Wages in the Czech Republic are the second highest out of ten accession countries slated to join the European Union next year. Considering the virtually non-existent inflation and relatively slow growth in labour productivity, we ask an expert about the sustainability of wage development.
Czech wages keep growing, now second highest among EU accession countries Czech average real wages rose by 6.4 percent year-on-year in the third quarter, slowing a little from 6.7-percent growth in the previous three months. The Statistics Office said the average nominal wage grew 6.3 percent but consumer prices fell 0.1 percent, boosting the real wage gains. Fast wage growth and almost zero inflation have stimulated higher consumer spending, which has helped to propel the Czech economy. However, the development does raise some concerns over the consumption-led GDP growth. I spoke to economic analyst David Marek from the Patria Finance company:
"There is one disadvantage and it is that a strong increase in real wages enabled by zero inflation exceeds growth of labour productivity. It is therefore negative for corporate profits and investment due to increased unit labour costs."
Can it translate into higher unemployment?
"Yes, it could be partly a reason for rising unemployment in the Czech economy."
Does that mean the wage growth is unsustainable given the performance of the economy, inflation development etc.?
"I am slightly optimistic because of the announced wage growth in 2004. According to the trade unions, wages should increase by six percent on average. Taking into account the projected GDP growth, changes in employment and inflation forecasts, this should be around a sustainable level. So, the gap between wages and productivity should close next year."
Can you compare the wage development in the Czech Republic with some of the neighbouring countries?
"Compared with countries like Slovakia, Hungary or Poland, our wages are increasing slightly faster, especially as compared to Poland and Slovakia, which are seen as our main competitors according to FDI inflow."
We are joining the EU next May, how do we compare to Western Europe measured by purchasing power parity?
"According to our calculations, the average wage in the Czech Republic is around 47 percent of the EU average and the ratio is slightly increasing."
How fast do you expect the Czech Republic to catch up with the West?
"I expect that the process will follow growth in labour productivity. I am slightly sceptical about the possibility of catching up with the rest of the EU quickly - it may take several decades."
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