When Jan Wroblewski was scouring the market for staff for his string of hotels across Poland this year, a company approached him with an unexpected proposal: why not fill the gaps with workers from the Philippines?
At first the idea of shipping in staff from almost 10,000km away seemed “weird”, Mr Wroblewski recalls. Yet now he is hoping to strike a deal. “We started to analyse it . . . and it turned out that maybe the difference between Polish people and people from the Philippines is not so great. They are Catholics, so we think they will integrate into local society better,” he says, referring to two societies that are predominantly Catholic. “Now we are thinking about bigger contracts.”
Mr Wroblewski’s experience is an example of the strains emerging in central Europe’s booming economies as unemployment hits record lows and labour shortages start to bite. Since they joined the EU in 2004, Poland, Hungary, the Czech Republic and Slovakia have made huge economic gains by matching capital from multinationals with cheap, well-educated local workers. The transformation of a region scarred by 40 years of communist mismanagement has been one of the EU’s biggest successes. Yet as the dearth of workers becomes more acute, that model is becoming harder to sustain, and the region is approaching a crossroads.
“The previous growth model took advantage of the reserves of labour that were available, and which should have been employed better. The communists were so wasteful that it has taken almost 25 years to fully re-employ the human capital that we have,” says Witold Orlowski, chief economic adviser to PwC in Warsaw.
“But now the central European countries are by and large all facing this problem [of labour shortages], or are slowly approaching it. And that means that they will need to change their growth model. That is clear.”
The upside of a successful shift in economic model would be considerable: higher wages for populations who have looked on in envy at the standards of living in western Europe. But the risk is that if wages rise faster than productivity, the region will not attract the foreign investment that has buttressed its economies for two decades.
Even to talk of labour shortages in central Europe will come as a surprise to many in the rest of the EU, which has seen an influx of migrants from the region in the past decade and has watched many central European leaders strenuously oppose plans to house more refugees . The large number of workers in the UK from countries such as Poland was one of the key underlying issues in the Brexit referendum.
Yet the labour shortages rippling through central Europe are the result of demographic decline and economic success. Having peaked in the late 1990s, the region’s population is now shrinking, wizened by emigration and tumbling birth rates. The trend is likely to worsen. According to UN projections, the combined population of Poland, Hungary, the Czech Republic and Slovakia — known as the Visegrad Four, or V4 — will fall from about 64m in 2017 to just 55.6m by 2050, or about 13 per cent. Over that period, no region in the world will experience a faster decline — although some countries, such as Japan, will see even sharper drops.
Meanwhile, economic growth in the region has accelerated, powered by surging private consumption, rock-bottom interest rates and billions of euros of funding from the EU. Lured by the prospect of faster growth rates than in western Europe, foreign investors have flocked to the region, with state of the art factories, steel-and-glass office blocks and sleek new shopping centres springing up from Gdansk to Gyor.
For now, the V4 continues to boom. Its economies are set to expand by around 4 per cent this year. JPMorgan and Standard Chartered are planning new offices in Warsaw. Britain’s biggest carmaker, Jaguar Land Rover, will shift production of its Land Rover Discovery to its vast new factory in western Slovakia. German rivals Daimler and BMW are working on new plants in Hungary.
However, the region’s ability to supply workers to keep those factories ticking over is approaching its limits. In the three months to June, 86.6 per cent of industrial companies in Hungary said labour shortages would limit their output in the coming quarter, according to Eurostat. In Poland the figure was 49.7 per cent, and in the Czech Republic it was 43.2 per cent — in both cases roughly double the level two years ago.
These pressures are fuelling a furious battle for staff. Labour costs in Hungary in the first quarter were 10 per cent higher than a year earlier. In the Czech Republic, they were up 9 per cent, in Slovakia 8.5 per cent, and in Poland 8 per cent. In some sectors, the competition has become so ferocious that it is beginning to disrupt business. Katarzyna Jaeger, of the Dutch logistics group Raben, which is active across central Europe, says clients have told her of cases where drivers from other companies did not turn up for work, after being offered better wages elsewhere.
“We were getting calls from customers asking whether we had any available resources because the trucks they had ordered just hadn’t appeared,” she says.
In other sectors, executives fear even worse consequences. Dariusz Blocher, chief executive of Budimex, Poland’s biggest construction group by revenues, says he deals “every day” with subcontractors struggling to complete projects on time because of staff shortages. In some cases, he says, the combination of surging wages and material costs and the stringent terms on public contracts could force companies out of business.
“Due to the low unemployment rate people have a lot of opportunities to find work with an incredible amount of money, because companies are desperate and they are offering sometimes to double your salary if you change job . . . There is huge pressure for wage increases,” he says.
In the short term, the countries in the region are trying to boost their labour supply. Hungary has attempted to do this largely by providing incentives to increase participation levels in the workforce. “We believe that if you rely on your own population . . . your own identity-environment . . . it is going to be an economic advantage,” said Zoltan Kovács, a spokesman for Hungary’s prime minister, Viktor Orban, adding that the government does not intend to use immigrants either “as a demographic solution and/or as a solution in the labour market”.
