Hungary: Short-term solutions to the issue of labour shortages

In Hungary, the social partners, government and experts have for many years failed to agree on possible solutions to the growing problem of labour shortages. The recent acceleration of the problem has made some short-term measures inevitable, including a steep increase in the minimum wage and the acceptance of limited numbers of skilled immigrants. 

Background

Hungary has struggled with a shortage of labour in many sectors and professions for nearly a decade and the problem has worsened in recent times. Experts estimate that about 500,000 Hungarians work abroad permanently, a significant number in the context of a total workforce of around 4 million.

Official figures (PDF) from the Central Statistical Office (KSH) are much lower, setting the number of Hungarians working and living elsewhere at about 33,000. KSH statistics suggest that about 117,000 workers are transborder commuters and are regarded by the government as domestic workers.

The causes of labour migration are complex and are often influenced by personal circumstances. It is, however, widely believed that Hungary’s historically low wages have played a crucial role in workforce migration. This view is supported by the accounts given by many expatriate Hungarians for why they have chosen to work elsewhere. Labour market experts, trade unions and opposition politicians repeatedly argued during 2016 that wages should be increased to keep Hungary’s potential workforce at home.

Employers have battled with the opposing pressures of long-demanded wage increases and the impact of the labour shortage on their competitiveness and even the very existence of their businesses. In mid-2016, the Confederation of Hungarian Employers and Industrialists (MGYOSZ) published a report that analysed labour market difficulties and proposed some solutions. The report suggested that labour shortages were caused by dramatic demographic trends which would continue to affect labour supply in the coming decades. The key factors identified were:

  • the increased demand for labour from a growing econ
  • omy, including large-scale public works programmes;
  • the current outflow of skilled and educated Hungarians;
  • the high number of unskilled and unqualified workers among the remaining workforce;
  • the deteriorating quality of job-seekers in general, due to inadequate education and vocational training;
  • the lack of labour inflow either from the EU or third-party countries.

As a short-term response, employers proposed a government-supported programme to invite foreign skilled workers to take jobs in Hungary if they were willing to integrate culturally. They suggested that the aim should be to recruit as many as 250,000 workers. They also said that they would be willing to accept differentiated real wage increases if the government was willing to cut taxes and employers’ social security contributions.

The Minister for National Economy, Varga Mihály, agreed during the summer of 2016 that ‘if needed, skilled and qualified workers should be welcomed from third-party countries to fill vacancies in Hungary’. The Minister in charge of the Office of the Prime Minister, János Lázár, later retracted this statement, saying that government policy to solve the labour shortage was to:

  • improve and restructure the vocational training system;
  • involve more people from the minority Roma community in the primary labour market;
  • encourage people currently employed in public works programmes to move into the regular labour market.

Trade unions rejected these proposals and insisted that low wages were the primary cause of the labour shortage and only wage increases would solve the problem. Wages at the level of or close to the national minimum wage were most problematic, since the net minimum wage was significantly below subsistence level. As long ago as 2014, the Hungarian Trade Union Confederation (MSZOSZ) was arguing that the minimum wage had to be significantly increased (PDF) by the end of the current administration’s cycle in 2018.

In late autumn 2016, the government began consultations with the employers on the labour shortage and wages. As an incentive to encourage talks, the government announced that the rate of social contributions paid by employers would be cut. It was hoped that returning revenue to companies in this way would help them to either raise wages, or improve their effectiveness and productivity by investing in technology that would make production less labour-intensive.

This approach was not supported by the trade unions, which argued that it offered no guarantee of higher wages for workers.

Policy on migrant workers

The government’s official stance on immigration has been to oppose acceptance of an EU-imposed quota of immigrants. However, a low-key policy to encourage carefully managed immigration was introduced, even though this ran contrary to the political message of the government’s campaign for the referendum held in October 2016 on the quota issue.

The government is primarily targeting Ukrainian citizens from regions caught up in the recent conflict there. The measures include:

  • permitting the employment of Ukrainian migrants in public works programmes from mid-2015:
  • shortening the time it takes to issue a work permit from 30 days to between 10 and 15 days;
  • removing the requirement for a work permit for jobs in trades that are officially recognised as having labour shortages;
  • since July 2016, giving Ukrainian citizens special status as ‘neighbour country citizens’ who are treated more favourably than other third country nationals, particularly in the labour market.

