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Breaking the 3SI Piggybank: Wages, Inflation and Real Values

Breaking the 3SI Piggybank: Wages, Inflation and Real Values

For the time being EU citizens, and especially those in the CEE region, have been quite shielded from skyrocketing inflation rates, governmental debt, price fluctuations or the looming recession. Yet, everyone has noticed how the purchasing power and their real wages have been eroded, as our baskets have become emptier and pricier. So, what is the deal with wages and how can we deal with them? 

If we analyse the OECD’s Employment 2023 Outlook report, like other macroeconomic observations, we can observe that the post-pandemic rebound was soon overshadowed by a spike in prices, primarily due to supply chain bottlenecks, with the war in Ukraine further shattering the global markets. These shocks have made inflation in Europe reach unprecedented levels, being the highest recorded in almost four decades. This aspect has translated into a cost-of-living crisis and spiralled down across the society, particularly as governments opted for various interventionist measures to steer their economic systems in the short term and increase their resilience (ranging from debt accumulation, fiscal revision, increased taxation, spending limitation etc.). Otherwise, for the Three Seas Initiative (3SI) region these measures also included an exponential increase in defence and security expenditures.

Therefore, by reviewing the Eurostat databases we can notice that, between 2020-2022, the HICP inflation (harmonized indices of consumer prices inflation) across the 3SI states increased roughly tenfold (except for Estonia which spiked to 30 times its initial value), with most of the region positioning itself in the double-digit range, apart from Austria, Greece and Slovenia, all of which remained just short of the 10% mark.

Figure 1. HICP Inflation 2020-2022 in 3SI states – created by author from Eurostat data 

Meanwhile, from the same datasets we can observe that, even though most of the 3SI countries increased in this period their minimum hourly pay rates (on average by a quarter), an issue that dragged the rest of the brackets with them (as there is an inverted cascade into the median and high-end salaries), these actions did not necessarily translate into an overall prosperity growth, with even the hours needed to exit the poverty line increasing by approximately 10%. Despite this fact, the redistribution brought them closer to their Western counterparts, with respect to the minimum wages expressed in purchasing power standards, with the region growing faster than France, Germany, Italy of Spain in this timeframe. In turn, labour costs have grown at the same pace, while remaining lower than the EU averages, with some practitioners arguing that this can strain the operational capabilities of companies, particularly SMEs, since every minute worked by the employees is more valuable.

Figure 2. Monthly minimum wage in 3SI states, bi-annual in PPS 2020-2022 - created by author from Eurostat data 

Figure 3. Labour Cost for LCI in 3SI 2020-2022 - created by author from Eurostat data 

Despite these „inflated” numbers, the bigger pay checks are expressed in nominal terms (absolute) and they often were not inflation adjusted, which translated into a significant drop in terms of real wages (relative) across the continent, currently below the pre-pandemic period in most countries, although the 3SI spaces have (so far) remained rather stable in this regard. Thus, from the OECD data we can highlight that, when it comes to the relative values (real minimum wages expressed in constant prices at 2022 USD PPP), the 3SI countries recorded a 10-15% downfall over the same period (apart from Slovenia and Croatia which grew marginally), like the rest of the EU. Otherwise, this means that the gap between the real minimum and average wages has been closing, whereas workers in low-paying industries have fared relatively better than those in mid/high-paying sectors.

Figure 4. Real minimum wages 3SI states 2020-2022 in USD at 2022 constant prices – created by author from OECD stats 

Surprisingly, despite the shift in all these factors, the purchasing power parity (measured in national currency/US dollars) in the 3SI countries has slightly increased in the meanwhile, which can be in part attributed to their complex and diversified business ecosystems, export-import balances and the manoeuvrings made by central banks to stabilize local currencies. Concomitantly, the Actual Individual Consumption Indices showcased a similar development and have remained rather unaffected by these fluctuations.

Figure 5. Purchasing Power Parity in 3SI 2020-2022 national currency/US dollar - created by author from OECD stats 

Figure 6. Actual Individual Consumption volume per capita for 3SI 2020-2022 with EU27=100 - created by author from Statistics Sweden 

When we draw the line, we can mention that whereas salaries now look better (on paper) across Europe and particularly within the 3SI region, with welcome advancements at all levels, the prices have also added several digits and turned local currencies into paper money for a while. Hence, this phenomenon was felt by everyone, yet the closing East-West gap (due to their trend of economic convergence) and lower cross-sectorial or inter-level disparities in the 3SI have enabled the latter’s workforce to feel less of a difference, for the time being.

In addition, while the region still enjoys a good deal when it comes to how every coin is used, things have begun to harmonize with the rest of the union bloc, partially due to the rising living costs (and standards), inflation, slight freezing of FDI or VC and overall market instability. How will the 3SI states continue their growth, as they closely turn from a “cheap” region into a merely “cheaper” option, remains to be seen and will depend on the governments’ capacity to influence and reorganize their economic models. 

Photo source: PxHere.




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