Balancing wages in an economic downturn

Wages will continue to stagnate this year, experts agree, a result of still-sluggish economic growth. Even without the effects of the recession, the country's gap between high earners and low earners will continue to widen to catch up with the layout typical in Western Europe, due mainly to a growing number of low-income earners.

In the third quarter of 2010, the period with the latest available data, the nominal average wage across the economy grew 2 percent on the year, according to the Czech Statistical Office (ČSÚ). However, once adjusted for price inflation, real wage growth was only 0.1 percent. Average wage growth was at its lowest in the third quarter since 2000, the ČSÚ said in an analysis.

"The development of wages is still affected by the lingering crisis in the Czech labor market," ČSÚ analysts wrote, noting that the effects of the crisis did not appear until 2010 for many sectors, and the first effects of the government's austerity measures began to take hold in the labor market.

With an even tighter budget in 2011, wages are likely to continue to stagnate in many sectors, the exception being industry, said Helena Horská, a senior analyst at Raiffeisenbank.

"The differentiation of wages ... generally increases over time, and during the recession, that gap widened further," she told The Prague Post.

The International Labor Organization (ILO), an agency of the UN, published a comprehensive analysis of global wage growth in 2007. The crisis hit soon after, and the organization released another analysis Dec. 15 that looked at the years 2008 through 2010. While Central and Eastern Europe enjoyed high levels of wage growth prior to the crisis, the recession put the brakes on the growth that was helping the region catch up to Western Europe, said Patrick Belser, the main author of the report. Since 1999, Central and Eastern Europe has seen cumulative wage growth of 61.3 percent, compared with advanced countries, which saw a rise of 5.2 percent, and the global rate, which increased 22.6 percent.

"If you look at Central and Eastern Europe, you'll see there is actually strong wage growth before the crisis, and suddenly in 2008, it goes down, and in 2009 there is basically a generalized wage freeze," Belser said in an interview with The Prague Post. "It's a considerable halt in progress in catching up with West European countries."

As it stands, the average domestic wage is 23,655 Kč ($1,322) per month. The minimum wage, last set in January 2007, is slightly more than one-third the average, at 8,000 Kč per month. Low pay, which defines the amount that low earners earn, is defined as less than two-thirds the median wage in most EU countries. While median earners continue to catch up to those in Western countries, it's these low earners who find themselves left behind in times of an economic downturn, Belser said.

"When you're looking at European countries, the increase in inequality is what we call 'the collapsing bottom,' the portion of people who are really not moving ahead at all and sometimes falling behind. That's the worrying part of the story," he said. With this widening income distribution gap, the lower earners begin to consume less and less, while higher earners whose wages are still growing at high rates save and invest their earnings rather than spend them.

"The overall aggregate demand begins to go down, and central banks have reacted to this situation by keeping low interest rates. We've seen that model in the U.S. particularly, and it's an economic growth model based on debt rather than earned income."

The Czech National Bank has held the two-week repo rate, a basis for interest rates, at 0.75 percent since 2008, a record low for the country.

This most recent recession has seen governments rethink wage policies as a way to aid economic recovery, Belser said. While free market capitalists may have demonized raising the minimum wage in the past, it's in fact a way of aiding growth, and the ILO has noted that more than half the countries it surveyed have raised the minimum wage. The Czech Republic is not among these, having kept the same rate since January 2007.

"[Governments] realized it helps the level of consumption, and it's a good thing for the economy," Belser said. "It's quite a shift compared to the previous crisis, when you saw a tendency to freeze the minimum wage."

Strong labor unions have proved helpful in keeping the bottom earners growing along with the rest of the economy, as in Germany and the Czech Republic, where unions and employers worked out an agreement to cut hours, and therefore pay, instead of laying off employees.

"It's a bit ironic because it shows the trade unions have been flexible rather than rigid, as they are often accused of [being]. When the system works well, it's a system of flexibility," Belser said.

Claire Compton can be reached at
ccompton@praguepost.com