How long will Hungary take to catch up to 50% of Western European income levels?

Anniversary

The turn of a new decade also coincides with the 30^th anniversary of the regime change. This makes many people wonder about how much we have succeeded in reaching the national goal that was set at that time—namely, catching up with the richer half of the continent. Few were bold enough then to make any assumptions about how the catch-up in prosperity would take place. Yet, a number of things did happen fairly quickly.

Rapid EU accession

Hungary joined the EU fairly quickly – 14 years after the change of the regime. Soon it became obvious that there was an enormous gap between domestic and Western European wage levels – apparently a lot of poor countries joined the European Union. With the exception of the United Kingdom, the EU labor market remained closed to Hungarians.

Catching up accelerates

Following a seven-year transition period, the EU’s entire labor market opened to Hungarian citizens in 2011. This, together with a change of course in the economic policy and the starting economic recovery lead to asignificant migration of the Hungarian workforce. Unemployment in the economy was replaced by a labor shortage, which created an unusually rapid rise of wages. This in turn has accelerated Hungary’s catch-up to western levels of income.

Standing a good chance

The question is how long these positive changes will last, and whether we manage to catch up by the time the wage increases slow down. Will it all take place in the next 10 years? There may be a lot of unforeseen events, but let’s suppose that mature economies will continue to grow at a more moderate pace, while emerging ones will grow faster. The free movement of goods, persons, services and capital is ensured acrossthe EU.

The value of capital in production depends partly on the availability of labor. When labor is drawn away to higher paying markets, the value of capital falls. When low wages rise rapidly during a labor shortage, domestic companies are forced to improve production efficiency, to avoid losing their competitiveness.

Room for improvement

Today, average net income in Hungary is a third of Western European levels. However, according to the International Monetary Fund (IMF), which takes purchasing power parity (PPP) across currencies, our average net income is a bit higher – about 55-60% of the Western European average.

Using real income data that adjusts for annual inflation, Hungarian income levels fair slightly better, at 60-70% of Western Europe. 

The PPP income data should be handled with caution, as the IMF’s calculation methods can be quite different from the actual consumer market basket. What’s more important is that migrating workforce generally looks at nominal wages which may have a stronger psychological effect than higher cost of living. 

GDP

We may choose to use the data adjusted for purchasing power when talking about catching up, but it would not show a realistic image of the current situation. So let’s stick with nominal data. In terms of economic growth, the aim of the government is to have a two-percent surplus (probably calculated in euro as well as this is the real basis of comparison). This is likely to be sustainable throughout the entire decade in parallel with considerable GDP growth.  GDP per capita, however, will still be lagging way behind Western European levels.

Wages

The good news is that the extent of GDP has less of an impact on the standard of living for workers.  The single most important factor for a majority of Hungarians is their level of wage income. Today, wages in Hungary are growing at a much faster pace than GDP. This is true even when looking at real wages, which take inflation into account. This growth is sustained and promoted by labor market shortages and productionefficiency improvements, but how long it will last remains to be seen.

So far, only Estonia has managed to attain this level, Slovenia is getting close.

Based on current trends, in V4 countries we expect to see real wage continue to rise until they reach that level as well.

Six years

How long it will take for workers in individual countries to gain equality with Western European wages depends on the difference in the rates of wage growth. In Hungary today, this figure is about 8-9% annually, if we ignore the temporary depreciation of the national currency in the past two years.  

Estimates show a slight moderation in future wage growth, and this indicates that Hungary will need six more years to catch up to Western European levels of labor income. 

Standing a good chance

The rate of wage growth may not fall instantly, as wages tend to rise with economic productivity in the economy. As a result, wage growth surplus can reach 10-15% in the last four years of this decade.

If such ascenario takes place, the average wages in Hungary may reach two-thirds that of German or French workers within this decade.

Yet there are other factors related to catching up including the quality of healthcare, education or infrastructure. Of these three, healthcare has the most catching up to do. The road network, on the other hand, is fairly close to optimum levels.

There is always a possibility that this scenario fails, but current trends suggest otherwise. Over the last decade, the world in general, and this region in particular, have both weathered financial crises and fought off economic challenges quite successfully – we expect they will continue to do so in this coming decade as well.