When will the labour market bottom out?

 

 

The most recent data released by the Central Statistical Office (GUS) do not provide a sufficient basis for formulating a clear assessment of the situation in the labour market. In October, the annual rate of salary growth in the enterprise sector dropped more than expected, having fallen from 3.3% to 2%, whereas the market consensus indicated slowdown of the growth rate to 2.7%. In real terms, the average salary declined by 1.1% year on year.

 

 

Analysis of the above figure should take account of the fact that, traditionally, the last quarter of the year is the time when bonuses are paid out in the mining industry. Depending on the year, it can be the first, second or third month of the quarter. Detailed data demonstrates that October saw a sharp decline in the annual rate for salary growth in this segment, which could be attributable to delay in payment of bonuses. Therefore, it can be conjectured that weaker-than-expected growth in the average salary in the enterprise sector was to some extent due to extraordinary circumstances and will be offset in November.

 

On the other hand, the annual fall in employment in the enterprise sector stabilised at 2.4% in October, although the market expected a 2.5% contraction. At the same time, the number of people in employment remained the same as it was in September, which means that, in comparable terms (i.e. excluding the effect of change in the sample of enterprises surveyed by GUS which took place at the beginning of the year), there was no fall in employment for the first time since October 2008 when the global financial and economic crisis started to unfold. But it should be noted that October is usually a period of increased employment followed by a strong seasonal reduction in demand for labour in the final months of the year. Seen in this light, the recent employment data are by no means impressive. Still, higher-than-anticipated employment figures to some extent make up for the disappointing change in salaries.

 

 

As expected, the registered unemployment rate expanded from 10.9% to 11.1% in October, 2.3 p.p. higher relative to the analogous period of the previous year. This change corresponds to a year-on-year rise of almost 30% in the number of registered unemployed persons.

 

 

In the coming months, unemployment is likely to continue to rise in connection with the second wave of job cuts anticipated at enterprises. This expectation is confirmed by a high number of layoffs declared by companies to take place in the nearest future (over 38,000). However, it should be noted that declared layoffs have remained around 40,000 for three consecutive months (above the record-high levels previously reported in December 2008), but companies are not yet planning to shed more labour in the wake of these developments. It may be the case that a large proportion of companies which earlier intended to make some redundancies revised their plans amid increasing signs of economic recovery. Hence, unemployment is expected to grow moderately in the future, with the registered unemployment rate not exceeding 12% at the year’s end and unemployment likely to reach its peak in the spring of 2010.

 

Stronger than expected slowdown in the growth of salaries and decline in employment smaller than forecast were factors contributing to the deteriorated growth in the wage fund at enterprises in October. In nominal terms, the wage fund dropped by 0.4% year on year, and it was the first drop this year. In real terms, the decline, continuing since April 2009, accelerated to 3.5% year on year (which was the lowest result this year).

 

 

Despite the significant real-terms decline in wage fund in the corporate sector, we should be careful about jumping to conclusions regarding the strength of consumer demand. This is due to disparity between the data on wages in the enterprise sector and the economy as a whole in Q3 2009. The annual increase in salaries and wages in national economy accelerated from 4.4% to 4.9% on a quarterly basis, in spite of the annual decrease in the enterprise sector, which fell from 3.5% in Q2 2009 to 3.4%[1]. It is likely that the disparity will grow wider in Q4.

Analysis of changes in salaries in the economy as a whole shows that the consumer outlook is not as bad as the changes to the wage fund at enterprises would suggest. This year, material support to consumer demand comes on the back of strong growth in social security benefits attributable to the large scale of adjustments as a result of a high inflation rate and the real growth in salaries and wages in 2008. Although the scale of adjustment of social security benefits will be smaller in 2010, it will provide fuel for real growth in disability and old-age pension benefits. Furthermore, it can be the case that some jobs cuts and slower salary growth at enterprises are made up for by the expanding grey market and, additionally, that incomes earned by households in this way add to consumer demand as well.

 

Although employment data suggest gradual weakening of the strong trend aiming to reduce demand for labour, which prevailed to date, the high number of layoffs declared by enterprises, as referred to above, is a worrying signal concerning the development of the labour market situation in the coming months. What can trigger these plans? It appears that one of the key factors that can potentially threaten recovery in the Polish economy – despite continued gradual improvement in the economic conditions worldwide – would be excessive appreciation of the Polish zloty. It could undermine the international competitiveness of Polish exporters, which expanded in the past, and lead to exporters seeking new measures with a view to cutting costs. Since the range of solutions available for reducing non-payroll costs is not that vast anymore, the decline in exporters’ financial standing could result in the second wave of redundancies. From the perspective of the Polish labour market, the optimum scenario would be for the zloty to stabilise at the current level and thus place Polish companies in a significantly stronger competitive position in international markets relative to the period preceding the breakout of the financial and economic crisis worldwide.

 

The analysis of the recent data confirms that the Polish labour market is still in a difficult situation. Before the trends affecting employment and salaries change fundamentally, no improvement in consumer demand should be expected. At the same time, due to other upbeat factors, consumer demand’s growth should not fall dramatically to any further extent. However, as long as there is no strong upturn in consumer demand, the fundamental inflation pressure should stay under control. For the outlook for the monetary policy it means that interest rates should remain flat for a longer period, until at least the second half of 2010. It will be then that we should see a pronounced change in the trends prevailing in the Polish labour market, with employment rising and a steady acceleration in salary growth.

 

 

Piotr Bujak

Senior Economist, Bank Zachodni WBK

[1] Increase in the growth of the average salary in national economy, despite a slower rate in the growth of the average wage in the enterprise sector, was partly due to increased salaries in the public sector. For instance, the second part of teacher salary increases planned for 2009 took place in September (both, September’s and March’s, by 5%).