, as people moved westwards when they gained the freedom to work anywhere in the bloc. Even as the pandemic descended in spring 2020, thousands of seasonal workers from Romania and other eastern EU states were flown to Germany, the UK and other West European countries to work in agriculture. Harvesting of labour-intensive crops such as strawberries has come to depend on cheaper labour from the eastern part of the bloc. With normal passenger flights suspended, workers were flown in on specially chartered planes. 

At the same time, in recent years there has been inward migration from non-EU members to the east particularly Ukraine to fill empty workplaces in Central Europe. This helped to ease the labour market squeeze, even as labour costs continued to rise. There were many reports of migrants returning to their home countries as the coronavirus (COVID-19) spread across Europe and companies shut down, in particular those on short-term working permits such as Ukrainian workers in Poland.  

“Poland is an interesting example of how migration can act as a buffer from the point of view of labour market tightness in boom and crisis time,” says Szczurek. He points to the substantial increase in foreign workers in Poland over the past five years, then the major drop in the second quarter of 2020 which, he notes is now recovering. 

This averted a sudden jump in unemployment figures in countries like Poland. “Ukrainian workers in Poland have to re-register every two months, so if the Polish authorities stop the process or the migrant workers cannot cross the border for epidemiological reasons at the time of labour market slack, unemployment can stay almost unchanged as a result. This process can be very flexible as shown in late summer 2020, when the recovery in the number of migrant workers was quite visible in Poland,” says Szczurek. 

“What we expect from the figures we see nowadays is that by 2022 unemployment rates should be most probably down at the level of 2019 in 2019 the developments were not that good compared to 2018 and from then on labour demand will also be fulfilled by immigration. We would expect by 2022 onwards there will again be increased immigration of workers from Ukraine and other non-EU regions,” he adds. 

Uneven impact 

While the pandemic hit all the economies across the region, with none escaping a recession in 2020, the impact varied widely depending not just on support packages but on the makeup of their economies. Tourism-dependent countries fared the worst, with Croatia and Montenegro experiencing the deepest contractions in the emerging Europe region. 

The EBRD’s Szczurek notes that the situation in some sectors, especially tourism and hospitality, remains “nightmarish”. By contrast, manufacturing and industrial output figures have been relatively robust. Moreover, says Szczurek, “the anecdotal evidence points to quite tight order books and labour shortages in that sector. The above 6% nominal wage growth [in Poland] in December suggests a shift of people moving from hospitality to manufacturing, where these people are needed.”

Other sectors that are doing well include financial services and IT, both extensively outsourced to the region pre-pandemic. Now is not the time for big new investments into the region, but companies aren’t pulling out of these sectors either and there have been some new commitments to expansion. For example, international e-commerce giant Amazon announced plans to enter Poland directly after local rival Allegro’s successful IPO last year, while Bucharest-based software company Tellence Technologies says it will take on 100 new employees to staff three new offices in the country. 

Unlike after the international economic crisis and great recession of the late 2000s, the world’s economies are expected to bounce back relatively quickly once populations are vaccinated and normal economic activity can resume.

“As we expect a rather solid recovery to unfold in H2 2020 and 2021, we would expect a return to tight labour markets conditions in the region in 2022 or 2023 the latest,” says Deuber. “This holds especially true, as in some key sectors we have labour shortages,” He lists sectors that weren’t hit hard by the pandemic such as industry, manufacturing and services/IT near-shoring. 

“Overall we expect real wage growth to be one-third to 50% lower in 2021 and 2022 compared to the pre-coronacrisis peak. In some cases we may even see flat or negative real wage growth, due to the stronger inflationary regional dynamics (e.g. Czechia, Poland, Romania, Slovenia),” says Deuber. 

In addition, the types of jobs in the region were already evolving before the pandemic. As wages and costs increase there has been a virtuous circle of more investment into automation and the relocation of higher value added occupations, followed by further wage rises and further efforts to increase productivity. Overall, Central Europe is no longer seen as merely a low-cost location. 

Leitner expects this trend to continue once demand returns: “more skills are needed that allow a productivity catch-up in manufacturing, so robotisation will be a topic again … this is a general trend wherever you have a big manufacturing sector.”

A further boost to employment in the region may come from “near-shoring” by West European companies; there are expectations that at least some companies will rethink their supply chains post-pandemic so they are less reliant on suppliers in the Far East and other far flung locations, and instead look to manufacturing in lower-cost parts of Europe. 

Meanwhile, even the worst-hit sectors could bounce back, as pent-up demand is set to lift sectors such as hospitality and services once restrictions are lifted.