Real wage growth outpaces productivity; NBS concerned

THE COUNTRY'S central bank, the National Bank of Slovakia (NBS), is concerned about the pace of wage growth during the first few months of 2005.
The bank claims that wage developments reflect neither inflation nor labour productivity.

THE COUNTRY'S central bank, the National Bank of Slovakia (NBS), is concerned about the pace of wage growth during the first few months of 2005.

The bank claims that wage developments reflect neither inflation nor labour productivity.

In the manufacturing, retail and transportation sectors, wage growth preceded inflation by 5 percent.

The NBS says that when wages outpace labour productivity, the risk for inflation increases.

According to the NBS, wages grew faster than labour productivity in essentially all spheres, except the construction industry.

Financial analysts warn that the premature wage growth might hurt the country's economy.

"It [premature wage growth] means more purchasing power than is backed by production. Alone it might not be so dangerous, but because interest rates are so low, more purchasing power is coming from excess liquidity (ie, borrowing), which could result in the economy overheating," Jan Tóth, analyst with the ING Bank told The Slovak Spectator.

Though complete statistics on wage development during the first quarter will be available only in June, preliminary data suggest that real wages in the industry have swelled by more than 10 percent during the first three months of 2005.

What is in fact the cause behind the growth of wages in the manufacturing sector?

"In 2003-4 wage growth was below productivity growth. Labour productivity growth creates space for 4 percent real wage growth, but it is expected to reach 5 percent. This isn't surprising, as the pre-elections' period coupled with the FDI-led wage recovery will keep wage increases high," Tóth said.

"In addition, some of the wage bargaining was based on last year's inflation (which was much higher than this year's) instead of this year's inflation. Average inflation in 2004 was at 7.5 percent while average 2005 inflation is at 2.6 percent," Tóth added.

The NBS also worried that such a wage growth might in fact threaten meeting the goals in the sphere of price growth.

"Even though the dynamics in the growth of nominal wages has slowed in most sectors, the bank continues to consider the growth of wages to be too high with respect to the growth of prices and labour productivity development," Governor Ivan Šramko told news wire TASR.

The central bank assumes that the fast growth of wages could after a certain time penetrate the non-production sectors of the economy, where labour productivity grows much slower.

In fact analysts expect wages in the manufacturing sector to grow further in 2005.

"There was one-off adjustment to February wages since wages increased by 700 percent at Slovnaft (one-off measure to get rid of the labour union contract). We expect wages to grow by almost 8 percent, implying a 5 percent real wage growth," Tóth said.

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