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Negative trends on the labour market


2012-10-03



The month of August brought another round of poor data from the labour market. The main factor behind the unfavourable trends in unemployment and job creation is a low level of investment activity in the business sector, as companies adapt to a slowdown in domestic demand and reduced flow of export orders. The jobless rate seems likely to fall only in 2014 at the earliest.

Sluggish employment and wage growth

According to the Central Statistical Office (GUS), in August 2012 the registered unemployment rate in Poland amounted to 12.4%, compared with 12.3% in July and 11.8% in the same period of 2011. The number of people registered as unemployed by labour offices grew by about 5.9% y-o-y over this period, even as the economically active population expanded by just 0.8% y-o-y.

The rise in the jobless rate was accompanied by poor figures for employment and wage growth. Thus at the end of August the number of people employed in the business sector was only 0.2% higher than a year ago, and the average wage grew by a meagre annualised rate of 2.7%, i.e. well below CPI inflation, which was 3.8% y-o-y in August.

On the other hand, the year-on-year rate of increase in newly registered unemployed persons was actually 0.1 points lower than the concurrent increase in job offers submitted by companies to labour offices. (By way of comparison, in July the annual increase in newly registered unemployed persons outpaced the increase in new job offers by more than five points).

Newly registered unemployed vs. job offers submitted to labour offices in Poland, January 2005-August 2012

Weakness in the construction industry…

In terms of sectors, employment data have long pointed to negative growth in manufacturing jobs, of which about 6,000 have been lost since the beginning of 2012. However, even more noteworthy is the fall in employment in the construction industry, by approximately 5,000 jobs during the same period. For whereas the eliminated manufacturing jobs constitute just 0.3% of total employment in that sector in December 2011, the lost construction jobs represent more than 1.3%. The decline in construction jobs is largely attributable to a fall in investment projects, particularly construction projects, after Euro 2012, which is no doubt one of the main causes of the economic slowdown in Poland. Furthermore, investment projects undertaken by the central or local governments with the support of EU funds have also decelerated, as Poland has already absorbed much of the funds allocated to it under the 2007-2013 EU budget.

… and in export-oriented sectors

The impact of the crisis on jobs is also starkly evident in sectors traditionally dependent on external demand. Thus companies involved in the production of furniture and wood products have eliminated a total of about 8,000 jobs so far this year, i.e. 3.6% of their payroll in December 2011. Unfortunately, there is little to suggest that the situation of exporters will improve any time soon. The news from the automotive sector are particularly worrying: in the first half of 2012 the value of Polish exports of finished passenger cars and light delivery trucks amounted to just €2.87bn, a drop of more than 25% compared with the same period of 2011, according to data from Samar. Paradoxically, employment in the auto sector has actually increased by about 4,000 since December 2011, even as its output plummeted by nearly 22% y-o-y in January-August, to just under 445,700 vehicles. However, it should be noted that sales to Germany, the biggest recipient of Polish exports, remained relatively strong during the period under consideration. It is highly probable, therefore, that as economic conditions in this key market, left largely unscathed by the crisis so far, gradually deteriorate, demand for Polish goods will suffer too, creating a risk of job losses in the car industry as well.

Redundancy plans of companies in Poland, January 2007-August 2012

The crisis spiral

Until recently, the weakness of Poland’s labour market could be traced, for the most part, to external factors, such as a decline in net foreign direct investments (in 2012 FDI inflows could decline by about 50%) and lower export orders. Now, however, domestic factors are making themselves felt more and more. Apart from the closure of Euro 2012 and the drying up of EU funds (a major source of funding for many investment projects), companies in Poland are having to cope with a slowdown of domestic demand, which is increasingly affecting their financial performance and hiring and firing decisions.

In a sense, the observed softening of demand is a consequence of the consistent, relatively high levels of consumption seen in recent years, which came at the expense of savings. It was this resilience of consumption, coupled with supply factors and higher taxes, that was responsible for the high rate of price growth and for the gradual levelling-off of increases in the real wage bill. The real wage bill in the enterprise sector has risen by less than 1% almost since the beginning of 2012, compared with an average of 4% in 2011. This, together with the deceleration of investments, pushed domestic demand into negative territory on an annualised basis already in Q2 (GDP grew by 2.4% y-o-y during this period).

In this connection, it is worth noting that the jobs lost in sectors such as construction or automotive were relatively well-paid ones, commanding wages that are higher than the country average and higher than the wages paid in manufacturing or services, i.e. sectors where these laid-off workers are likely to find employment most readily. Thus it is not just the sluggish pace of job creation, but the shifting structure of employment, that may exert a negative impact on the wage bill in the economy.

Poor outlook

In the quarters ahead the situation on the labour market will be affected by two major factors: the phase of the economic cycle and the pension reform being implemented by the government.

That is because the level of unemployment in Poland is dependent to a large extent on the fluctuations of the country’s GDP around its potential level. Considering that the economy has probably dropped down below its potential rate only very recently (in Q2 2012), one should not expect the unemployment rate to be at a lower level next year than it is this year. On the contrary, joblessness could reach 13.5% by the end of 2013, an increase of 0.7 p.p. from our projection for the end of 2012 (12.8%). An uptick in economic activity, helped by a recovery in export orders and investment, is unlikely to occur before 2014.

Registered unemployment rate vs. changes in GDP growth in Poland, Q1 2000-Q2 2012

As for the likely effect on the labour market of the gradual lifting of the statutory retirement age to 67 years for both women and men, it should be noted that the pre-retirement age bracket is already where increases in the economic activity rate tend to be disproportionately concentrated, as shown by figures for the past several quarters. The reform of the pension system will probably lead to a further rise in the number of economically active persons in this group. However, since it is unlikely to generate any quick rise in demand for labour and job creation, the reform may well produce a corresponding increase in the jobless count. The possibility cannot be ruled out, therefore, that the immediate consequence of the pension reform will be to drive up the unemployment rate. One group that could be hit particularly hard by the new regulations are school leavers and graduates, whose lack of experience is making it very hard for them to find jobs in times of downturn. Research by the National Bank of Poland (NBP) shows that already now, more than 50% of new entrants to the labour market are joining the ranks of the unemployed. The short-term effect of the pension reform could thus be an accelerated increase in the registered unemployment rate, particularly among the young. The expanded labour supply should, in turn, exert a strong moderating influence on wage growth. This ought to have a beneficial long-term effect on labour productivity, enhancing the international competitiveness of Polish companies.

LFS unemployment rate in Poland by category (%), Q1 2007-Q2 2012

While it is difficult, under the present economic circumstances, to assess the strength of the pension reform’s positive consequences, it seems likely that its beneficial effects will coincide in time with a recovery in the global economy and with renewed high inflows of EU funds to Poland under the new 2014-2020 budget perspective. It is possible, therefore, that 2014 will mark the beginning of a downward trend in unemployment in Poland. It is worth remembering, however, that historically, the country’s jobless rate has only exhibited a clear downward trend when its GDP expanded by at least 4%. Considering that the Polish economy is projected to show growth of 3.5-4% in 2014-2016 (even allowing for possible gains in productivity), the anticipated decline in unemployment is therefore unlikely to be very rapid.

Paweł Radwański

Financial Markets Analyst

Raiffeisen Bank Polska

pawel.radwanski@raiffeisen.pl



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