Text below is a working translation of an article published a few months ago in the Polish newspaper Rzeczpospolita
According to the Central Statistical Office, approximately a half of people employed in Poland earn less than PLN 3 ths. Only for that reason it would be hard to find anybody in our country who would not agree that the level of salaries in Poland is low. For some people it is even too low to see the work could pay off – hence we have a large number of people who are economically inactive or who have chosen to emigrate.
However, the suggestions which are being put forward more and more often these days to simply officially rise salaries (it particularly refers to the minimum wage) can be much more harmful than beneficial. The problem of low salaries in Poland should be solved by increased productivity in the sectors exposed to international competition. This can be achieved through the diversification of economy towards new, highly productive activities. It would initiate positive, bottom-up pressure on increasing investments and salaries in traditional sectors of the economy.
Why salaries are what they are?
At the macroeconomic level, salaries are a sort of compromise between what employees would like to earn and what employers are able to offer them. However, this simple mechanism does not explain a tremendous difference in salaries between two neighbouring countries (such as Germany and Poland), and also why in different countries people doing exactly the same job get very different remuneration.
It is because in reality the mechanism of determining salaries in economy is much more complex and it depends on a number of different factors. At the macroeconomic level, however, we can assume that in small (in global terms) and open (with relatively high share of foreign trade in GDP) economies – i.e. like the one which the Polish economy is now – the starting point are salaries in the sectors exposed to international competition (tradable).
In these sectors, salaries are strongly linked to the productivity level, which in turn results from some kind of self-regulation mechanism. If for some reason the wages rises considerably exceeds the rate of increase of productivity then it results in loss of international competitiveness, financial problems of companies (at the microeconomic level) and growing trade deficit (at the macroeconomic level). This in turn enforces adjustment processes – salaries go down.
In normal and stable conditions, with a relatively sustainable labour market, the increase of productivity should translate into higher salaries. The situation we have at the moment, however, is not standard. The crisis in many European countries caused reduction of salaries. Thus, in order to maintain their relative competitiveness enterprises operating in our country have to compensate those changes with salaries growth rate below that of productivity.
The level of salaries in the sectors exposed to international competition also affects salaries in other sectors, the so-called non-tradable (mainly local services). Why? Because the level of salaries in tradable sectors largely determines purchasing power for non-tradable goods (if a barber charges for the rendered service more than a factory worker is able to pay then the latter will cut his hair at home).
Another mechanism existing at the point where tradable and non-tradable sectors interface provides that if for some reasons (e.g. pressure of trade union organisations) the salaries increase in services sectors is higher than increase of productivity in those sectors, then it exerts pressure on salaries in non-tradable sectors and in specific circumstances it may lead to extinction of those sectors in the given country, with all the related consequences (growing trade deficit and growing dependence on foreign capital) leading to crisis which in turn enforces adjustment (salaries reduction). The euro-zone countries from the south of Europe provide an evidence that it is not a purely theoretical problem – the process described above have just occurred there.
Socially sub-optimal equilibrium
Taking into consideration the above-mentioned mechanisms, what is the situation in Poland? Our tradable sector (for the sake of simplification we can assume that it is the same as manufacturing) is characterised by a low productivity level. The average added value per employee in processing industry is EUR 21 ths., i.e. by about 70 per cent less than in France or Germany, and by nearly one-fourth less than in Hungary. In this situation, it is hard to expect the salaries in industry (and consequently in the whole economy) to be high.
In a situation of generally low level of salaries, even in the sectors where productivity is high (there are not many of them, but there are a few) there is no need to pay as much as in other countries because there will always be employees who will be ready to take up job for a lower pay (but still relatively attractive in comparison with other salaries).
Here one can pose a question: what is the origin of low productivity of Polish tradable sector? Is it only a question of our poor efficiency and skills? No. Productivity is a derivative of many factors but the following issues seem to have a decisive impact on Poland:
– the structure of our tradable sector – which is still dominated by relatively simple activities characterised by low added value (technologically advanced products account for only 5% of Poland’s exports today, in the Czech Republic it is 15% and in Hungary 17%);
– strong reliance on labour and low penetration with machinery.
The industry structure somehow marks the limit of possible increase of productivity. Let us take the food processing industry for instance. Although you can make the best effort and create an added value in that sector (e.g. inventing new products, new brands, putting on ecology etc.), then the productivity in this sector will still remain low in comparison with, for instance, manufacturing of special chemical products (which we in fact do not manufacture and we import them on a mass-scale).
When it comes to the low machinery factor in Poland, then owing to the abundant supply of cheap labour the companies in many cases find it not beneficial to invest in mechanisation of their production processes. Confirmation of that in the fact that the value of investments in fixed assets per one inhabitant (after taking into account the differences at prices level) is in Poland the lowest from among all EU countries. Poland is also characterised by the lowest level of capital stock in relation to GDP.
It is a kind of vicious circle: productivity is low because companies either invest little or do not invest at all as the labour is cheaper than capital necessary for investment. Furthermore, we are trying to increase attractiveness of labour as opposed to capital ourselves – the system supporting new investments applied in our country (under allowable public aid) is constructed in such a way as to prefer involvement of labour at expense of capital. Bearing all this in mind it can be said that Poland has stuck up in a specific, socially unattractive equilibrium characterised by low salaries and generally low level of technological advancement.
What should be done to make salaries in Poland higher?
In the light of facts presented above there may be several concepts/ideas how to reach higher salaries in Poland. For instance, one can call forth to the employers operating in the sectors where salaries can be increased (without any major detriment to profitability), but there are few such industries and the salaries in those sectors are already relatively high. Taking into consideration the uncertain and volatile business environment, you can look out for major chances in this respect not as much in base salary increase but in greater participation of employees in corporate profits (variable component of remuneration).
The salaries increase can also be enforced by introducing (or rising) the minimum wage by virtue of law regulations. Apart from the justifiable cases where such actions may protect the employees against exploitation, generally the application of such policy poses a risk that it will be more harmful than beneficial to the economy (in extreme case it may end like in the south of Europe), especially if it were to be a “blind” tool – not taking into account the situation in particular industries or regions of the country.
In reality, the only way to reach a sustainable increase of salaries is to stimulate structural changes in our economy (especially the industry and tradable services) leading to more advanced and highly productive types of activity. How to do it? – this is a complex issue. In short, the adequate incentives are necessary to support development of new, non-traditional sectors in Poland. It should be accompanied by the policy of markets deregulation (particularly in services) and our economy ought to be made less bureaucratic. The latter would allow to absorb the ”overhang” of non-utilised labour which currently exists in Poland.
The appearance of new industries, characterised by high productivity and relatively high salaries, would affect the salaries in other sectors of economy. The healthy – resulting from increased productivity in economy – pressure on salaries would enforce greater capital investments (in the form of mechanisation of some processes) in traditional sectors of the economy. The raising average productivity and purchasing power of employees in industrial sector would translate into gradually higher salaries in services rendered to local markets. Higher salaries would also make work more attractive as opposed to economic inactivity and they would encourage people to go in for work in the official sector as opposed to working in grey area of economy. Working in Poland would also become more attractive as compared to working abroad, which might encourage many well educated and experienced people, who migrated abroad, to come back to their home country .
There is no time to waste – the sooner we start relevant reforms the quicker we will see their effects in the form of higher wages.
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