Wage Growth Implications in Romania

Abstract

Economy-wide real wage growth in Romania has been accelerating since 2015. While wages in Romania are low relative to the rest of the EU and they are expected to continue growing faster than the EU average as the economy catches up, wage growth in excess of productivity gains could lead to losses in competitiveness. Overall, the increase in real compensation per employee was broadly in line with that of labour productivity between 2011 and 2016. Already in 2016, however, real compensation started to race ahead and in 2017 unit labour costs expanded by more than 11%. While Romania's exports have fared well in recent years, the current account deficit has been gradually increasing since 2014 as imports accelerated in line with booming private consumption, itself stimulated by a persistently pro-cyclical fiscal policy. Thus, a deteriorating external competitiveness and export performance due to rising production costs could pose significant macroeconomic risks. Against this background, this paper seeks to investigate the role of public sector wages in leading wage changes in the economy as a whole, which in turn might influence Romania's cost competitiveness.