02.04.2019

Comprehensive package could further boost employment in Hungary

Supporting mobility and retraining are key factors here

Comprehensive package could further boost employment in Hungary

Employment figures in Hungary are at an all-time high, and unemployment rates are at their lowest in recent years. Nevertheless, experts in the field – the Ministry of Finance included – believe the system still has untapped potential. Regional disparities persist, and there is still labour market potential to lure the inactive population into work. Employment could be boosted further by retraining, supporting mobility, and via tax allowances which encourage flexible and part-time forms of employment. However, in the long run the desired economic growth can only be sustained with technological developments aimed at replacing human labour.

Who are the employed and the unemployed? 

The latest unemployment rate of 3.6% published by the Hungarian Central Statistical Office is now close to full employment even according to relevant literature. Pushing the rate below 3% verges on the impossible since there are always people incapable of working or those who do not want to do so. Since the impact of the government’s current family support measures will only be felt in the labour market in 15-20 years, we might conclude from the unemployment and employment figures that the labour shortage in Hungary is not likely to be remedied soon.

However, the employment and unemployment in economic activity are not two factors that fully complement each other. There is a third, large group, the inactives, in whom Hungary still has a wealth of potential. In Budapest alone, the economic activity among 15-75 year-olds barely exceeded 60% a few years ago, indicating 524,000 people aged 15-74 not working compared to around 800,000 workers. The number of those unemployed was around 40,000, which meant 10-15 times as many inactive people as those unemployed. These inactive people could still be students, pensioners, or possibly even women on maternity or childcare leave. These groups could indeed be lured back to the labour market if there was a comprehensive package encouraging employers to recruit people from this inactive population.

Boosting employment through retraining and mobility

A comprehensive package should in all cases include mobility support. The employment ratio in Budapest detailed at the beginning of this article is 8-10 percentage points higher than in Southern Transdanubia and Northern Hungary, so until workplaces are established where they should be, it seems practical to move employees to regions and counties struggling with labour shortages.

To help labour mobility, employers were able to provide tax exempt accommodation cost compensation until the end of 2018. Yet this allowance fell victim to the cuts in the fringe benefit system as of 1 January 2019, even though the inclination of Hungarian employees to move is quite low to begin with. From 1 January the preferential tax rate of the housing allowance to facilitate mobility was abolished due to the impact falling short of expectations, but we believe it could have been an effective system had the government allowed more time for it to exert an effect.

Retraining, in other words re-education, is another significant factor which needs to be included in the afore-mentioned comprehensive package. Although the government funds retraining from EU and other sources, employers should be involved more and be given some sort of beneficial support to facilitate growth in such training and to help an increasing number of employees acquire the professional qualifications they need for their given jobs.

Flexible forms of employment and the role of automation

Employers could claim a social contribution tax allowance on employing people above the age of 55, young career-starters or young mothers returning to the labour market. However, this allowance was insufficient in itself to increase employment rates. The majority of these groups are not necessarily ready to work eight hours, so the possibility of part-time employment or working from home (home office) could be a decisive factor for them. To this end, companies need to have an interest – through local business tax allowances for instance – in offering part-time positions and establishing the conditions for working from home and other similar opportunities. This would most certainly have a beneficial effect on the labour market pressure companies find themselves under.

Supporting innovative investments for SMEs to allow for the replacement of human labour by machines would also be helpful in reducing labour shortages. In Hungary the social resistance towards such developments is still quite strong, but we have to realise that this is the current trend in Western Europe, with companies increasingly automating their processes to solve the issue of labour shortages. Retraining employees to be able to hold positions requiring higher expertise, as discussed above, and thus the replacement of human labour by machines could most certainly reduce the labour shortage in Hungary.

Just raising wages and salaries is not enough

It is clear that the more than 10% annual rise in wages and salaries in the last three years has not resolved the labour shortage issue; in other words, higher wages did not create more or many more employees or a higher rate of employment. Such wage and salary growth should be coupled with better efficiency and this could primarily be achieved by technological investments at Hungarian companies. The two processes together could lead to a scenario where small and medium-sized companies are not destroyed by such wage and salary hikes, companies that incidentally could make an immense contribution to the sustainability of economic growth.

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