Workers Winning War on Low Wages in EU's Most Stable Economy

(Bloomberg) -- Czech workers are slowly winning the war on low wages.

Faced with the European Union’s lowest unemployment rate, companies are tackling a dearth of able bodies in the country of 10.6 million with bonuses and higher salaries. According to Josef Stredula, the head of the nation’s umbrella union, that will continue for several more years as labor costs lie far below those in the richer West.

“In the medium term, certainly in the next three or four years, we can realistically expect real wage growth of 3 percent to 5 percent per year,” Stredula said in an interview in Prague on Monday.

Workers Winning War on Low Wages in EU's Most Stable Economy

After years of subdued salary increases, the ex-communist country saw average paychecks rise a nominal 8 percent in the last quarter of 2017 to 31,646 koruna ($1,430) from a year earlier and 5.3 percent when adjusted for inflation. The surge will affect everything from living standards, in which the Czechs have surpassed older EU members Greece and Portugal and are closing in on Spain, to monetary policy.

A shortage of drivers forced the capital city of Prague to scale back public-transport service in the first two weeks of this year, while Brno, the country’s second-largest city, offered new bus and tram operators a signing bonus worth more than three monthly salaries in March. Skoda Auto AS, a unit of Volkswagen AG and the biggest Czech manufacturer and exporter, last month agreed to increase salaries, including bonuses and overtime, by more than 20 percent.

Interest-Rate Hikes

The central bank, which kick-started interest-rate increases in Europe last year, has repeatedly said an overheating jobs market will warrant additional monetary tightening to keep inflation in check. While price growth is running below the 2 percent target, higher salaries will eventually force companies to pass extra costs to customers, the bank’s chief economist, Tomas Holub, said a month ago.

Investors have increased bets this month on a further increase in Czech borrowing costs, with forward-rate agreements now pricing in a quarter-point hike in the key rate to 1 percent in the fourth quarter.

The overheating labor market is similar to Romania’s, where an annual increase of 15.5 percent in average wages helped prompt policy makers to raise the cost of borrowing three times since January. In Poland, wages grew almost 8 percent from a year earlier in April. While Czech productivity is lower than Germany’s, there’s plenty of room to push Czech paychecks higher, according to Stredula.

“This shouldn’t cause any imbalance because the gap between productivity and wages is still relatively large,” he said.

Stable Economy

Caretaker Prime Minister Andrej Babis has promised to hike the wages of medical workers, teachers and pensioners, adding to a blanket 10 percent salary hike for all state employees of the previous government that kicked in last November.

Unlike Romania, which has received warnings from the European Commission about its fiscal position, Allianz SE ranked the Czech Republic as the EU’s most stable economy of 2017, citing its fiscal performance as one of its main strengths.

Stredula, 50, said the current pay gap versus richer neighbors is unacceptable. He says the economy must rely less on the export of simple components, such as car parts, and focus on harnessing more advanced technology and embracing sophisticated types of manufacturing and services.

“Would you like to do the same work as someone across the border in Germany for one third of their pay?” he said. “Our push for wage growth represents the most efficient form of pressure for technological change. Our single most important goal is to stop being subcontractors and become final producers.”

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