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How a Lag in Living Conditions Betrays the Region’s Economic Success

A new report measuring prosperity in Central and Eastern Europe shows the rise in wealth has been felt unevenly across the region while the cost of living has soared across the board, leaving many struggling with in-work poverty and feeling pessimistic about the region’s ability to continue its march to a higher quality of life.

Measure CEE on macro data alone and the picture looks rosy: 3.7 per cent growth in 2019, almost triple the average eurozone growth rate; 4.8 per cent growth in Romania, long considered Europe’s ‘poor man’; and Europe’s lowest unemployment rate (2.9 percent) in Czechia.

But this promising data masks a confluence of indicators - soaring living costs, low wages compared to the West and the threat of workplace automation - contributing to a less optimistic outlook for younger generations. Solid economic growth over the past 30 years has not translated into marked improvements in disposable income, living conditions and job satisfaction for all. A new Legatum Institute report on Central and Eastern European Prosperity, produced in partnership with Erste Group, shows that even those in gainful employment are sometimes fearful things will get worse rather than better.

The situation is exacerbated in the less-developed economy of Romania, but conversations with young workers in the region’s golden child of Czechia reveal that to some extent this lag in living conditions is being experienced right across CEE.

A TALE OF TWO COUNTRIES

Laura Bejan lives in the village of Simand, near Romania’s border with Hungary, where she runs a building supplies store with her husband. She studied to be a teacher, but says the “wages were very low” and she changed track. She is unsettled by the lack of shared prosperity in her country.

“Although over the last five years wages have increased in Romania, about 90 per cent of an unskilled worker’s salary goes on food and household maintenance. By contrast, the salary of my friends in medicine has increased considerably,” she says.

Bejan points to workers in recently opened factories in her area whose low salaries mean they must work extra hours to make ends meet. Official EU statistics bear out her observation on the working poor: Romania has the EU’s highest rate of in-work poverty, at 18.9 percent.

Right across the region, wages at the low end have remained very low, while salaries at the top end have pushed living costs to levels that are unmanageable for many. Those in the middle are being squeezed by day-to-day expenses and feel vulnerable to workplace shifts that may make their skills redundant or undervalued.

Minimum wage increases in Croatia, Czechia, Estonia, Romania and Slovakia have still not exceeded €3 per hour compared to €10 in France. At the same time, the cost of living soared by 257 per cent between 2000 and 2017 in Romania, 98 per cent in Hungary and 87 per cent in Latvia compared to average price rises of 36 per cent in the EU. Wages have gone up but average wages in CEE are still only around 25-40 per cent of those seen in Germany, the report shows.

“Romania in general is a lower income economy compared to the other economies in the region,” says Alexander Plekhanov, a lead economist at the European Bank for Reconstruction and Development.

Part of this relates to its rural demographic, which also makes its workforce vulnerable as production, including in agricultural industries, moves rapidly towards automation.

“Romania is about half rural and half urban,” says Plekhanov. “It needs to make rural jobs more productive, with new skills and technology.”

In Czechia the living experience is very different.

The country can draw on a deeper pool of skilled workers, which translates into higher per capita income, which in turn means higher fiscal revenue to invest in more skills and infrastructure. “They face a lot of the same problems [as Romania] but they have a better foundation to address them,” says Plekhanov.

Three-quarters of Czechs live in cities, where tech investment is overwhelmingly directed. The country has a strong manufacturing base, including a booming automobile industry, and has successfully integrated technology, thus raising workers’ productivity, at a faster pace than Romania, says Plekhanov.

Czechia has the EU’s second-lowest rate of in-work poverty, at 3.8 per cent (the EU average is 9.4 per cent).

One effect of the labour shortage in Czechia is that workers enjoy more power than ever before in the form of salary increases, benefits and previously unthinkable flexibility in their working arrangements.

“If companies want to get people, then they’re willing to offer them really nice conditions,” says Nina Bosnicova, a Prague-based consultant in diversity and work-life balance. “[A few years ago] the best companies would offer people the option to work from home once a month or just when necessary. Now, it’s quite normal to work from home two days a week.”

But even in Czechia, where income inequality is significantly less than the EU average, some people feel the ground shifting. Housing is a growing concern. There is little social housing and a Deloitte report last year found the country’s housing to be the least affordable in Europe. In Prague, the asking price of apartments has risen almost 64 per cent since 2014.

“People live five in one flat, but it’s still really expensive,” says Veronika Houdková, who’s working part-time while studying to be a lawyer at Prague’s Charles University. Houdková is fortunate to be able to live with her father, observing that she couldn’t even afford a shared bedroom on what she earns as an assistant in a law firm.

So, what can be done? The Legatum Institute’s report concludes that while the Fourth Industrial Revolution presents a significant challenge by hollowing out mid-level jobs that are currently crucial to prosperity across the region, new, future-fit jobs can be created and workforces can be upskilled to fill them.

It recommends collaboration between industry and universities to harness the growing demand for skills, technology and innovation to create ‘good jobs’ for the future. This would in turn encourage young graduates to remain in the region, and lead to more secure, better paid jobs and less in-work poverty.

As governments, institutions and industry unite around this task, they also need to spread their optimism about the region’s unrealised potential to reverse young people’s creeping fears that today’s great charge to prosperity may soon abate.