Why have labour costs risen less in Hungary than in other countries in the region?

Varying labour costs affect competitiveness at both company and national economy level. Businesses have an interest in keeping labour costs down, and governments have an interest in creating an attractive business environment for firms, one segment of which may be labour costs (attracting investors with low wages). But what determines labour costs?

In addition to wages and other benefits, taxes and contributions are built into it, but the regulatory side (minimum wage) is also strongly influenced. In addition, supply and demand (labour shortages and unemployment) also drive labour costs. Changes in productivity also play an important role. If the population is more skilled, more productive and has higher value-added work, firms are more willing to pay higher wages.

Change in labour costs in euro (2004=100%)

Format: GKI calculation based on Eurostat (2023) data

The change in labour costs in the given currency, adjusted by the exchange rate between the currency and the euro in the given year.

The change in labour costs in the given currency, adjusted by the exchange rate between the currency and the euro in the given year.

Labour costs in Hungary have doubled in euro terms and tripled in forint terms since 2004.In this period, German labour costs have risen in line with euro inflation, by 44% in total. However, in a developed economy it is natural that wage levels - and hence labour costs - rise at a lower rate than in countries starting from a lower base. It is therefore worth looking at how these expenditures have evolved in the states of the region.

Labour costs in euro terms in Poland, Slovakia and the Czech Republic have risen much more significantly than in Hungary, tripling over two decades. So in this respect, it was worthwhile for large foreign companies operating in Hungary to bring their working capital to Hungary: costs have risen less here than elsewhere, so they can expect higher profits. Romania is a special case: labour costs have increased 5.5 times in euro terms. This is because, on the one hand, wages started from a low base and, on the other, the Romanian economy has grown rapidly over the past 20 years. It is also worth mentioning the whitening of the economy (which was also significant in our country, e.g. due to the introduction of online cash registers), which also increased the value of the indicator.

The question arises: why have labour costs risen less in Hungary than in other countries in the region? The answer is prosaic: one of the main goals of current Hungarian economic policy is to attract foreign working capital. To achieve this, the government keeps taxes on labour (SZJA, SZOCHO, etc.) low, while taxes on consumption (VAT, excise tax, consumption tax, etc.) high.

Another key instrument of domestic economic policy has been the devaluation of the forint.When the forint depreciates against the euro, it costs multinational companies less euros to make the same forint-based payments. In parallel, of course, imported goods will become more expensive at home (but this will not affect multinationals that are primarily engaged in export activities). Meanwhile, most Hungarian employers are not helped by the depreciation of the domestic currency, since - if they are not producing for export - their revenues are typically in forints, while their imports become more expensive.

Overall, Hungarian labour costs have risen much less in euro terms since our accession to the EU than in the neighbouring countries surveyed, which could in principle be a competitive advantage. However, the very low productivity growth rate means that most of the firms attracted have entered the country with low value added. The depreciation of the forint against the euro, the forced increase in the minimum wage, the generous subsidy policy, the reduction of labour costs - to the advantage of the machinery and car multinationals - have all contributed to the fact that Hungary's competitiveness has lagged behind that of the regional countries.

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photo: freepik