Why is Orbán's Hungary still a low wage economy?
Because of low productivity and a low wage-to-GDP rate
In the previous post in our series on the Hungarian economy, we demonstrated with figures that Hungary is still indeed a low wage economy. In this post we shall examine the causes behind this.
There are fundamentally two such reasons:
1. Low productivity
One reason is low productivity.
GDP is the aggregate value added of all firms in the economy. Productivity is this GDP divided as per employee, or as per working hour. As we can see from the following graph, Hungary’s productivity has been stagnating during the Orbán regime at around 70-74% of the EU average.
Contrast this with Poland or Romania, which have achieved significant gains in productivity in the same time period. 55% to 81% in the case of Romania, for instance, a fantastic achievement! As you can see on the figures in our previous post about wages, this increase in productivity has also been reflected in Polish and Romanian wages.
The reasons for the stagnating productivity will be addressed in our next post in this series on Orbán’s economic modell.
2. Low wage-to-GDP ratio
The second reason for lower wages in Hungary is the low wage-to-GDP ratio (the wage rate, for short).
Not only does Hungary have a lower GDP/capita than most EU countries, but the actual share of wages within this GDP is also lower. GDP is the aggregate value added of all firms in the economy. This aggregate value added is divided into wages and profits during what is called the primary distribution of income. This process takes place through wage bargaining - on an individual or a collective basis, depending on the strength of national trade unions (trade union density, see below). The state then taxes both wages and profits directly (as well as numerous other sources, such as consumption, wealth, etc., all financed from wages and profits). These taxes are then used to finance education, healthcare, social policy, etc. This is called secondary redistribution.
However, as can be seen from the graph above, even during primary redistribution Hungarian workers receive a smaller share of a smaller GDP, than their Western European counterparts. It is also crucial to observe that the wage-to-GDP rate demonstrates a decreasing trend both during the so-called Left wing governments (2006-2010), as well as during the Radical Right wing Orbán government (2010- ).
The reason for the low wage-to-GDP ratio is the low union density of Hungarians. Higher wages are won through collective bargaining by unions. It is not surprising that the European economies with the highest wages (Scandinavia, Belgium, Luxembourg) are also the countries with the highest union densities. (Some countries, like France, are outliers. They have low union density, but union calls for collective action - such as strikes, demonstrations - mobilise far larger crowds than the membership.) Eastern member states have lower union densities, and Hungary is amongst the lowest. Direct consultations by this author with Hungarian trade union officials suggest that even the official 8.3% figure for Hungary is probably optimistic.
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