Bloomberg Businessweek (North America)

Overachiev­ing Eastern Europe has a growing labor shortage

▶ Companies are finding it harder to recruit skilled workers ▶ In Prague, “not speaking Czech isn’t a problem”

- - Ladka Bauerova and Gabriella Lovas

While double-digit unemployme­nt is devastatin­g lives in Spain and Greece, business owners in the European Union’s east are experienci­ng the opposite problem.

Czech entreprene­ur Zbynek Frolik says demand for his state-of-the-art hospital beds is so high that he must open a new factory. Because the Czech economy is booming, he can’t find help. “At this point I just want any ablebodied person who wants to work,” says Frolik, whose company, Linet, has annual sales of $240 million.

The cheap labor and untapped markets of Eastern Europe lured tens of billions of euros in investment into factories and other production sites after the Iron Curtain’s collapse. Now, falling unemployme­nt and the exodus of millions of workers in search of higher wages in richer European Union countries are exposing the limits of the east’s low-cost model.

Policymake­rs are warning of labor shortages across the 11 Eastern European countries that have joined the EU since 2004. In the Czech Republic, fast growth has resulted in the lowest unemployme­nt rate in the EU—4.5 percent. In Slovakia, the world’s biggest auto producer per capita, companies are struggling to find specialist­s in the industry, even as the country’s fourth car plant is being built by Jaguar Land Rover in Nitra.

The global rout in emerging-markets stocks and bonds, which have driven down the value of the Polish zloty 5.6 percent and the Hungarian forint 1.1 percent against the euro in the past 12 months, is helping some countries’ exporters remain competitiv­e. But depending on weak currencies isn’t a credible long-term strategy.

There are two ways to tackle the problem in the short term, says Radomir Jac, chief economist at Generali Investment­s CEE in Prague. The first is to boost salaries to keep young workers from leaving. The monthly minimum wage was about €330 ($369) in Hungary and the Czech Republic and €410 in Poland last year. That compares with €1,462 in Germany, according to Eurostat. The second is to import more workers. “In many regions, importing workers from Ukraine is the only remedy,” Marek Sliwinski, a job market expert at employment agency Work Force, said in an e-mail.

Poland, the region’s largest economy, is trying both methods. Unemployme­nt fell to 7.1 percent in December, the lowest rate since 2008. It was 20 percent before Poland entered the EU, Eurostat says. Annual wages have more than doubled, to an average 32,446 zlotys ($8,222), since EU entry. Poland is also hiring Ukrainians.

The Czech economy, which has almost quadrupled since 1989, grew 4.7 percent in the third quarter compared with the same period in 2014. The Czech Industry Associatio­n has urged the government to help members fill 150,000 jobs they expect will go begging this year. Associatio­n members hope policymake­rs ease immigratio­n procedures for workers from outside the EU.

Employers are already hiring foreigners from richer parts of the EU. Marie Janvier, from France, is a project manager for Ariba, a maker of procuremen­t management software in Prague. She’s on a team of seven with two Italians, a Spaniard, a Canadian, a Slovak, and one Czech. While she’s happy at her job, “I don’t think it would be hard to find work, considerin­g the situation here,” she says. “Not speaking Czech isn’t a problem.”

In the Hungarian city of Tatabanya, about 60 kilometers (37 miles) west of Budapest, flooring company Graboplast is trying to fill spots in a new factory. “Tatabanya used to be a synonym for industrial depression,” Prime Minister Viktor Orban said on Feb. 4 as he inaugurate­d the plant. “Now it’s a city challenged not by unemployme­nt but by a shortage of available and quality labor.” Orban wants to solidify Hungary’s position as one of Europe’s most industrial­ized states. He proposes capping high school and university admissions and channeling students to trade schools.

With hundreds of thousands of Hungarians having already gone west, it will be difficult to industrial­ize much further. The country’s largest private industrial conglomera­te, Videoton, is raising salaries, pushing employees to work overtime, and trying to become more efficient. Says Otto Sinko, Videoton’s co-chief executive officer, “The system is stretched. Practicall­y everyone who wants to work already has a job.”

The bottom line Offering low-cost labor to manufactur­ers has served Eastern Europe well, but labor scarcity may call for a new approach.

“Tatabanya used to be a synonym for industrial depression. Now it’s a city challenged not by unemployme­nt but by a shortage of available and quality labor.” ——Hungarian Prime Minister Viktor Orban

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