World Bank Report on Labour Shortages in the EU10

The European Union's 10 eastern members must take concerted action to increase employment participation levels to avoid a serious short-term slowdown in economic growth and important supply-side structural problems in the longer term according to a report published today by the World Bank.

"Addressing the emerging skills shortages is particularly important, because failure to do so will constrain job creation and future economic growth"

You can find the report summarized here, or you can download direct here.

Claus and I will prepare a full summary and review over the weekend, but for now here are some revealing extracts.

The report in fact says the following:

In this atmosphere of short term turbulence it is important not to lose sight of the longer term trends and the fundamental challenges the EU8+2 continue to face. With the exception of Hungary, growth remains high throughout the EU8+2 and in the case of Latvia represents serious overheating. This growth is sustained largely by consumption and investment. With tightening labor markets, large increases in real wages and employment and very rapid credit expansion, a moderate slowdown in growth may in fact be desirable in the countries showing signs of overheating.

They also have this to say, which is IMHO very important, and to the point:

Unemployment has fallen substantially in virtually all EU8+2 countries since 2004 due to strong growth in labor demand. This has given rise to skill shortages and associated wage pressures, often amplified by out-migration of EU8+2 workers. However, employment/working age population ratios remain relatively low.

Really this is the very point that Claus and I have been making. They then continue:

In contrast to the earlier period of weak labor demand it is now the supply side of the labor market that constrains new job creation. Many persons of working age are economically inactive in EU8+2 either because they lack skills demanded by employers, or because of labor supply disincentives, such as early retirement benefits, generous disability schemes, high payroll taxes, and limited opportunities for flexible work arrangements. These effects are concentrated among the younger and older workers, while the participation rates for middle aged workers are similar to those of the EU15. Hence the main challenge facing now EU8+2 is to mobilize labor supply to meet the demand. Addressing the emerging skills shortages is particularly important, because failure to do so will constrain job creation and future economic growth. To increase the effective labor supply EU8+2 countries need to: (a) improve labor supply incentives through reforming the social security systems, (b) improve worker skills through reforming the educational systems and improving domestic mobility; and (c) import labor with skills that are in short supply by opening labor markets to foreign workers. The weights assigned to each policy depend on the nature of the most binding constraint to labor supply, which vary across countries.

also this is very important, even if I am nowhere near as optimistic as the World Bank is about the possibilities of Eastern Europe staying out of the firing line, especially as the eurozone itself is slowing fast.

The effects of deepening financial turbulence would potentially be more serious for the EU8+2, but are more difficult to predict. The greatest risk is that the countries that have large current account deficits – the Baltics, Romania and Bulgaria – are suddenly less able to finance them through capital inflows and are forced into an economic contraction. This is particularly true for countries like Hungary that are highly dependent on more volatile portfolio inflows than on FDI. Banking sector foreign borrowing which is the main financing source in the Baltics is generally less volatile than portfolio flows, but the extreme surge in the Latvian CAD (to 30% of GDP in the 12 months to end July ) clearly cannot be financed in this way in a sustained manner. There are other potential risks as well. A general retreat from mortgage lending provoked by US experience would lead to broad based credit tightening and weaken the booming construction sector in the EU8+2. Moreover, the increased risk sensitivity may cause the unwinding of carry trades making external finance more difficult for higher interest, carry trade destination countries.

Finally:

In the latest quarters unemployment rates have either continued to fall or have remained fairly stable despite upward seasonal pressures. In several countries unemployment rates declined to historical minima (the Baltic States, the Czech Republic, and Poland). Employment rates in Latvia, and also in Estonia reached the highest levels since the start of transition and are around 68% for people aged between 15 and 64 years, which is close to the Lisbon strategy target of 70%. Nevertheless, further employment increases may be limited because of structural nature of joblessness due to skills mismatches and unwillingness to relocate or retrain, which is particularly relevant for those who stayed out of the labor market longer.


The recent trends have undoubtedly strengthened the power of employees in the wage bargaining process. Real wages have begun to grow rapidly in Poland where their expansion had been moderate so far. The highest growth is occurring in sectors which suffer most from shortages of workers (for example, construction). Rising employment and strong dynamics of real wages are pushing the growth of the wage bill into double digits. Nevertheless, demands of higher wages for public sector employees come into sight in most countries in the region. In Bulgaria and Poland, trade unions are prepared to resort to strikes or the threat of strikes in wage setting negotiations.

In all countries apart from Slovakia and Slovenia, wages are growing faster than labor productivity. Rising unit labor costs provoke central bankers in the region to tighten monetary policies (Poland and the Czech Republic). Apart from inflationary pressures, excessive ULC growth may undermine competitiveness and prospects for sustained long-term output growth and further labor market improvement.

