The end of cheap labor wonderland

Orbán’s Simplistic Economic Vision Backfires

A car part manufacturer announced the closure of one of its Hungarian factories, letting go of 500 employees. The reason: Increasing labor cost coupled with crippling labor shortage that turned production unprofitable. The closure is symptomatic of bigger problems in Hungary’s economy. 

Lear Corporation is a Fortune 500 company with 257 locations in 38 countries worldwide. They manufacture car seats, and electric circuits in Hungary in four locations and with 4000 employees. Lear supplies BMW, Volvo, Daimler AG, Audi, Porsche, Ford, and Nissan – among others. It has been among the top 50 FDI companies in Hungary since its arrival to the country in 1997.

Lear has started the closure of its Gyöngyös location in December, letting go of approximately 500 employees. The reason: The increasing labor cost coupled with the crippling labor shortage makes production unprofitable.

It is the result of Orbán’s grand vision of cheap labor, low value added industries and low skilled workers. (At some point, a factory even moved here from China, for cheaper labor – a dubious achievement.) Low wages chased labor away, resulting in a massive skills gap and labor shortage on all education level. The increasing labor cost is now chasing employers to cheaper countries – leaving Hungary with nothing. And all the government could come up with is unilaterally increasing the number of unpaid overtime to 400 hours per year, calculated every 3 years (to add to the confusion and kill worker mobility), triggering a strike. But if the strikes don’t work (which they won’t), the new labor code will only give more people a final kick to leave the country.

Next thing you will know we will need a border wall to keep workers in.

The Gyöngyös factory of Lear was home to low added value, labor-intensive production. It was profitable to keep this in Hungary due to cheap labor and the proximity of major car manufacturers, the buyers of Lear’s products. But once the labor shortage started to bite and even low-skilled labor became scarce (but increasingly expensive), Lear started to realize losses. Their production of electrical cables was labor intensive, yet low value added – their margin for wage increases was thin. Last year, they closed their car seat factory in Mór with 800 employees for similar reasons. And after realizing losses in 2017, they are also moving the Gyöngyös factory to Romania, Ukraine and Serbia.

Lear has been the biggest local taxpayer in Gyöngyös.

One can argue good riddance – low added value industries are not suitable for an OECD economy and low-skilled labor would surely not catapult Hungary into the 21st century any time soon. It is a one-way road to the middle income trap – or worse.

The problem is that low added value and low skilled assembly jobs are exactly what Orbán had in mind for his subjects. (Because he thinks he has to plan the economy, obviously.) He expressed many times his grand economic vision – that people’s place is next to assembly lines, that too much education is unnecessary, and his government spends resources to lure more such factories into the country. Even at the cost of paying them more in taxpayers’ money than they contribute to the economy. That is the well-known economic horror of “job creation” by politician – coupled with the central planning instinct of old communist comrades. Even I can hear the echoes of communism in Fidesz’ economic statements, they have just stopped calling themselves a “worker-peasant government”, but the instincts and the deafening economic success propaganda are exactly the same.

The other thing Orbán is responsible for stems from exactly the above: They have been pushing the cheap labor sales agenda for so long, labor actually started to flee. Hungarians are not the migrating type, but shortly after Orbán’s came back to power, they have started leaving the country en masse.

If Orbán didn’t spend so much money and bandwidth to distract us with various hate campaigns, emigration would be on top of the political agenda. It hurts families, and it hurts the economy. Estimates vary and are unreliable due to lack of data from within the EU, but up to 10% of the population has left since 2011 – many for economic reasons. And the higher educated is someone, the more likely that they plan to move – creating an emigration profile that is substantially different from other countries in the region that hemorrhage low skilled workers.

Hungarian emigrants in the West may or may not plan to ever come back, but they make more money, live financially more secure lives and have a higher fertility rate than their peers who stayed at home. The labor shortage is now so severe, businesses rather shut down than trying. Demand for your product or service is not enough to keep your business open, you must also find employees to fulfill it.

And now the raising labor costs are chasing employers away. Lear didn’t have the option of raising prices because they are dependent on their biggest buyers, car manufacturers, and those have a strong negotiating position. But what happens to the carmakers?

On the same week, workers and management of the Mercedes factory of Kecskemét agreed upon a 32% wage rise by 2020. Without government interference, only based on labor market realities, just as they should. But the labor shortage is still hanging above all of them. Workers now have to be able to justify the opportunity cost of not leaving the country, they have to be able to explain to themselves (and to their children) that it was really a good choice to stay for a 30% raise. Workers are sought after everywhere in Europe and wages are multiple times the Hungarian ones. And the cost of living is proportionately lower. Car manufacturers also have to be able to justify the increased labor costs.

The workers of Lear don’t have to worry. Plenty of companies in the region are struggling to hire. But the question remains: What place have grand visions in the 21st century economy? This region had seen the damage done by enforcing the narrow and ignorant economic vision of powerful party functionaries. And what is next? When low paid jobs finally leave the country, where is the next step in economic development? And are we ready for it?

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