How to solve the CEE labour force riddle? Colliers International presents and explains six possible solutions to the puzzle. http://www.colliers.com/en-gb/emea/insights/ee-research

1. Macro | Outlook report
CEE REAL ESTATE
July 2018
Labour force riddle
The problem
The availability of workers to companies is right now perhaps
the most significant factor when assessing business plans and
prospects in the CEE-6 region. Very low unemployment, dynamic
growth, emigration and the fast development of the service sector
have combined to create acute labour shortages. If the labour
force riddle is not solved, then we foresee limitations to GDP
growth, perhaps a recession and a likely shadow over private
investment in the region in the medium to long run. If fulfilled,
this path has negative implications for the demand for commercial
real estate in CEE into the next cycle.
The solutions
We outline in this report six possible solutions to the riddle:
the first is a return of the labour force from the west. We reported
on the possibility of workers returning to the CEE-6 countries on
a net basis in our „Labour force boomerang“ report published
in July 2017. Our data gathering suggests another 0.5mn CEE-
6 passport-holders migrated west in the calendar year 2016.
The „boomerang“ is not with us yet but the economic conditions
to trigger it, including wage growth in CEE, are. Secondly,
immigration from the east, from the former USSR and elsewhere,
for similar economic reasons can boost the CEE-6 workforces. It
appears that there are c.2mn Ukrainians in Poland already, a figure
which may be rising rapidly. These two appear the most likely
solutions for now.
We see, thirdly, a step up in the quality of labour supplied in
the region, through better education and training to improve
productivity. If workers are more productive, then the labour
shortages are felt less. Boosting graduate numbers should help.
But do the graduates have the right skills? Can workers be more
productive? On top of that, fourthly, an increase in the working
“activity rate” in the population aged 15-64 and perhaps those of
retirement age has boosted workforce sizes across the EU and
CEE-6 over the last 15 years. This can continue in the future with
more infrastructure investment and correct legislation. CEE-6’s
recent high wage growth can sustain and be a factor in these four
scenarios.
Less positively for the workforces, downward shifts in the demand
for labour are possible. In the long run, fifthly, an automation of
jobs and lower working hours in the week may do the job. These
shifts, allied to technological changes, are already in train.
And sixthly, on a less optimistic note for real estate, if nothing of
note is done then an economic slowdown or a recession is most
likely to solve the riddle by itself in the shorter term.

2. 2 Macro / Outlook report | JULY 2018 | CEE
The riddle
Jobs, growth but no people
Very low unemployment, dynamic growth, emigration and the fast
development of the service sector are combining to create acute
labour shortages in CEE. If the labour force riddle is not solved,
then we foresee limitations to GDP growth and a likely shadow
over private investment in the region in the medium to long run.
Unemployment rates in all the CEE-6 countries are presently at
the lowest point seen in this cycle and all are below the EU-28’s
(Eurostat methodology) 7.0%. Czechia remains with the lowest
level in the EU, at just 2.3%.
The riddle exists in part because typically when economies reach
such cyclically-low levels of unemployment, the historical precedent
is for an economic slowdown/recession to ensue. That slowdown
sees jobs lost, the unemployment rate rising and thus some
equilibrium to the labour supply is restored. This mechanism involves
economic pain, which is not attractive to policymakers, business or
real estate players alike.
Symptoms and part of the process of a cyclical overheating and
eventual economic pain include rampant wage growth and a feed-
through to inflation rates. We predict national wage growth in
a 4%-10% range for the CEE-6 countries in 2018, compared to
the wider range of 6.6% (Slovakia) to 14% (Romania) recorded in
the region last year. Consumer price inflation (“CPI”), has risen to
hit 5.4% yoy according to the latest June reading for Romania but
remains below 3% in all of its peers. So, inflation is not signalling
the risk of recession yet outside of Romania but with wage rises
continuing, it would be no surprise to see CPI tick higher in CEE-6.
Another portent is the rising ratio of job vacancies compared to
the number of unemployed. In Czechia, the number of vacancies
exceeded the unemployment count by a factor of 1.78x at the end of
Q1 2018 (Eurostat data). Job vacancies in the Czech economy have
increased even more since March. Vacancy to unemployed ratios at
these levels is a rare development in any economy. The numbers are
by no means as severe in the other CEE countries but nevertheless
at cyclical highs everywhere.
