2008: The Year East-West Wage Convergence Came To A Standstill

The crisis has put an end to wage convergence of the poorer Central and Eastern European new EU member states (EU-11, being: Czechia, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, Slovenia (2004), Bulgaria, Romania (2007) and Croatia (2013)) towards wage levels in the West.

Figure 1 below shows their share of wages (nominal compensation) in percentage terms of the EU-15 over two decades. The trend-break in 2008 is clear and this is largely due to flawed one-size-fits-all EU crisis management practices. In six countries (Croatia, Hungary, Poland, Czechia, Romania and Slovenia) wage convergence went into reverse. In most of the EU-11, 2016 relative wage levels got stuck for almost a decade, with only Estonia and Bulgaria showing significant progress. But Bulgarian wages in 2016 were still just 17.7% of the EU-15 average and, with the exception of Slovenia, wage levels in the rest of the EU-11 were between 20% and just over 40% of western Europe.

Figure 1: Nominal compensation of EU11 in % of the EU15 average (on EUR/ECU basis)

Source: AMECO 2017

Stalled wage convergence undermines social cohesion in the EU; with the free flow of capital, services and people the persistently high wage gap creates adverse effects both in the east and the west – such as a `brain drain` from east to west that undermines economic development in the east, and exploitation of posted CEE workers that undermines wages in the west. The resulting disappointment leads to the emergence of political forces that question core EU values. The lack of wage convergence is thus not only a matter of social injustice for eastern workers, it is detrimental to sustainable growth and threatens the future of Europe.

What can be done? First of all, collective bargaining in the EU-11 needs to be strengthened, and economic policies based on austerity and wage moderation should be phased out. Minimum wage policies should push the wage-floor upwards (recent positive examples in Hungary and Romania show that this could work). Instead of undermining workers` rights, Labour Codes in the region should be improved.

Wages should be allowed to follow inflation and productivity and, given that productivity has increased considerably faster than wages in the past (and wages make up a lower proportion of GDP in the east than in the west), it should not be taboo for wages to increase faster than both inflation and productivity.