Austerity package leads to drop in real wages

The Hungarian Central Statistical Office has reported a decrease in real wages in the first five months of 2007. Gross average income rose by 7.4%, while net average income increased by 1.2%. When adjusted for inflation, this corresponds to a 6.8% decline compared with real wages a year ago. The drop is due mainly to the 2006 austerity package; however, state measures to combat the undeclared economy may also have had an impact on pay developments.

The government’s new economic policy, introduced in 2006 with the aim of macroeconomic stabilisation and redressing the budget deficit, anticipated that gross domestic product (GDP) growth would decline to 2%–3% a year (HU0609029I). Moreover, a 3%–4% drop in real wages was expected in 2007.

Pay developments

According to data from the Hungarian Central Statistical Office (Központi Statisztikai Hivatal, KSH) regarding pay levels in the first five months of 2007, real wages in companies with at least four employees declined by 6.8% compared with the same period a year ago. Gross average income rose by 7.4%, while net average income increased by 1.2%; when adjusted for inflation, the 6.8% decline in real wages emerges. Wages thus represent a monthly net average income of HUF 112,300 (€456 as at 6 September 2007). Blue-collar workers received an average HUF 83,400 (€338) a month, while the average monthly salary of white-collar workers was HUF 144,900 (€588).

Wages of employees working in the public sector showed a 2.9% gross increase and a 2.1% net decrease, which signifies a substantial decline of 10% in real wages in the sector when inflation is taken into account. Full-time employees in this sector earned HUF 209,700 (€851) a month in the period in question. In the private sector, however, a 3.3% rise in net wages and a 10.4% gross increase were noted. On average, private sector employees earned HUF 170,700 (€693) a month.

Factors behind pay developments

Analysts and policymakers are divided on how to interpret the significant increase in nominal wages in the private sector: employers may have increased wages to compensate for growing inflation, or reported wages may have increased as a result of the government’s actions to combat undeclared work. Nevertheless, higher than expected inflation and the austerity measures introduced in 2006 – in other words, tax increases for the most part – dented even the significant rise in gross nominal wages in the private sector and resulted in declining real wages overall.

The assumption regarding changes in the illegal economy is supported by the fact that pay increases were greater in sectors where undeclared work and wages may have been prevalent, such as construction and services, and in companies employing fewer than 20 personnel. In the construction industry, incomes grew by 19.8% – a rate much higher than the average increase. In the case of enterprises employing fewer than 20 staff, wages rose by 20%–30%. Meanwhile, in the services sector, the increase in prices may be a result of some companies trying to compensate for increased costs due to having to pay official wages to employees.

Wage statistics from May 2007 did not provide any clarification. In the private sector, the pay increase, compared with last year’s data, was higher – at 12.4% – than in the previous month, which may suggest that employers were compensating for inflation. However, when extra-wage allowances and other benefits are taken into consideration, the statistics indicate that the pace of the wage increase slowed down. This may indicate a forced pay rise prompted by the increment in the national minimum wage and various measures to crack down on the grey economy, as well as an attempt to increase wages in the form of benefits and extra-wage allowances.

2008 budget in preparation

In the meantime, the Ministry of Finance is preparing next year’s budget, anticipating economic growth of 3%–3.5%. The Minister of Finance, János Veres, estimates a 3.5% decrease in real wages for 2007 and anticipates a stagnation of real wages for 2008. The pace of next year’s economic growth is questionable, however, since the GDP data for the second quarter of 2007 came out late and showed a meagre 1.4% growth; this represents a considerably lower rate than that predicted by the government when it announced its new economic policy in 2006. Such a slowdown is probably the result of tighter fiscal policies and decreasing private consumption due to falling wages.

Commentary

In light of the available data, it is most likely that real wages declined because of tax increases and higher than expected inflation; this reduction in real wages then resulted in decreasing private consumption. These developments curtailed GDP growth to the lowest levels in 10 years. At the same time, the undeclared segments of the economy were forced to pay more on behalf of their workers, which means that average real wages – including official and unofficial – declined even further than statistics suggest, leading to the biggest contraction in the standard of living in the past 10 years.

Orsolya Polyacskó, Institute for Political Science, Hungarian Academy of Sciences

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