Matthew Day in Warsaw -

Anybody employed in Poland could well be booking a more expensive holiday this summer owing to bulging pay packets. Official figures for April put wage increases in the corporate sector in double digits, and the trend looks set to continue as Polish salaries climb steadily upwards. This in turn is putting pressure on inflation, which the Finance Ministry said on June 2 probably rose to 4.3% in May.

In April, corporate salaries rose by 12.6% on year, well above the expected 11.5% level and up from 10.2% in March. The latest increase, which brought the average monthly increase in 2008 to 11.8%, also comes after months of double-digit – or close to double-digit – salary growth. Not to be totally outdone by the world of private business, the state sector also registered a 5.6% year-on-year increase in April.

For an explanation as to why Poles are taking home more and more money, economists point to an in-balance on the Polish labour market caused by EU accession and Poland's healthy and growing economy. After Poland joined the EU in May 2004, hundreds of thousands of Poles left the country just as the economy began to pick up speed. So Poland was hit by a diminishing supply of labour just as demand for labour surged – and this triggered salary growth.

And with economists warning that the upward pressure on wages is expected to continue for at least another quarter, Poland's economic policymakers have come under increasing pressure to raise interest rates owing to fears that soaring salaries will fuel inflation, which the Finance Ministry said June 2 probably rose to 4.3% year-on-year in May from 4.0% in April.

The Polish central bank has already increased borrowing costs by a 175 basis points since last April in its struggle with inflation, and market watchers expect a further hike in interest rates – now at 5.75% - in early June. Marian Noga, from the bank's rate-setting Monetary Policy Council, has already called for a 25-basis-point rise and experts predict that soaring wages will encourage more dovish council members to follow Noga's lead.

Ramifications

A failure to control inflation and thus help rein in wages could have some awkward implications for the Polish economy. "At the moment wage growth is much higher than economic productivity and from the perspective of the corporate sector it is not a particularly comfortable situation," says Marcin Mroz, chief economist at Fortis Bank in Warsaw. "They have to pay more because of a difficult labour market, but at the same time the productivity of the labour market is diminishing."

Mroz's words echo central bank warnings that increasing production costs for products and services, coupled with demand outstripping the pace of productivity, could well mean consumers having to pay more, which will add to inflationary pressures.

Higher wages also spell bad news for Poland's exporters. Already battling with the problems stemming from the strong zloty they now face a war on two fronts as higher wages drive up costs and undermine their competitiveness. To an extent cheaper imports should offset these problems but as they represent only a partial solution exporters face an increasingly uphill battle.

But perhaps more significantly, wage growth could also represent a sea-change in the Polish economy as companies, faced with hefty salary costs, move away from investing in labour.

"What we see at the moment is a historical change," says Mroz. "At the beginning of the 90s the Polish economy was perceived as an economy with a cheap labour force and therefore investors invested in labour-intensive methods of production. But now labour is no longer cheap, so, first of all, new investors will take this into account and people will switch from labour to capital."

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