This graph shows the wage handicap in both Western AND Central Europe

The Financial Times published an article yesterday about the „emerging European countries” including Slovakia, Czech Republic, Poland and Hungary. It was titled ‘CEE Stop Imitating, Start Innovating’, and it was based on research by the  Erste Group Research on Central and Eastern Europe.

In a nutshell, the report shows that to catch up to Western Europe, Central and Eastern Europe will have to focus on education and innovation – and to towards high added value products and services. In order to do that, CEE countries have to invest more in education and innovation. 

In the last 10 years, we’ve seen an influx of outsourcing companies in the CEE. I’m thinking about call centers, shared service centers and the likes – not exactly intensely innovative companies. At the same time, we’ve increasingly seen skilled workers like IT developers and healthcare professionals leave the CEE because they can earn more and get better conditions in the West.

This graph in the report sheds some light on why that might be.

If we have a quick look at on the research, the labour markets in the CEE countries could be considered as ’good value for money’ from the companies perspective for the first sight because the employees are underpaid in avarage for the productivity they offer (In avarage almost twice of the hourly labour costs were the hourly real labour productivity according to the research in 2011.).

So far that could be attractive for the investments. Cheap labour force is always attracting, isn’t it?

It sounds fairly good value proposition so far, but let’s have a deeper look at the figures and here comes the surprise:

The price of the working hours for different professionals is not the only factor that companies looks at. The actual level of productivity matters too, and it’s here that the CEE has its work cut out. The Netherlands and Ireland are twice as productive as the CEE workforce: that is a huge difference. In an knowledge economy, it’s a big handicap for the CEE.

It’s possible that this productivity gap is the result of the much lower pay – and from this perspective the low labour costs could actually work against CEE countries. But that doesn’t explain the position of other “undervalued” countries like Slovenia or Ireland where the productivity far exceeds the CEE average. Especially since „Celtic Tiger” Ireland shows the highest productivity rates together with The Netherlands and Belgium.

It’s interesting to see that the CEE has exactly the reverse problem from some Western countries. They both have a wage handicap, but they are exactly mirror images.

In the CEE, pay is too low for the productivity, but overall productivity is low. In countries like Belgium, Sweden, Denmark and France, productivity is high, but the wages are too high for the productivity you get.

This is probably the underlying reason for the now famous (infamous) letter by Titan CEO Maurice Taylor, when he said he wasn’t interested in buying a French tire plant: “Keep your so called workers, who get paid high wages, but work only for three hours a day.

For the CEE, it’s clear that the five countries should spend more on education and innovation to attract value added industries instead of the low cost based outsourcing industries. The CEE countries should also try to change the (counter)culture of productivity and motivate key employees by giving them incentives and competitive salaries – as startup companies often do.

As Birgit Niessner, the Chief Analyst of Macro Research at Erste Group told the Financial Times Blog:

“Pure cost competitiveness is not enough when countries are approaching the technological frontier; CEE countries will need to increase productivity of capital and labour by their own means, and this makes investments in education and R&D crucial.”

What do you think?

[FT, Erste Group Research]

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About the author

Balazs Szabo

Balazs Szabo is head of Business Development at InVendor and the Regional President of Kairos Society in Central Eastern Europe. (Kairos Society is a global network of top young entrepreneurs and global leaders using innovation to solve the world's greatest challenges.) He is also a member of the education committee at Hungarian Venture Capital and Private Equity Association. He has been elected four times as a Future Leader, by The Ambrosetti Forum (IT), by the World Foresight Forum (NL) by the St. Petersburg International Economic Forum, Youth International Economic Forum (RU) and Open Innovations Forum (RU). You can find Balazs on LinkedIn.

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