Across much of Europe over the past two years low levels of price inflation – or even contracting price levels (deflation) -have been running hand in hand with high levels of wage inflation. This illogical phenomenon is particularly evident in countries such as Ukraine (+27%), Hungary (+20.5%), Estonia (+14.2%), Romania (+11.9%), Moldova (+11.8%), Turkey (8.1%), Bulgaria (+7.7%) and Finland (+6.3%).
It is difficult to explain this outcome, as low price inflation or deflation will naturally reduce pressure on wage levels, as workers would be either at a constant living standard or better off – even without a pay rise. There can also be little reason why private sector employers should voluntarily improve the rewards of workers at such levels when the priority after the past recession would appear to be to return profits to shareholders.
What would seem to be happening is a mixture of forces that expose the naivety of many employers to dealing with changing price levels. The biggest impact on prices in the last three years has been the cost of oil and its products. Although this has rebounded somewhat since its lowest level, the consequence for companies have been lower transport, heating etc costs. This saving has only partly been passed onto consumers and has had a fairly modest overall impact on profits. The need for profits has been less necessary in the post-recessionary era as shareholders hold equities for even shorter periods than before and look less to dividends than returns through share volatility. Companies have also not been investing at levels which would have a longer term benefit on their business as labour has been relatively cheap and few managers wish trust a 7-10 year ROI period on capital investment any more.
It should also be remembered that some progressive harmonization could always be anticipated between eastern and western European salary levels. Competition due to foreign direct investment (FDI) inflows in new enterprises has also been less intense, leaving many countries such as Romania (27th), Turkey (29th), Moldova (36th), Hungary (40th) and Finland 42nd) floundering in the per capita FDI investment league. Ironically too the decline in collective bargaining will have reduced an important link between pay and prices. Maybe, therefore, trade unions are good for us after all?