The slowdown in the Hungarian labor market has been absorbed
Labor market indicators were used to lag other major indicators of economic activity, such as gross domestic product (GDP) growth. In the rebound period from a crisis, the labor market would be the last area where one might see signs of improvement. Only 18 months have passed since the unemployment rate reached a record high during the Covid-19 crisis (in June 2020), but the Hungarian labor market seems to be regaining its full strength.
The December 2021 unemployment rate was 3.7%, which means around 180,000 people are officially unemployed. The year-end figure is roughly in line with November data. The same goes for the activity rate and the employment rate. The labor market may have reached a quiescent point, suggesting that the crisis-induced slowdown has already been absorbed.
Labor market trends (%)
Some might say that the unemployment rate before the crisis was lower and therefore there was room for improvement. In our view, as participation and employment rates are virtually unchanged since the second half of 2021, the only source of improvement could come from the recent pool of labor reserves. Unfortunately, the quality of this pool is deteriorating. The share of the long-term unemployed (those who have been out of work for at least 12 months) in the unemployed group is back at 34%, equaling the figure seen at the start of 2019. The potential labor reserve is now back below 300 000, close to an all-time low.
Potential labor pool (‘000, 3m moving average)
Based on a recent Eurostat survey, which measures the share of companies complaining about lack of labour, we can say that the labor shortage in Hungary is increasing rapidly. In 4Q21, more than 30% of businesses were constrained by labor shortages, matching the ratio at the end of 2019.
In such an environment, we would not be shocked if wage growth in 2022 was fueled by labor shortages. This impact will be complemented by the 20% increase in the minimum wage for both skilled and unskilled labour. Wage growth in November exceeded expectations, showing gross and net wage growth of 10.1% year-on-year. Regular wages were up only 8.7% year-on-year, so bonuses were much higher than a year ago, which seems realistic as Hungary likely saw record GDP growth in 2021.
Salary dynamics (3-month moving average, % YoY)
The significant increase in average earnings in the nonprofit sector is explained by the fact that since the beginning of August, many educational institutions, previously funded by the state, have been included in this sector.
But even this strong nominal wage growth means nothing (or at least much less) if inflation takes off. The Statistical Office has calculated an increase in real net wages of 2.5% year-on-year in November 2021. Workers are aware of the inflationary situation and they also know that companies need workers. Add to this equation the 20% increase in the minimum wage, and we are sitting on a wage time bomb. Anecdotal evidence points to double-digit wage increases, even in industries where minimum wages aren’t necessarily in play. We estimate gross average wages will increase by around 15% in 2022.
The Impact of Minimum Wages and Labor Shortages on Wage Growth
Eurostat, HCSO, ING
We therefore continue to see a serious risk of extraordinary price increases for both goods and services at the start of 2022. Inflation from November to December may have already shown an earlier than expected price revision in some areas, but we don’t rule out that more of the same will show up in the next inflation figures. We see the average consumer price index (CPI) for 2022 at 5.7–5.8% y/y surrounded by new upside risks, stemming in part from the stronger inflation push from the wages.
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