Why Covid might be intensifying CEE’s “people problem”

Back in 2018, PwC ran its 21^st annual CEO Survey. Asked to rank a list of 10 “threats to your organisation’s growth prospects”, CEOs from Central & Eastern Europe put “the availability of key skills” at the top of the list. 51% said that they were “extremely concerned” about it, more than double the number who said the same thing in Western Europe.

Why?

The biggest factor was unemployment rates, which have been falling for years across the region (see chart below). At the start of the last decade, the unemployment rate in the V4 ranged between 8% (Czech Republic) and 15% (Slovakia); Poland and Hungary were in the middle, around the EU average at that time. By the time Covid hit, the picture looked very different. Slovakia was, by then, below the EU average unemployment rate of 6.6%, Hungary had fallen to 3.6%, Poland to 3.1% and the Czech Republic to just 1.9% – comfortably the lowest level anywhere in the EU.

On the surface, Covid looks to have eased things slightly. The EU’s total unemployment rate peaked at the start of last year, but had returned to pre-pandemic levels by October. In contrast, rates were still up very slightly in the V4:

The problem for employers is that the European Commission’s Autumn 2021 Economic Forecast predicts that they will fall again over the next two years (see above).

What factors are driving this forecast?

It’s partly predicted economic growth, supported by substantial EU funding, but evidence is also starting to come through about Covid impacting the “people problem” in the region in subtler ways – which provide further hints at why the problem is likely to get worse:

1. The factors driving the “Great Resignation” exist in CEE too

Randstad’s Workmonitor 2021 survey was published in November. It indicated that Covid has had a slightly greater impact on the attitudes of workers in “Eastern Europe” than elsewhere. For example, the rates of workers in the region who said that they felt more stressed, planned to make changes to their work-life balance and wanted more job and career flexibility were slightly higher than in Southern Europe, and significantly higher than in North West Europe. Based on the survey, this doesn’t yet appear to be leading to more people in CEE making career changes, but it is manifesting itself in more people looking for a new job – so it may be a matter of time.

2. Covid’s impact is not evenly dispersed geographically

In 2019, one third of the EU’s NUTS 2 regions with an unemployment rate below 3% were in the V4: six each in the Czech Republic and Hungary, four in Hungary and one in Slovakia. This included all four capital cities.

Covid has done little to ease the unemployment rate in most of these regions. The exceptions include the capital cities, perhaps because foreign travellers, who have been kept away by the pandemic, normally dominate their tourism industries. The chart below, which looks at the Czech Republic and Slovakia, seems to indicate this. Two regions in the Czech Republic – Prague and Severozápad, in the north west corner of the country – saw their unemployment rate rise by 1% in the first year of Covid (no other region in the country saw an increase above 0.6%). Those are comfortably the two regions in the country that are most heavily dependent on foreign tourism. Once international travel returns to more normal levels, the chances are that the unemployment rate will too.

There isn’t a direct correlation between the unemployment rate and the tourism sector – for example, Eastern Slovakia’s unemployment rate rose by 1.4% in the first year of Covid, higher than any other region, and it isn’t heavily reliant on foreign travellers – but Bratislava and Warsaw both fit the pattern. Pre-Covid, the unemployment rate in Slovakia and Poland was lowest in the capital cities: 2.3% in Bratislava, 2.0% in Warsaw. In the first year of Covid, the unemployment rate increased by 1.1% in Bratislava and 0.5% in Warsaw (which might not seem like much, but that’s still a bigger increase than any other Polish region). The issue for businesses struggling to hire in those cities is that, even without a rebound in international travel, economic growth is likely to be concentrated in the capital cities and that could soon squeeze the unemployment rate below 2019 levels.

3. More people appear to be choosing self-employment in CEE

By European standards, there are above-average levels of self-employed people in three of the V4 countries (Hungary is the exception). Data for 2021 isn’t available yet, but across the EU, there was no change in the number of self-employed people between 2019 and 2020. In Poland, the Czech Republic and Hungary, on the other hand – the V4 markets where labour shortages are already most acute – there was a small rise in the percentage of the workforce choosing self-employment (see chart below). 

We will need to check in on this data when the 2021 numbers are published, but if this is a real trend, then it will even further reduce the number of workers available to be hired.

4. The gap between the number of men and women in the workforce seems to be widening

With the exception of Hungary again, the gap between the percentage of men and women in the workforce is higher in the V4 countries than the EU average. Again, we only have 2020 data to go on for now, but that gap closed slightly (by 0.4%) across the EU in Covid’s first year. It did in Slovakia too, but the gap widened even further in the Czech Republic, Hungary and Poland, albeit by a small margin (see chart below). 

We will keep a close eye on all of these areas over the coming months. None of them change the landscape very substantially on their own, but taken together, they could certainly have meaningful impact on the hiring challenge in CEE.