Most recent Economic Perspectives for Central and Eastern Europe
Why did real wages in the Czech Republic fall more than in the rest of Central Europe?
Czech real wages strongly lagged behind both the EU and the Central European average. While Czech wages have grown above average in nominal terms over the last three years (7.5% in 2023), they are still relatively low compared to their regional peers – Poland and Hungary. Though all regional economies faced double digit inflation over the last two years, Czech real household income was ultimately hit the most (see figure CEE 1).
One explanation may simply be the lower bargaining power of Czech trade unions in a Czech society, which have historically not had much experience with higher inflation. These arguments could also be underpinned by the sharp rise in the Czech profits and their share of GDP.
That said, trade union weakness can hardly explain all the differences, as its strength is not significantly different compared to regional peers according to OECD statistics. And while on average the profitability of the Czech corporate sector has gone up sharply, the increase in profitability has probably not been driven by the largest Czech employers - manufacturing, for example, has visibly lagged behind, as the CNB analysis shows.
Compared to 2019, the main factors differentiating the Czech Republic from the region seem to be lower productivity and a stronger exchange rate. Productivity has been hit more in the Czech Republic by the combination of the COVID 19 pandemic and the energy crisis. And if we also consider the relatively stronger Czech crown, it translates into the fastest growth in nominal unit labor costs in the region, no matter how steep the fall of domestic real wage was (see figure CEE 2). Looking ahead, the situation in the Czech Republic may improve, as productivity is more cyclical and could catch up with the region during a recovery.