Century needed for Romanian labour cost to converge with EU28 average

Century needed for Romanian labour cost to converge with EU28 average
By Iulian Ernst in Bucharest June 17, 2016

The nominal labour cost in Romania increased by a record 10.4% y/y in Q1, marking the steepest annual increase in the EU28, according to Eurostat. On average, the labour cost increased by only 1.7% y/y across the EU28. There were high growth rates in the new member states where the wages are among the lowest (Romania, Bulgaria, the Baltic states), and are now converging.

The labour cost in Romania remains very low, at around one fifth of the EU28 average, according to 2015 average data (latest available), while it is only around one tenth of the level in Norway, which has the highest labour cost in Europe. The labour cost in Romania was only 17% of the average cost in the Euro area. In Europe, only Bulgaria has a lower labour cost according to the annual data reported by Eurostat.

The high rise in wages, or the labour cost, such as seen in Romania over the past quarters cannot be sustainable over longer periods of time. The annual rise in Q1 was supported by a number of salary hikes in the public sector. Salaries in the healthcare system were raised by 25% as of October, while teachers’ wages were increased by 15% as of December. Other public sector employees saw their salaries increase by 10% in December. Hourly labour costs are expected to continue rising in the short term, as the country raised the minimum salary in May.

Over the last 15 years, the labour cost in Romania converged to the EU28 average, rising from 9% in 2000 to 20% in 2015. The sharp rise in Q1 has further narrowed the gap. But at nearly 80%, the gap might be fully closed no sooner than one century from now, assuming a similar speed of convergence.

Based on the same assumptions and our calculations, the labour cost in Bulgaria will converge to the EU28 average in one and a half centuries. The slowest convergence is seen in Croatia (191 years), but the data is not comparable because Eurostat does not provide labour costs for Croatia in 2000. We have based our calculations for the country on the 2004-2015 speed of convergence, as compared to the 2000-2015 speed calculated for the rest of the countries. We have not calculated the convergence period for Slovenia, where the labour cost as a percentage of the EU average has actually decreased from 65% in 2000 to 63% in 2015.

If one extrapolates the convergence speed for 2004-2015 (as we did above in the case of Croatia) the results are not dramatically different. One exception is for the case of Hungary, where convergence stagnated during 2004-2015 and the calculated convergence period skyrockets to nearly 4,000 years. Slovenia’s convergence period would be 61 years and Romania’s 85 years.

The graph below shows the time to full convergence under two different scenarios: i. 2000-2015 speed of convergence remains constant and ii. 2004-2015 speed of convergence remains constant. Uneven performance, such as the high rise seen in Romania over the past quarters might impact the results, but they are still strikingly similar for both scenarios.