EU's Fattest Pay Rises Spell Trouble Down the Line

Romanians may not have long to bask in the European Union’s biggest pay rises.
The government’s quest to boost public salaries and the minimum wage is also dragging up compensation for private workers. With productivity failing to keep pace, the consequence is a hit to competitiveness. That’s bad news for inflation and economic growth, according to Lucian Croitoru, a monetary-policy adviser to central bank Governor Mugur Isarescu.
“To think you can force your way out of the category of countries with a cheap labor force is an illusion,” he said. “The country’s economic competitiveness is being eroded.”
Romania’s government has faced criticism for adopting an excessively short-term approach to the economy. While growth has surged beyond 5 percent thanks to the pay increases and several rounds of tax cuts, the central bank and analysts complain the measures come at the expense of investment spending, crimping future expansion. Low wages have previously helped attract companies such as Renault SA and Ford Motor Co.
Public-sector employees make up a third of the workforce in the Black Sea nation of 19 million people and are a core voter group for the ruling Social Democrats. To lure poorer workers, the party has also doubled the minimum wage.
The knock-on effects are becoming evident.
The Romanian Council for Small and Medium-Sized Companies says that about a quarter of the firms it represents have scaled back or ended operations since October 2015, months after the wage initiatives gained traction. It cited rising labor costs among the biggest issues, along with a shortage of workers, bureaucracy, high taxes and corruption.
One example is U.K. apparel manufacturer Alison Hayes, which closed a factory in Romania in March citing, among other things, increased costs of labor. And it's not going unnoticed. Romania halted four years of competitiveness gains in 2016, slipping nine places to 62nd of 138 countries the World Economic Forum’s global ranking.
EU's Fattest Pay Rises Spell Trouble Down the Line EU's Fattest Pay Rises Spell Trouble Down the Line Reviewed by Alexander Von Stern on 00:24:00 Rating: 5