* Labour-induced risks to growth are real, but dire demographic trends will not automatically condemn the region to a low-growth future.
Meanwhile, Brexit is more likely to steer migrants from the Visegrád countries to other parts of the EU where labour shortages are apparent, and here Germany stands out, as it is also facing its own demographic crisis thanks to the very low replacement rate.
The wage gap between “old” and “new” EU member states remains huge. Our data show that wages adjusted for local costs are only around 50-60% of the Austrian level in the Visegrád countries (and even lower in much of the rest of EU-CEE).
Higher migration into the region from other places could be another solution, notably from Africa and the Middle East. However, this looks highly improbable in the current political context (and is also not likely to change). The Visegrád countries have fought hard against participating in the EU refugee-sharing scheme.
Demographics as destiny?
Long-term demographic projections for EU-CEE countries are undeniably negative. According to Eurostat, by 2025 the working-age population in EU-CEE will be almost 10% smaller than in 2015 (with the respective declines for the Visegrád countries in the 6-10% range), and trends will only worsen thereafter (see chart below).
There is a risk that companies will struggle more and more to find enough workers and, faced by ever higher wages to attract what labour is available, will simply move production away from the region.
Potentially there is going to be a north-south tension as the countries of the Balkans and Caucuses start to compete for labour with central and northern Europe, but that is still in the future. It is true that some production is already being moved to the southeast, to countries with lower labour costs such as Serbia and Macedonia. However, despite the demographic trends, the scenario described above is not inevitable, or even perhaps likely.
Another possibility is that the labour-shortage induced steep wage rises seen recently in EU-CEE could push firms to invest more in capital and automisation.
There are already signs that higher wages are driving improvements in productivity in the region.
As wiiw highlighted in its recent Spring Forecast Report, rises in unit labour costs in EU-CEE over the last few years have lagged way behind headline wage increases. This also helps to explain why inflation has stayed so low despite labour market tightness.
Owners of capital in the Visegrád countries (chiefly Western firms) have big incentives to invest more rather than move production east on a large scale. Countries such as the Czech Republic and Slovakia enjoy huge advantages in comparison with their eastern and southern neighbours, including proximity to Western markets, better infrastructure, workforce quality, generally lower corruption perceptions, and the reassuring anchor of EU membership.
* The publication is not an editorial. It reflects solely the point of view and argumentation of the author. The publication is presented in the presentation. Start in the previous issue. The original is available at: intellinews.com
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