Salary growth in Europe: an East versus West divide

09 May 2019 Consultancy.eu

For years, the wages of Eastern European workers have lagged far behind those of their Western counterparts. Now, a new survey has found that wage growth in the old Eastern bloc is accelerating well above inflation to deliver a real wage increase more than twice the rate of Western Europe.

At best, the last decade saw UK salaries stagnate, with the majority of the country’s workforce seeing their pay shrink in real terms since the crisis. More often than not, the last 12 years have seen wages outstripped by inflation, meaning that on the rare occasions wages have outpaced the price of living, it has been celebrated as a decade-long ‘high’. It was a pattern that was scarcely bettered across the west of Europe.

While wages in the continent’s leading economies have stagnated, developing economies have however gained significant ground in terms of their average salaries. A recent study by Big Four firm PwC found the likes of India, China and Malaysia are set to enjoy accelerated wage growth in the next 20 years, increasingly bringing them in line with the salary expectations of Western workers. Now, a new study from organisational consultancy Korn Ferry has found that this trend is set to ramp up across Eastern Europe as well.

Changes in wages – nominal and real terms

On average, the report found that as a result of higher inflation, the world’s real wage growth will increase by an average of 1% this year. This is lower than the real wage increase of 1.2% in 2018, and is a key sign that economic growth is being passed down from the top to the bottom of companies much less strongly than before. In the world’s largest economies, this has led to a lacklustre performance in the consumer goods sector, putting a great number of jobs on the line, as many customers are paid so poorly that they are scaling back their spending on anything that could be seen as a luxury.

This is not the case across the entire world, however. In regions such as Eastern Europe and Asia, economic growth remains relatively strong, thanks in part to the fact that these regions are enjoying the highest real wage rises. Yet, while Asia’s new economic powerhouses are often the countries which draw the highest levels of press, it is actually Eastern Europe which has the greatest promise.

According to Korn Ferry’s figures, while Eastern Europe is seeing real wage growth of 2%, and Asia is enjoying 2.6%, the real terms increase is also decreasing in Asia. In 2016 and 2017 the increase was still more than 4% per year, so there is a noted slowdown in the region. In contrast, Eastern Europe is enjoying a much more rapid nominal wage increase than Asia. While high inflation rates in the Eastern bloc mean that this still only translates as real wage growth of 2% – 1.3% faster than Western Europe – there is arguably much more room for the region’s economy to grow at pace.

Changes in wages – top and bottom countries

This is illustrated by Ukraine, which is currently enjoying the largest real terms increase in wages of any country analysed by Korn Ferry. Despite a high level of inflation, the country’s 14% nominal increase in wages has delivered a 6% real term improvement for the country’s workers. That means wages are growing faster in the conflict-ridden state than in India, Vietnam, Indonesia or China.

The study found that it was important to look at the country specifics, and sector specifics to determine what is leading to this improvement. At the heart of it, it is likely that Eastern Europe’s burgeoning reputation as a technology hub is pushing up its wages.

An example of the extent of this can be seen in the consulting industry, in which technology is the biggest and fastest growing service line in Eastern Europe. The industry recently expanded by 7%, thanks to work relating to digital initiatives, as the region is seeing a good deal of demand for traditional IT work with digitisation in Eastern Europe gaining momentum. Digital maturity however still lags a good distance behind the world's largest economies.