Current wage growth is too much for inflation, too little for healthy economic growth

HUNGARY - In Brief 01 Aug 2021 by Istvan Racz
We quite rarely report on wage growth separately, but this time around it seems really important, from the point of view of growth and inflation prospects, and of government and central bank policy.The news is that net (after-tax) wage growth for the average full-time employee was 8.2% yoy in May, implying 9.3% yoy cumulatively in January-May. These numbers are in nominal terms. Given May's headline CPI-inflation of 5.1% yoy (3.9% yoy in January-May), the corresponding real wages growth number was 2.9% yoy in May (5.1% yoy in January-May).Note: Net after-tax wage growth in nominal terms, yoy changes in %; Source: KSH So, since the start of this year, nominal wage growth have continued to decelerate moderately, but it has remained high. Meanwhile, CPI-inflation has continued its strengthening trend. As a result, real wage growth has weakened materially, and by now, it has reached a level which is not enough to support the 5-6.5% yoy real GDP growth that official forecasters (and largely everyone else, for that matter) are predicting for Hungary. Note: Yoy % changes in real terms; Source: KSHThe charts attached here clearly show that these trends of both wage growth and inflation have been there for several years already, and the Covid intermezzo, no matter how influential it was otherwise, did not change any of those fundamentally. Well, one reason for the latter is that Covid did not change the fundamental trends of the labor market either. Employment is now back to where it was two years ago, or indeed slightly higher, whereas the available pool of labor (the domestic working-age population) is shrinking by slightly over 1% each year. The government keeps swearing tha...

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