Public sector pay hikes, higher minimum wage raise net wage in Romania

Public sector pay hikes, higher minimum wage raise net wage in Romania
By bne IntelliNews September 7, 2016

Romania’s net wages increased by 12.4% y/y to RON2,078 (€463) in July, according to the statistics office INS. The real annual increase, deflated by consumer price inflation, was 13.3% y/y, down from 16.5% y/y in Q2 and 15.2% y/y in Q1.

Net wages have increased by roughly one third in real terms since the major wage cuts in the public sector in mid-2010. The VAT cuts last year contributed, through negative inflation, to the outstanding expansion. Nonetheless, the low base has been the main cause of the significant increase. Wages in Romania remain among the lowest in Europe even compared to other new member states.

The double-digit rise in wages over the past year was driven by the public sector and by the government's decision to hike statutory minimum wages. Around one third of the 4.5mn employees in Romania are paid at or close to the minimum wage and the ratio has increased with the hikes in the lowest wage paid legally.  

Low wages remain the main attraction for foreign investors, irrespective of sector, and this does not bode well for the labour market’s outlook or even for potential GDP growth.

Recently, a German investor announced that it had dropped plans to invest €18mn in a new plant, for which it received €9mn state aid, because it could not find workers. EKR-Elektrokontakt, part of German group Nexans, already employs 2,500 people at its plants. Notably, the company wanted to develop the new plant in Targu Jiu, a region where the collapse of the mining industry has pushed up unemployment in the last decade.

The failure to find workers was caused by the low wages, close to the minimum statutory wage, where most of the car parts producers operate in Romania. As a result, a significant part of the workforce has migrated to EU countries, where they can earn more even in the lowest paid jobs, adjusted to supplementary costs connected to migration, conmpared to the typical €300 net wages paid by foreign cable producers in Romania. 

Around half a million people were still looking for employment in June (more than 10% of the current employment), as revealed by the ILO unemployment data released by the statistics office. However, wages offered by many manufacturers in Romania are not enough to persuade people to relocate from other parts of the country. 

  2014 2015 Q1-16 Q2-16 Jul-16
A. Net Wages (RON)            1,706            1,848            1,981            2,076            2,078
y/y % 5.2% 8.3% 12.2% 13.6% 12.4%
CPI deflated, y/y 4.0% 9.0% 15.2% 16.5% 13.3%
B. Net Wages (EUR)              384              416              441              461 463.2
    y/y % 4.6% 8.3% 11.1% 12.2% 11.2%
C. Employment (thous)            4,420            4,545            4,641            4,688  
     y/y Change (%) 1.3% 2.8% 3.5% 3.4%  
Source: INS