Higher wages and better education key to Hungary's future, says economist

August 17, 2016

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Raising the minimum wage and improving the effectiveness of adult training could increase Hungary’s economic productivity, Zoltán Pogátsa, an associate professor at the University of West Hungary, told Figyelő.

Translation of György Dózsa’s interview with Hungarian economist and sociologist Zoltán Pogátsa appearing in business print and online weekly Figyelő on 15 August 2016 under the title “Forced pay rise–the complete Pogatsa interview.”

– In an interview with this newspaper, Minister for National Economy Mihály Varga announced a change in the government’s economic policy. Among other things, instead of supporting the workforce, the cabinet wants to promote the efficiency of businesses.

– If by this the minister means increasing productivity, then there is some sense in it. Hungary’s economy stagnated between 2008 and 2014, the period following EU accession. A typical worker generates an average of EUR 11.30 per hour, and still does. This is a reflection not of the efficiency of workplaces, but of the position of companies in the global value chain. Existing workplaces cannot be made productive through direct support. Instead, a well-financed, effective education and adult training system should be set up, which would make it possible to slot workplaces with higher added value into the global value chain. There is no point in directly supporting existing companies. A firm must improve its operational efficiency by itself.

– Without increased productivity there will scarcely be any acceleration in GDP growth in the short term, although the government’s aim is precisely to compensate somehow for the growth-reducing effects of dwindling EU funds.

– If a well thought out adult training system is set up, it could significantly raise the added value of workplaces within one or two years. If billions in state money were to go into education instead of workfare schemes, which are fit only for supplying a workforce for jobs with very low added value, then beneficial effects would be seen even in the short term.

– The minister also stated that Hungary should reduce the dependence of its economy on the automotive sector.

– When someone makes such a statement, a new automotive investor usually shows up in Hungary a couple of days later. This is what happened with the extension of the Mercedes plant in Kecskemét. I can only say again that there is no path other than training. With the possibility of accessing cheap capital, and low corporation tax, everyone is complaining about the shortage of employees and the quality of the workforce. A labour market crisis has developed. State support for education has been reduced from the equivalent of 5% of GDP to 3.7%, and participants in adult training have been reclassified as workfare labourers. So, to put it simply, there are no suitable employees. If the government wants to do something beneficial, then it must do precisely the opposite of what it has been doing so far.

– In relation to training, there has been widespread criticism of the dual training model, where students simultaneously study at educational institutions while undertaking work experience within companies.

– This works well in Germany and Austria. However, it requires a well-financed education system, which we do not have. There is no sign that the Hungarian government will channel serious money into modernising the vocational training system. In Germany, apprentices are placed with small- and medium-sized enterprises that generate high added value, while unfortunately here they go to multinationals that create little added value.

– It is often said that raising the minimum wage could increase efficiency. I see a contradiction in this, since rising wages would in principle harm a company’s financial situation.

– There is a term “national average productivity”. This can be calculated by averaging the hourly productivity of all those currently in employment. Let’s assume the cabinet raises the minimum wage. In this case a proportion of firms generating low added value would close down, so the average productivity would increase. Those freed from workplaces that do not provide a living wage must be retrained, and with them we should try to fill the many tens of thousands of jobs that are currently standing vacant. I would add that it would also be important to create a national research and development system. Every one of the developing countries so often cited by György Matolcsy has a well-planned R&D strategy, usually based on the research activities of universities. Here, the state says that universities should survive in the marketplace and finance such activities through it. The problem with this is that the market, or companies, will not fund basic research – they are interested in applied research. However, without the former, there can be no applied research, so it should be state funded.

– But an enforced raise of the minimum wage will lead to increased unemployment.

– There is widespread disagreement about that amongst economists. In 2001 and 2002, the government of the time raised the minimum wage significantly, while unemployment did not rise, or only to a slight degree. Those left without jobs must be brought into adult training schemes. Today they either do not work, or head for Western Europe to seek employment. There is no market process that forces companies to improve their productivity. The state must force this through an increase in the minimum wage.

– What is your opinion of the recommendation that a chronic workforce shortage should be tackled by importing labour?

– I disagree with it. A country must first provide work for its own population. Please organise retraining and education properly. Put money into it, do not underfund it. If this does not lead to a sufficient labour force, then workers can be imported.

– The government also plans to increase the mobility of workers within the country. This is an old problem. Centuries-old habits would have to be changed.

– I do not believe this is a cultural pattern, much rather a rational economic calculation. If someone cannot sell their home in Nyíregyháza, but has to move to Győr, the following problem arises. They have a net monthly wage of 100,000 to 120,000 forints, from which they have to pay for utilities, flat rental and household expenses, and an occasional visit home. With such low average wages, this does not work. They either stay at home unemployed or as a workfare labourer, or try to make up the numbers add up on the black economy. Those who leave are not going to go to Győr, but to Western Europe for much higher wages. Having made such a serious decision, which means giving up local connections and a way of life, why not try to settle in Germany or the United Kingdom?

– It will be a long time before Hungary’s economy will be able to pay wages competitive with those in the west.

– Numerous studies have shown that earning a very high salary is not necessarily important to people. It is also important for them to work in their own language and cultural milieu, if doing so provides them with a respectable quality of life. If supporting a family does not cause problems, they have no urge to move abroad. The solution would be for the state to increase wages to a certain level – for example by raising the minimum wage – and develop an education system that will provide employees suitable for filling high value added workplaces. The minimum wage must be raised slowly but consistently, to give economic actors time to adjust. But employers must be forced to raise wages. I can imagine a three-year programme at the end of which minimum pay would reach the level of a living wage, and perhaps even exceed it slightly. An employer who can pay a living wage should be forced to do so. Those who cannot would have three years to pull themselves up. Companies who are unable to do so – despite our low capital costs, energy prices and transport provision, in addition to numerous tools with which the central bank is trying to help the economy – have no right to exist in the Hungarian economy.

Business card

■ Economist and sociologist, born in 1974, expert on international political economy.

■ Associate professor at the University of West Hungary and a visiting lecturer at the University of Verona.

■ Course supervisor at the István Széchenyi Doctoral School of Management and Organisation Sciences

(Pogatsa received his MBA from the University of Technical and Economic Sciences in Budapest and in 2004 his PhD in Contemporary European Integration from the Centre for European Studies at the University of Sussex, Brighton.  He has an MA in Sociology, an MA in Southeastern European Studies, and an MA in Political Science and International Relations from the University of Westminster, London-trans.).