The official list of trades that have labour shortages is published by the Ministry for National Economy. The 37 trades currently listed include roles in building and construction, IT, commercial and catering, and skilled or qualified factory work.

Agreement on wage increases

When annual negotiations on the minimum wage began in October 2016, the government proposed an unprecedented increase combined with tax reductions. It seems that the factors the government took into consideration included:

  • the OECD’s listing of Hungary as the country that levied the fourth highest tax wedge on labour income (PDF) (49%, compared with the OECD average of 35.9%);
  • the need to give workers living below subsistence level a pay increase;
  • repeated trade union demands to increase the net minimum wage gradually to subsistence level by 2018.

On 24 November 2016, the government signed a multiannual wage agreement with the trade union confederations and the employer organisations representing the private sector. It sets out the following provisions.

  • The minimum wage will be raised by 15% in 2017 to HUF 127,500 a month (about €406), and by a further 8% in 2018.
  • The guaranteed minimum wage paid to employees in positions that demand skill qualifications or secondary educational attainment will be increased by 25% in 2017 to HUF 161,000 a month (about €518), and by further 12% in 2018.
  • Social contributions paid by employers will be cut by seven percentage points from 27% to 20% over the next two years, and may be further decreased by half a percentage point from 2018 if average wages increase by 11%. In 2019, if real wages increase by 6%, four further cuts of two percentage points each may be possible in that year.
  • Corporate tax will be reduced to a uniform 9% as of 2017. It currently stands at 10% up to a taxable revenue base of HUF 500 million (about €1.6 million) and 19% over that threshold.

Social partners’ opinions

Although national employer organisations signed the multiannual wage agreement, the Secretary General of the National Association of Entrepreneurs and Employers (VOSZ), Dávid Ferenc, said his organisation had been the last to sign and had done so reluctantly. He was concerned that small and medium-sized enterprises (SMEs) would find it difficult to pay the increased wages while preserving their economic competitiveness and market position.

MGYOSZ Vice President, Géza Kelemen, was moderately optimistic. But he added that the government could have helped businesses to pay the wage increase by cutting taxes even more. He believed some enterprises, especially smaller ones, could slide into ‘grey’ or ‘black’ employment if they could not afford to pay the much higher wages.

Trade unions were pleased with the agreement but voiced concerns that, while the lowest paid would certainly benefit, those higher up on the wage ladder also needed to see their income rise. Average wages in Hungary are currently 20% lower than those in nearby competitor countries such as the Czech Republic, Poland and Slovakia.

Commentary

The labour shortages placed the government in a tight corner when it eventually decided to concede on a higher minimum wage long-demanded by the trade unions. However, the increase will not be enough to halt the migration of labour from Hungary, and a significant overall rise in wages is still necessary.

Most employers have already had to deal with the painful limits and consequences of the low-cost labour ‘low road’ strategy they and successive governments have followed for decades. Employers now seem ready to move towards higher wages provided their profitability and competitiveness are not threatened.

Publicly, the government has not expressed a view about the relationship between wages and many Hungarians’ inclination to move elsewhere to work, or the labour shortage in general. However, wage adjustments in the health sector and some other segments of the public sector have been introduced by the government on an ad hoc basis. These measures suggest that wage policy is seen by the government as a tool to halt or at least slow down the outflow of skilled labour.  

Given Hungary’s lack of skilled workers, fierce political debate over its education system and the weak performance of its vocational training system has now been raging for years. Yet even if the education system was restructured, it would take a decade for any positive effects to filter through to the labour market and would not help enterprises that need well-trained employees now.

However, allowing foreign labour into the Hungarian labour market on a larger scale might have serious political hazards. The social temper over the migrant crisis has left the government with little leeway to ease the labour shortage by welcoming foreign workers, even the limited number of primarily Ukrainian workers who are being allowed to take jobs in Hungary for the time being. There is likely to be fierce debate over managed labour migration between the social partners and the government in the coming year.

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