Accelerating wage growth in Hungary cannot keep up with inflation…


Typically, double-digit wage growth would generate a lot of talk about a rosy economic outlook and wage convergence. Unfortunately, this is not the case today.

Let’s look at the actual data from Hungary.

Gross average wages rose 16.6% year-on-year in August, prompting a small surprise on the upside. Net average wages rose even more sharply (17.3%) due to changes to the personal income tax system for people under 25. If we check the development of regular wages (thereby removing the impact of one-off payments and bonuses), we can clearly see that underlying wage growth has also strengthened significantly, showing a increase of 15.6% year-on-year.

Nominal and real gains (% YoY)


Looking at the data in more detail, we can see that private and public sector wage growth did not show a significant difference in August, hovering around the average reading. Meanwhile, due to the reclassification of educational institutions into the nonprofit sector, wage growth has remained well above average, as wage settlements still impact wages. However, as this impact is slowly fading, wage growth has started to slow in this subsector.

If we look at wage developments in the business sector, we see that wage growth is above average in the primary and secondary sectors (agriculture and industry). The primary sector has faced a shortage of labor due to high demand from seasonal work, which has led to higher wages. Manufacturing and construction are still dampened by a high level of orders, so there is some room for further wage increases. With regard to the tertiary sector (services), the differences are much greater in wage growth. In these sectors, where for example tourism is important, the labor shortage pushed wages up in August.

Wage dynamics (3-month moving average, % YoY)


However, as this seasonal impulse will fade and aggregate demand will contract as we slide into a recession, the services sector will be the first hit. All the pressures on the cost side and falling revenues will not leave room for wage increases. We therefore expect a few layoffs. However, recent experience suggests that there is a flow of workers between the service sector and industry – meaning that people take jobs in manufacturing industry who previously worked in the service sector – thus limiting the impact on the labor market. Moreover, given the level of wages in these sectors, the composition effect will cause wages to rise, if employment increases in industry and decreases in services.

Core inflation and wages in the corporate sector (% YoY)


But even with that, we cannot expect real wage growth to stay in positive territory. In August it was 0.9% year-on-year, but we saw a significant jump in inflation in September. In this respect, we observe a decline in purchasing power over the rest of the year. Due to strong real wage growth in the first half of the year, real wage growth this year will remain, on average, in positive territory. However, we are not too optimistic for next year. Inflation will prove to be sticky (partly due to wage inflation), so we expect negative real wage growth in 2023. While this is painful, it is necessary to observe a downward trend in inflation.


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Laura T. Thrasher