Other evidence of the labour market tightness comes from qualitative
surveys. Every quarter, national data agencies ask identical questions
of samples of industrial and service sector companies across Europe.
One that is asked is whether the company faces a labour shortage
that is acute enough to arrest plans to expand output. The survey
data for Hungarian industrial companies has been at a staggering
70%-90% “yes” response rate for several quarters already. But it is
very noticeable that across the CEE-6 (and across the EU as well)
these quarterly survey points are rising inexorably.
The other part of the labour market riddle in CEE-6 is that rampant
wage growth is occurring in some sectors yet is not resulting in
significant job losses through companies relocating out of the region,
or “re-shoring” back west or east to Asia. The wage gap between the
CEE-6 and the rest of the EU remains vast and how much that gap
closes will dictate in part how the labour force puzzle is solved.
Fig. 3: % of industrial and service sector companies
agreeing that labour shortages are arresting growth of output
Source: Eurostat, Colliers International
Service Sector
Industrial Sector
80% 60% 40% 20% 0% 20% 40% 60% 80%
EU
UK
France
Germany
Bulgaria
Romania
Slovakia
Hungary
Czechia
Poland
Fig. 1: Rates of unemployment in CEE and key EU
countries (%, May 2018*)
* April 2018 figure for Hungary
Source: Eurostat, Colliers International
Spain 15.8%
Italy 10.7%
France 9.2%
EU-28 7.0%
Slovakia 6.8%
Bulgaria 5.0%
Romania 4.6%
UK 4.1%
Poland 3.8%
Hungary 3.7%
Germany 3.4%
Czechia 2.3%
152
709
231
25 194
79
178
58
414
24 189
Job vacancies Unemployment (Eurostat)
130
Fig. 2: Numbers of unemployed and job vacancies
in CEE-6 countries in March 2018 (in ‘000)
Source: Eurostat, Colliers International
PL
CZ
SK
HU
RO
BG

3. 3 Macro / Outlook report | JULY 2018 | CEE
POLAND
BULGARIA
ROMANIA
SLOVAKIA
CZECH REP
HUNGARY
ICELAND
NORWAY
SWEDEN
FINLAND
UKIRELAND
FRANCE
PORTUGAL
SPAIN
ITALY
GREECE
SWITZERLAND
DENMARK
BELGIUM
GERMANY
NETHERLANDS
AUSTRIA
LUXEMBOURG
Belgium
Denmark
Germany
Ireland
Greece
Spain
France
Italy
Luxembourg
Netherlands
Austria
Portugal
Finland
Sweden
United Kingdom
Iceland
Norway
Switzerland
Fig 4b: Breakdown of CEE-6-born residents in Western European countries
Fig. 4a: Size and breakdown of CEE populations in Western European countries in 2017 [2016]
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Poland
Czech Rep.
Hungary
Slovakia
Romania
Bulgaria
0.14mn
[0.14mn]
1.24mn
[1.23mn]
0.36mn
[0.34mn]
0.12mn
[0.12mn]
2.02mn
[1.65mn]
0.08mn
[0.08mn]
0.15mn
[0.14mn]
0.13mn
[0.13mn]
0.01mn
[0.01mn]
1.57mn
[1.36mn]
0.15mn
[0.15mn]
0.19mn
[0.17mn]
0.2mn
[0.19mn]
0.28mn
[0.25mn]
0.82mn
[0.82mn]
0.04mn
[0.04mn]
0.02mn
[0.01mn]
Source: Eurostat data 2017 population estimates of EU states by country of birth, except for Destatis.de for Germany, Sefstat for Portugal and World Bank for CZ/SVK/HUNG in Spain.
0.01mn
[0.01 mn]
Total of CEE-6 born
residents in W Europe was
7.53mn on 1 Jan 2017

4. 4 Macro / Outlook report | JULY 2018 | CEE
The solutions
A labour force boomerang
We set out in our July 2017 research “Labour force boomerang” the
argument that the now 7.5mn-strong emigration of CEE-6 passport-holders
to Western Europe may reverse. We believe that both economic and
emotional/social factors are shifting such that the tide of migration turns.
The wide gap between average wages in the CEE-6 and those in Western
Europe remain a key competitive advantage. Companies appear still willing
to tolerate wage rises and maintain jobs in the region even the face of
a loss of competitiveness.
If annual average wage rises in the 5%-10% range continue, the economic
argument for a worker to work in their native country becomes louder.