The other members of the V4 are increasingly looking abroad for relief. Poland — the region’s biggest economy — has gone the furthest. Last year, it issued 1.7m special short-term work registrations to citizens from its eastern neighbour. It is on course to issue even more in 2018. Businesses estimate that between 1m and 2m Ukrainians are now working in Poland, in what has become one of Europe’s biggest, yet least visible, migrations. “If it wasn’t for the Ukrainians we would be in big trouble,” says Maciej Witucki, chief executive of Work Service, a staffing group active throughout central Europe.
Most Ukrainians in Poland are only there temporarily. But with businesses pushing for them to be allowed to stay longer, the government is now working on an immigration overhaul that would allow Ukrainians — and selected other foreigners, mainly from eastern European countries — to come to work in Poland for longer. It is also pondering the more radical step of easing rules for workers from some Asian countries, such as Vietnam and the Philippines.
However, in a region that includes some of the EU’s most ethnically homogenous countries, and where politicians routinely seek to earn political capital by railing against foreigners, even small changes can be controversial. Krzysztof Bosak, vice-president of Poland’s far-right National Movement, said in June that any government that made immigration part of its socio-economic system would be “a government of national treason”. “Better depopulation and slower development than immigration and population transformation,” he tweeted.
“If you look at the data on public attitudes to immigration, it seems that the Polish population is becoming less and less tolerant,” says Pawel Kaczmarczyk, director of the centre of migration research at Warsaw university. There is, he says, an “absolute tension between the growing needs of the Polish economy and negative attitudes towards immigrants”.
With similar attitudes to immigrants in the ascendancy throughout the region, and given Ukraine’s own poor demographic outlook, most observers reckon that in the long term, central Europe’s best chance of mitigating the impact of its labour shortages will be to shift away from their model of growth based on cheap labour that has powered the region for the past two decades. Instead, it will need to develop a new formula that is built on very different foundations: more investment in technology and innovation, higher wages and a more sophisticated education system.
To some extent, this shift has already begun. From 2014-16, sales of industrial robots to the region leapt by almost two-thirds, according to data from the International Federation of Robotics. Gudrun Litzenberger, the federation’s general secretary, says the figure “again increased considerably” in 2017.
Mr Blocher says that Budimex has begun to scale back activities in labour-intensive fields such as residential construction and concentrate on projects in rail and hydro-technology that deploy more machines. “Those contracts are bigger, and you have to have a lot of very productive machines, so this is what we try to do,” he says. “It’s a pity because I see the market pipeline [in more labour-intensive areas], but we cannot increase our exposure, which is crazy.”
To sustain such a shift, however, the region will need more highly-skilled workers. This, in turn, will require local education systems to do a better job of preparing students for such careers, a change that will take time to achieve. “We have to come back to motivate young people to go more to technical colleges,” says Czech prime minister Andrej Babis. “We need a reform of the system.”
This pressure to produce higher-skilled workers will become more acute as wages in central Europe edge closer to those in western Europe, a trend that, while desirable, will also reduce the incentive for multinationals to continue to locate factories in central Europe. Some in the region fear this dynamic could lead foreign investors to shift their investments further east.
However, Richard Grieveson, an economist at the Vienna Institute for International Economic Studies, says he expects foreign investors to stay where they are, in part because they have already invested in the region.
“The Czech Republic and Slovakia are right next to Germany and Austria. In the context of just-in-time supply chains, that and the better infrastructure in central Europe versus further east and south is an advantage,” he says. “Western companies in the region have a big decision to make . . . but my sense is that they will pay higher wages and invest more in increased productivity.”
Ukrainian workers could move further west
Over the past few years, Ukrainian migrant workers have played a crucial part in easing the strains on the labour markets in central and eastern Europe.
But businesses in the region — especially in Poland, where by far the biggest number of Ukrainian migrants work — are already asking themselves how long this will be the case.
One concern is Ukraine’s demographics. The country is one of only a few where the population decline over the next 30 years is forecast to be worse than that in central Europe. Another is that Ukrainians could head further west.
Although central European countries such as Poland and Slovakia are relatively attractive for Ukrainian migrant workers as a result of their cultural and linguistic similarities, wages in central Europe are far lower than in western EU member states.
For the moment, it is difficult for Ukrainians to access labour markets in western Europe. But Germany is considering loosening its rules for Ukrainians in relation to seasonal work. If it did so, Polish businesses fear that this could lead to an exodus in some sectors such as agricultural and construction.
Some employers say that there are already cases of Ukrainians heading west. Krzysztof Tołwiński, head of the National Farms and Farmers Trade Union, who owns a farm near Dziadkowice in eastern Poland, says that while Ukrainians worked in local agricultural sector three or four years ago, they have now moved on.
“Today these workers are in the west [of Europe]. No one will work in such conditions [as in Polish agriculture]. A person from Ukraine . . . knows how to count,” he says. “[Poland] is a country where it’s not profitable to work from the perspective of agricultural production.”
“If Germany opened its market to Ukrainians, it would be a big problem,” agrees Maciej Witucki, chief executive of Work Service, a temporary staffing company active throughout central Europe. “The Polish bus and railway companies would have very strong results. But just for one month.” James Shotter and Evon Huber
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