It’s official: Romanians live better than Hungarians

Who cares about GDP, which shows that Romania is ahead of Hungary? It is just a nebulous and intangible economic indicator for the common man! Let’s look at salaries, because that’s what people care about! Because salaries in Hungary are higher than in Romania, right? Unfortunately, I’m not anymore. Romanians were in front last year in price-adjusted wages. In other words, Romanians can now buy more than Hungarians, according to all indicators, reports portofolio.hu

In recent years, the Romanian economy has grown faster than the Hungarian one. Romanians consumed more than Hungarians. And now we know why: last year, salaries were already higher in Romania than in Hungary. According to just-released Eurostat data, 2023 was the first year that wages in our eastern neighbor reached purchasing power parity (PPP).

Poland has by far the highest wages in the region, and while wages are rising in all countries, Romania has seen the fastest growth. In the last ten years, the gap between salaries in Romania (orange line) and those in Hungary (green line) narrowed almost constantly, eventually disappearing completely.

Net wages at purchasing power parity

Comparing salaries between countries is very difficult. The first difficulty is caused by the different currencies or, more precisely, by fluctuations in exchange rates. The second problem is the different prices. The third problem is that of the gross-net salary.

Eurostat’s annual data on net wages at purchasing power parity address all three issues. So, in the end, there is no need for a coin, but a so-called PPS value to account for price level differences.

Eurostat produces estimates for a wide range of household types, including single-earner, multi-earner, childless and children households. The weakness of the indicator is that the price level may not be a perfect estimate. To date, this suspicion has only been confirmed for Slovakia, but it is regularly suggested that price estimation is one of the weak links in the wage aggregation process. Therefore, it is better to look at longer term trends.

It is also worth looking at the impact of successors on wages, that is, how the support system in each country affects net earnings.

If there are two wage earners in a household with two children, the situation is now broadly the same as in a one-person household.

In Hungary, the child tax credit may have had a significant effect for a while, raising net wages substantially, which maintained a noticeable gap between Romanian and Hungarian family incomes. Since the tax allowance has not increased for many years (HUF 10,000 for one child and HUF 40,000 for two children), while wages have increased, child allowances have flattened, i.e. they have less and less impact on net salaries.

The recovery of wages in Romania was more dynamic in the case of households without children, and the recovery was also slightly more dynamic.

Previous data showed that, in recent years, Romania’s GDP per capita has approached that of Hungary, and last year it surpassed it. In terms of consumption, the Romanian advance seems more stable and, although the data is still uncertain, the recovery recorded at the wage level is less and less doubtful. An interesting aspect of the above data is that Bulgaria is also advancing at an increasingly brisk pace, so it would not be surprising to see Bulgarian consumption catch up to Hungarian consumption in a year or two.

If we look at the relationship between wages and consumption, we can say that Hungary is well below the trend line. That is, at the level of wages we are currently at, consumption could be higher. And the salary level in Romania (which is not much higher than that in Hungary) is slightly above the trend. This phenomenon can be explained by a number of factors, perhaps the most important of which is that policymakers in Hungary are focused on ensuring that investment occupies as large a slice of the economy as possible, while other countries operate with a much lower accumulation dynamic. In other words, at current income levels, the economic policies of other countries in the region tend to focus on consumption rather than investment.

Overall, it appears that Hungary has not moved away from the high-wage countries, and is currently ahead of only Bulgaria in terms of per capita consumption. Hungary continues to compete with low wages, a depreciating forint exchange rate, resulting in a relatively slower recovery than its investments in human capital (better training, more graduates). The total hourly wage of €13 (including taxes and contributions) is one of the lowest in the EU, which remains an attraction for companies that focus on cheap labor rather than high skills and high added value.

It is abundantly clear from the above that Hungary is not keeping pace with the region, with a tendentious deterioration of our relative position. According to a recent central bank report, our global relative development and relative productivity have also deteriorated in recent years compared to countries in the region. “As a result of imbalances and weaknesses in competitiveness, the Hungarian economy has been more vulnerable to external shocks than other countries in the region,” says the MNB, warning that Hungary’s performance in key areas (knowledge capital, digitalisation, green energy) is below the regional average in the new decade.

Therefore, major changes are needed to quickly catch up.