Well-run national budgets allow the CEE-6 to retain low tax regimes.
If the numbers for the workers add up, then the more emotional and
individual judgment of whether to stay or return comes into play.
There will still be emigration from the region but, we calculate that by 2021
some 411,800, on a net basis, of the emigrants may have returned. This
compares to 569,000 job vacancies in the CEE-6 at the end of March 2018.
Immigration from CIS and S Europe
Setting aside the politics of migration and challenging the net emigration
pattern of the last 200 years, the presence of foreigners is noticeable in
the CEE-6 for the first time. 7.1% of Czechia’s population in 2017 was
foreign, according to the World Bank migration dataset. The lowest ratio was
Poland’s, 1.8%, including the World Bank’s estimate of 221,307 Ukrainians.
The truth appears to be a multiple of that figure. Several sources suggest
2mn Ukrainians in Poland at the end of 2017. 900,000 work permits
were issued to Ukrainians last year (National Bank of Poland). Media
such as money.pl suggest that the number may reach 3mn by the end
of 2018. Ukrainians are helping to drive Poland’s economic performance
and solve its demographic and labour riddle.
Are there more CIS citizens to come? Yes, if wages in the CEE-6 keep
rising. The comparatively good quality of life on offer is an attractive
proposition. And the EU relaxed the visa rules for Ukrainians in June
2017. Czechia doubled the quota of Ukrainians allowed in on work
permits to 19,600 in January 2018. The Czech Deputy Minister of Labour
stated in Q3 2017 that 300,000 Ukrainians had applied to work there.
We estimate there are over 150,000 Ukrainians in Czechia presently. And
other CIS countries are sources as well: 121,717 Russians and 92,276
Belarussians are in the CEE-6 (World Bank). Immigrants from these
sources have the advantage of an easier integration into a Slavic milieu
in Poland, Czechia, Slovakia and Bulgaria. Moldovans (151,249 (World
Bank), perhaps over 0.5mn in our estimation) have a good chance of
integrating into Romania. Hungary has the least ability in the CEE-6 to
tap into a “hinterland” of potential immigrants who could integrate
easily into society.
An even more recent phenomenon is a so-far small flow of mainly
young immigrants from those parts of Western Europe with high
unemployment, such as Spain and Italy. Most of these migrants and
those from the CIS are workers, addressing the labour shortage.
Tab. 1: the Boomerang “personal P&L”
Source: Eurostat, Colliers International
Tab. 2: Possible return rates to CEE by 2021
Source: Eurostat, Colliers International
PL CZ SK HU RO BG
% of pop. In W Europe in 2017 7.2% 2.0% 4.9% 4.6% 15.7% 11.2%
% of migrants Boomerang-ed back
by 2021
7% 15% 7% 10% 3% 4%
% of overall population returning by
2021
0.50% 0.30% 0.34% 0.46% 0.47% 0.45%
Absolute numbers in W Europe in
2017 (million)
2.72 0.21 0.25 0.48 3.08 0.8
Absolute numbers returning by 2021
(thousand)
190,400 31,500 17,500 48,000 92,400 32,000
BULG 4.9
ROM 6.3
LITH 8.0
LAT 8.1
HUNG 9.1
POL 9.4
CRO 10.6
SVK 11.1
CZ 11.3
EST 11.7
MALT 13.8
PORT 14.1
GRE 14.5
CYP 16.0
SLV 17.0
ESP 21.2
UK 25.7
EU-28 26.8
ITA 28.2
Eurozone 30.3
IRE 31.0
FIN 32.7
DEU 34.1
AUT 34.1
NETH 34.8
FRA 36.0
LUX 37.6
SWE 38.3
BEL 39.6
DEN 42.5
Fig. 5: unit labour costs across EU (2017, EUR/hour)
10
Source: Eurostat, Colliers International
20 30 40 50
Tangible profit &
loss account
Status
Revenues / income Wages rising faster in CEE than in W Europe
Costs / living
expenses
Inflation rates similar in W Europe to CEE
Currency effect /
interest costs
UK Pound Sterling down and koruna up in CZ.
Higher interest costs and informal lending for migrants in W Europe?
Incentives No big gov’t incentives to move back to CEE yet
Taxes Lower tax rates in CEE-6 than W Europe. Less “hidden taxes”?