Romanian Central Bank Leaves Interest Rates Unchanged

Romania's central bank today left its key interest rate unchanged, after cutting it four times in previous meetings. The decision was taken as a the effects of an extensive drought and a weaker leu threaten to add to pre-existing inflationary pressures.

The National Bank of Romania decided to leave its Monetary Policy Rate at 7 percent at a board meeting in Bucharest today. According to the press statement

"The short-term inflation outlook has worsened due to a prolonged impact of drought on food prices and the evolution of the leu exchange rate, given the difficulty of assessing the duration and effects of the recent world financial market turbulences..

The analysis of recent trends in macroeconomic indicators reveals a slowdown of the disinflation process and of the economic growth mainly due to supply-side factors (the impact of a prolonged drought on the farming sector) but also attributable to persistent domestic demand pressures. These pressures are also highlighted by the widening external imbalance.

Year-on-year inflation climbed to 4.96 percent in August, close to the upper limit of this year's target band, due to a significant increase of food prices and a correction of the leu's exchange rate against the background of recent turbulences on the world financial markets.

Wage dynamics have accelerated well above productivity growth, emphasizing the risks of deteriorating external competitiveness and of labour cost-related inflationary pressures. "

A drought that damaged two-thirds of Romania's crops this year hus pushed up food prices and a weakening of the leu during this month is making imports more expensive. The government also plans to increase spending, moving an eight-month budget surplus earlier this year into a full-year deficit of 2 percent of gross domestic product.

Romania's annual inflation rate rose to 5 percent in August, reaching the upper limit of the central bank's year-end annual inflation target of 4 percent, plus or minus a percentage point.

A weaker leu since mid-August has helped raise the prices of goods and services indexed to the dollar or the euro, including rents, telephone bills and gasoline. The leu has continued it's decline in September, bringing its loss against the euro since Aug. 1 to 6.6 percent and its drop against the dollar to 3.5 percent.

The International Monetary Fund warned last week that Romania's widening current-account gap makes the economy and the currency more vulnerable to external issues such as international investors' reluctance to place money in emerging markets amid the U.S. subprime crisis.

The current-account deficit widened to a record 9 billion euros ($12.6 billion) in the first seven months of this year from 4.9 billion euros in the same period last year as imports rose because of the stronger leu and the scrapping of many trade barriers when Romania joined the EU.

Romanians in Spain

For those who missed it, here's a graph showing the number of Romanians living and registered in Spain:



This data can give us some idea of how many Romanians are currently living and working outside their country at the moment. We should also remember, of course, that not all the Romanians who have out-migrated since the end of the 1990s have gone to Spain (there are for example a significant number in Italy), although I dare say a fair proportion of them have. The important thing is that we simply don't know. What we do know - and we know it since the Romanians in Spain (whether they are working legally or not) have an interest (like access to the health system and future amnesties) in registering with the authorities, and indeed the Spanish authorities have (for their own reasons) an interest in maintaining the data in a very up-to-date condition - is that according to the Spanish Padron Municipal electronic-data there were 524,995 Romanaians with active and valid id cards for the Spanish health care system as of 1 Jan 2007. These are not just Romanians who are simply passing through, or just might be around somewhere. The municipal registration which lies behind the data is renewable regularly for those without resident permits, and renewing them is how you get the right to have residence later, so this data is VERY accurate.

Just how accurate can be judged from the sort of detailed data you can get from the Spanish statistics office, like the breakdown of Romanians in Spain by age and sex which I present below. And yes there are people in the 75 to 80 (54) and over 85 groups (41), it's just that they are so few that they don't show.

Romanian Labour Force

Here is some initial data on the Romanian labour force.



Apart from some considerable seasonal volatility there is not too much in the way of a trend to identify here, except, of course, that total employment is not increasing, which is not perhaps surprising. Here now are the numbers of unemployed, and again apart from the volatility there is not a lot to note, except that the numbers are slowly declining.



Again, if we look at the annualised data we can see the position a bit more clearly, since all three - labour force, total employed and numbers of unemployed are all coming slowly and steadily down. This is very common and not especially surprising trend in a steadily ageing society. What is not at all clear is how you can expect to get rates of growth of 5, 6 or 7 per cent annually with such a static labour force.

Romanian Inflation

Long term, inflation in Romania has obviously been coming down:



But if we look at the evolution in the monthly CPI the recent trend is rather different:



We can see that since March this year the trend has now reversed and inflation is on the rise again. This will now need watching very carefully in the months to come in the light of what I have been saying in recent posts on construction cost and wage cost inflation.