Poles Punch Out of Cheap Labor Era, Risking Profit Decline

(Bloomberg) -- In a cavernous hall at Danwood SA three hours east of Warsaw, a worker in gray overalls hunkered over a keyboard, making computer-driven cuts into a six-meter roof joist in a fraction of the time once needed with hand-operated electric saws.

That creates its own set of problems for Chief Executive Officer Jaroslaw Jurak. Though robotic technology makes it possible for the Polish turnkey home builder to boost output by as many as 200 homes a year, Jurak’s company is struggling to find enough staff to meet that goal. Without extra help, he may have to downscale his plans, despite the time-saving methods.

“Currently, the main limitation for us to develop faster is definitely linked to the labor market,” said Jurak during a recent tour of the Bielsk Podlaski, Poland-based company, which prepares homes for assembly in Germany, Austria and the U.K. “In theory, we would like to sell more homes, but for the number of people we can hire.”

Companies across eastern Europe are facing the specter of eroding profits as their business model is being shaken to its core. It’s the end of an era of cheap and ample labor that underpinned their transition from communism, with growing complaints that a labor dearth is threatening to foil production plans. With Polish unemployment in the region’s biggest economy at the lowest since 1991 and more than 2 million Poles working abroad, companies are having to offer higher wages and invest in job training programs for cutting-edge technologies that strain budgets.

Worker Warning

Though the new trend has yet to work into many companies’ bottom lines, the percent of Polish employers reporting difficulties finding workers has jumped to almost 51 percent from 35 percent a year ago, according to a survey by Wroclaw-based recruiting and human services provider Work Service SA. That means an “employee market” that raises the risk of delays, according to Poland’s biggest homebuilder, Dom Development SA.

That’s already happening. London-based research firm IHS Markit in August indicated a rise in work backlogs for Polish manufacturers for the first time since February 2015. Firms cited shortages of labor and supply constraints as potential causes.

“The situation of a falling jobless rate and growing employment is very unfavorable from the economy’s point of view as it has to translate into wage pressure,” said Jaroslaw Janecki, the chief economist at Societe Generale SA in Warsaw. “The labor market could well be the biggest risk for the Polish economy in the coming quarters.”

With the unemployment rate at 4.8 percent in July, compared with the EU average of 7.7 percent, and the employment ratio close to a record 54 percent, demand for employees boosted wage increase through July by an average 5 percent a month, the fastest pace in six years. The Central Statistics Office said on Monday that wage growth accelerated to 6.6 percent in August, beating the 5.7 percent estimate of 22 economists surveyed by Bloomberg. Last month’s employment rose by 4.6 percent from a year earlier.

Pay Inflation

Biedronka, the Polish grocery retailer owned by Jeronimo Martins SPGS of Portugal that has about 60,000 employees, raised salaries for a third time in a year in April, echoing increases by the Lidl and Kaufland chains. Cashiers with three years of experience earn a monthly base salary of 2,750 zloty ($765), or 25 percent more than a year earlier, outstripping a 16 percent increase in sales in the second quarter.

The company has so far managed to keep profitability from falling by “reinforcing our focus on cost efficiency,” it said in a report, particularly “in the context of increased pressure on labor costs.”

But as long as Polish wages remain lower than in western Europe, Poles will still seek better pay abroad, cutting the pool of qualified workers at home, executives say. The average annual salary for Poland is $25,921, compared with $46,389 in next-door Germany, according to the Organization for Economic Cooperation and Development.

No Applications

Intive, a Munich-based software designer with annual sales growth of between 20 percent and 25 percent, has 1,200 of its 1,500 employees in Poland. Because of growing demand, it needs to add another 400 workers, mostly in its Polish offices, to its payroll by next year, increasing company expenses that ultimately eat into profits.

In the past, applications flowed into the company’s office, but no more. Like other companies in Poland, Intive has become more aggressive, searching for new blood at job fairs, and then offering training and raising starting salaries to retain them.

“It’s not enough to post a job ad on the website and wait for applications,” said Chief Executive Ludovic Gaude in a phone interview. “There is more effort needed.”

More than ever, firms are looking east, to neighboring Ukraine and Belarus.

With more than 1 million Ukrainians working in Poland -- many escaping the civil war there -- more is needed. In the first six months, companies applied for permission to hire 904,854 Ukrainians, compared with 1.26 million for all of last year, according to the Labor Ministry.

No Poles

Budimex SA, the country’s biggest publicly traded construction company, needs to bring in workers from the east to meet the demands of new contracts and cope with skilled-labor scarcity in the nation of 38 million, according to Cezary Maczka, head of human resources.

“We’re looking for Ukrainians as there are no Poles,” said Maczka. “We also want to go to the Belorussian market.”

It’s easier for low-tech companies to fill the gaps with foreign workers.

On a summer day outside Warsaw, Poles and Ukrainians knelt side by side in a hectare-wide field clipping seedlings with exotic names such as lycium barbarum No. 1, vitis zilga and actinidia bingo for shipment to markets as far away as China.

Adding Ukrainian workers at Clematis Zrodlo Dobrych Pnaczy Sp.k., Poland’s largest wholesale exporter of clematis plants, helps ease the wage pressure that keeps it squeezed between meeting demand and staying competitive with western rivals, said head of sales Andrzej Gruszczynski. But even that strategy is not a long-term solution, he said.

“There’s the fear that Ukrainians will find better-paying jobs in Germany and they won’t come back,” said Gruszczynski. “We aren’t able to raise salaries because then the Dutch would eat us alive. That’s the truth.”

Too Efficient?

At Danwood, Wojciech Markowski was installing a window sill to an outdoor wall from the comfort of the indoor factory floor, safe from the thundershowers raging outside. The glued and mortared section, when complete, will be shipped to Germany and bolted to other prefabricated walls to complete the family home.

Production director Antoni Zin said prefabrication and robotics has enabled Danwood to cut manpower hours needed for one house from 1,000 to 350. But even that is not enough to meet demand. The company is investing in training programs in the eastern Polish region, less than an hour from the Belarus border, because school curricula are not satisfying the requirements of modern industry.

“We want development in this direction,” he said. “But it is not easy. People in the schools are deeply in the old times. It’s very comfortable for teachers, but not for industry, not for us.”

To contact the reporters on this story: James M. Gomez in Prague at jagomez@bloomberg.net, Maciej Martewicz in Warsaw at mmartewicz@bloomberg.net.

To contact the editors responsible for this story: James M. Gomez at jagomez@bloomberg.net, Balazs Penz at bpenz@bloomberg.net, Piotr Bujnicki