Intangible emotional
factors
Status
Overcrowding Low quality urban living for many migrants to W Europe
Language Opportunity to live/raise family in native language environment
Social status Bigger opportunity to contribute to native society rather than be
a peripheral migrant
Physical environment Pollution/noise/congestion in big W European urban centres now as bad
as in CEE-6?
Political environment Was worse in CEE and maybe still so. But West may be less welcoming
in future?

5. 5 Macro / Outlook report | JULY 2018 | CEE
B G
PL
CZ
SK
HU
R O
Russia
Belarus
Ukraine
Moldova
Other CIS
China
Turkey
Other CEE
W Europe
Rest of world
Fig.6: Immigrant stock in CEE-6 countries in 2017 (World Bank dataset)
2.2%*
7.1%*
3.4%*
5.0%*
2.0%*
1.8%*
**Number of Ukrainians estimated by media/Colliers International as resident (end 2017)
10,000**
16,000**
50,000+**
16,102**
150,000+**
2,000,000**
*% of country’s population from other countries (World Bank, 2017 estimates)
Bulgaria
Czech
Republic
Hungary Poland Romania
Slovak
Republic
Russia 30,950 35,700 4,053 40,879 7,280 2,855
Belarus 1,064 9,400 216 81,363 1 232
Ukraine 9,639 138,000 50,222 221,307 15,698 10,450
Moldova 3,162 10,740 257 595 151,249 142
Other CIS 9,333 20,485 1,622 8,612 249 635
China 1,471 5,219 18,193 1,262 4,909 1,135
Turkey 9,867 3,000 2,330 937 7,992 347
Other CEE 20,334 359,396 273,551 74,089 38,179 126,804
W Europe 43,122 54,846 77,926 184,630 125,596 26,706
Rest of world 24,751 113,466 66,532 53,146 39,887 13,389
Data on origin of other nationalities (in doughnut charts):
Fig.6: Immigrant stock in CEE-6 countries in 2017 (World Bank dataset)

6. 6 Macro / Outlook report | JULY 2018 | CEE
Improving labour quality
When labour is scarce, growth and efficiency can result from
the labour force delivering higher productivity. That higher
productivity becomes a substitute for extra workers. Switching
workers out of public-sector jobs may be an option in Hungary
and Slovakia especially, as both of those countries have a higher
proportion of their workforces in public administration roles.
On-the-job training can make a lot of difference but the baseline
for improving long-run productivity across an economy is
education. Only Poland has a (marginally) higher % of its
workforce with a tertiary level of education vs. EU-28 according
to our calculations of 2017 Eurostat data (Fig.8) The CEE-6 have
amongst the lowest ratios in the EU and the smallest percentage
point increases since 2002 (Fig.8). But considering the low base
of comparison in 2002 (Fig.9), the rise in the tertiary workforce
in proportion to the whole is impressive across CEE-6, especially
in Poland. What the chart also shows is a positive correlation
of this expansion with GDP growth across Europe. If the CEE-
6 keeps growing faster than its peers, the tertiary-educated
workforce will probably also grow faster.
6,6% 6,5%
9,6%
9,1%
5,0%
7,1% 6,9%
0,0%
2,0%
4,0%
6,0%
8,0%
10,0%
12,0%
Poland Czechia Hungary Slovakia Romania Bulgaria EU-28
average
Fig. 7: % of workforce employed in public
administration, social security and defence
in Q1 2018
Source: Eurostat, Colliers International
Source: Eurostat, Colliers International
Source: Eurostat, Colliers International
EU-28 BEL
BULG
CZ
DEN
DEU
EST
IRE
GRE
ESP
FRA
CRO
ITA
CYP
LAT
LITH
LUX
HUNG
MALT
NETH
AUT
POL
PORT
ROM
SLV
SVK
FIN
SWE
UK
ICE
NOR
SWITZ
0%
5%
10%
15%
20%
25%
0% 10% 20% 30% 40% 50%
Fig. 8: % of workforce with tertiary education level
and change in p.p of % between 2002 and 2017
Fig. 9: Annual growth in GDP per capita and expansion of tertiary-
educated workforce between 2002 and 2017
0% 10% 20% 30% 40% 50%
25%
20%
15%
10%
5%
0% X
X
X
Y
EU-28
BEL
BULG
CZ
DEN DEU
EST
IRE
GRE
ESP
FRA
CRO
ITA
CYP
LAT
LITH
LUX
HUNG
MALT
NETH
AUT
POLPORT
ROM
SLV
SVK
FIN
SWE
UK
ICE
NOR
SWITZ
0%
40%
80%
120%
160%
0.0% 2.0% 4.0% 6.0% 8.0% 10.0%
0.0% 2.0% 4.0% 6.0% 8.0% 10.0%
160%
120%
80%
40%
0% X
Y
Y
Y
% of workforce with a tertiary
(post-school) level of education in 2017
Annual growth in nominal GDP
per capita in EUR, 2002-2017
Change in percentage points of
tertiary workforce as % of total
workforce 2002-2017
Total growth of tertiary-educated
workforce (% on %), 2002-2017

7. 7 Macro / Outlook report | JULY 2018 | CEE
Increasing the participation rate
Both the EU-28 and the CEE-6 have seen success over the past
15 years in policies designed to increase the proportion of the
population aged 15-64 that is willing and available for work, or
the “activity rate”. Czechia’s ratio stood at 70% in 2002 but had
risen to 75.6% by 2017, widening the gap vs. the EU average of
72.4%. Hungary saw a significant improvement, closing on the
EU average. Common explanatory factors include higher wages,
training (including government programmes), increased female
workforce participation and rural-urban migration.
As might be expected for such a tight labour market, Czechia’s
“employment rate” (labour force at work as a proportion of the
population aged 15-64) is also much higher than the EU average.
On this measure, Bulgaria and Slovakia have improved very
significantly since 2002, reducing previously high unemployment
rates. The improvements in Romania since are more gradual,
though also with a reduction of unemployment.
If business-friendly policies and infrastructure investments are
retained, the CEE-6 countries can improve these ratios further in
the coming years, thus expanding the workforce within their own
populations. And combat natural population declines.
Automation and lower working hours
A long-run solution to tight labour markets is automation.
Automation improves productivity per worker by removing
workers. Tight labour markets maybe even encourage
investments in automation. Whilst the CEE-6 is by no means
unique in the world regarding this “threat” to jobs, it does have
the tight labour markets and also a high proportion of GDP that is
generated by manufacturing. Automation in manufacturing may
be closer to actually making a difference to the demand for labour
in manufacturing than in services presently. Signs of this are
present in neighbouring Germany, with the agreement this year
between the IG Metall union and the auto producers to move to
a 28-hour working week. Where the German auto industry goes,
that in CEE-6 may well follow.
Lower working hours might well improve productivity, especially
in value-add service industries. But it in theory also increases the
supply of spare labour capacity, as more workers move to having
more than one job over the coming 20 years.
Recession
In the shorter run, if wages go up as a result of the scarcity
of labour, inflation rises. As inflation rises, central banks hike
interest rates. If interest rates are higher, then economic activity
slows, due to less investment in the creation of jobs and plant
and less consumption of goods by people encouraged to save.
If this process is too severe, a recession (negative GDP growth)
ensues. People lose their jobs in a recession, wages stabilise (or
sometimes fall) and some equilibrium returns to labour markets.
The above is not the inevitable future for the CEE-6 economies
but inflation is rising and the central banks are starting to hike
interest rates. The above will solve the CEE labour force riddle if
nothing else does.
Fig. 10: change in activity rates in EU-28 and CEE-6
Source: Eurostat, Colliers International
Fig. 11: change in employment rates in Czechia,
Bulgaria, Slovakia and EU-28
Fig. 12: Romania’s activity and employment rates
vs EU-28 activity rate
50,0%
55,0%
60,0%
65,0%
70,0%
75,0%
80,0%
EU-28 Poland
Czechia Hungary
50,0%
55,0%
60,0%
65,0%
70,0%
75,0%
EU-28 Czechia
Bulgaria Slovakia
50,0%
55,0%
60,0%
65,0%
70,0%
75,0%
EU-28 activity rate Romania activity rate
Romania employment rate

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© 2018. All rights reserved.
AUTHOR:
Mark Robinson
CEE Research Specialist | Research
+420 226 537 646
mark.robinson@colliers.com
BUSINESS CONTACT:
Luke Dawson
Managing Director & Head of Capital Markets | CEE
+420 739 571 597
luke.dawson@colliers.com
CONTRIBUTOR:
Lucie Schwabova | Marketing Manager | CEE
lucie.schwabova@colliers.com
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