EurWORK European Observatory of Working Life

Wage increase agreed after protracted negotiations

About

Country: 
Hungary
Author: 
Márk Edelényi and László Neumann
Institution: 
Institute for Political Science, Hungarian Academy of Sciences

In December 2007, the National Interest Reconciliation Council finally reached agreement on the annual wage increase for 2008. The wage increase is set at 5%–7.5% as a recommendation for lower-level wage settings. Initially, both employers and employees rejected the government’s 4.8% wage increase proposal, while negotiations were further interrupted following the wave of demonstrations and strikes that took place in December.

Background

Annual wage negotiations are among the most important issues dealt with at Hungary’s National Interest Reconciliation Council (Országos Érdekegyeztető Tanács, OÉT). Owing to its direct influence on both employers’ and employees’ earnings, as well as its far-reaching effects on the country’s budget, wage negotiations always attract widespread public and professional interest. The two main outcomes of these negotiations are an agreement on the national minimum wage and a recommendation on wage development for the following year. These proposals are based on a combination of factors, most notably the estimated level of inflation, calculated by the Ministry of Finance (Pénzügyminisztérium, PM), along with changes in taxation, forecasts on gross domestic product (GDP) growth and medium-term expectations regarding labour market development.

Since its last main reform in 2002 (HU0209101N), the OÉT has concluded six annual wage agreements. Between 2002 and 2005, the negotiations necessitated the effective use of a complex matrix of elements to broker a deal – including wage development, minimum wage deals, early retirement issues and changes in taxation. In 2005, the OÉT agreed to establish a three-year accord on minimum wage development, setting it at HUF 69,000 (about €266 as at 13 March 2008) a month for 2008 (HU0512104F). At the same time, it implemented a guaranteed higher and annually growing wage threshold for skilled workers with a minimum of two years’ professional experience in the same job. To ensure that the deal was acceptable to employers, the OÉT included the possibility of setting a lower-level minimum wage through sectoral collective agreements, while also introducing the government’s planned tax-cuts to guarantee extra resources for covering the projected pay rises. However, just six months after the agreement, the government introduced austerity measures which changed all major indicators on which the agreement was based, thus severely undermining the social partners’ confidence in the government (HU0607059I). As a result, that year’s negotiation was not concluded on time (HU0703019I).

Sectoral-level bargaining

The wage negotiations for 2008 emerged as a priority issue in sectoral-level bargaining, as its participants were authorised to establish wages lower than the statutory and guaranteed wage minimum. This development was a direct result of the 2005 minimum wage agreement, which altered the practice of setting wages for the following year. Accordingly, OÉT negotiations for the 2008 pay increases started when sectoral-level bargaining was already underway. It is worth underlining the efforts made by central government to improve sectoral social dialogue. In 2001, for example, a Phare programme was launched to allow for the establishment of numerous sectoral social dialogue committees (Ágazati Párbeszéd Bizottaságok, ÁPBs) (HU0212106F).

During the fourth quarter of 2007, negotiations became heated in many sectors, particularly in the following four sectors – agriculture, retail trade, hotels and restaurants, and manufacturing. According to employers in these sectors, the established statutory minimum wage levels s were unsustainable, therefore threatening jobs. As a result, the employers pushed for wages lower than the statutory minimum wage agreement and threatened to refrain from making a wage rise offer at the OÉT if their demand was not met. However, these negotiations failed to result in the introduction of sector-specific minimum wages; instead, they only succeeded in delaying OÉT negotiations. In the agricultural sector, an agreement was only reached on implementing the minimum wage rise in two steps; in the retail trade sector, negotiations reached a deadlock when trade unions made it dependent on a subsequent two-step accord concerning Sunday shop closures.

Meanwhile, in the public sector, the government started negotiations before the OÉT bargaining round, constituting an unprecedented move in the history of Hungarian top-level wage bargaining. In the National Public Service Interest Reconciliation Council (Országos Közszolgálati Érdekegyeztető Tanács, OKÉT), the government concluded an agreement with the trade unions on 6 December 2007, after three months of negotiations. This provides for a 5% salary rise for public service employees, in order to maintain the real value of salaries in this sector (HU0801059I). Another ‘quasi’ sectoral deal was brokered at the state-owned Hungarian Post (Magyar Posta, MP) – Hungary’s largest public sector employer – securing a 7.5% average wage increase for 2008 (HU0801049I). Both of these agreements later served as benchmarks for the national accord.

Stages of OÉT pay negotiations

The bargaining round on pay increases for 2008 began on 12 October 2007 and ended after seven rounds of negotiations by 21 December. Based on their changing internal dynamics, the negotiations can be further categorised into three distinct phases.

First phase

The first phase of the negotiations took place from the first week in October to the second week in December 2007. The negotiations began with the government proposing, one week before bargaining officially began, a 4.5% pay increase, based on the Prime Minister Ferenc Gyurcsány’s 4.5% projected inflation rate. This implied maintaining the real value of wages only. The trade unions instantly rejected this proposal and called for an immediate recovery of the 4.3% real wage losses in 2007, thus demanding a 9% wage increase overall.

Meanwhile, the employers upheld their position, partly to increase pressure on both the government and trade unions in their call for the cancellation of the three-year minimum wage agreement, and partly in an effort to derive positive results from the sectoral wage negotiations. The employers also insisted that they would only confirm their position after taxation rules for 2008 had been brought into law. In addition, they demanded the withdrawal of the bill on uniting so-called ‘small taxes’ – mainly contributions to vocational training, innovation and rehabilitation funds. Employers often did not pay these contributions to the central fund but, using their legal entitlements, spent these locally for the same purposes. Although these contributions aimed to ease the administrative burden on companies, they turned out to be only a new form of increased taxation.

The absence of the employers’ proposal, together with a warning by the President of the Hungarian National Bank (Magyar Nemzeti Bank, MNB), András Simor, indicating a possible loss of control over inflation, made trade unions increase their wage demand to 10%. In November, positions became so divergent that bargaining was suspended for a while. Finally, as neither conclusion to further sectoral collective agreements nor the cancelling of the minimum wage agreement of 2005 had occurred, and after obtaining certain changes on taxation matters, the employers proposed a unified 5% wage increase in the second week of December.

Second phase

The second phase of the negotiations, which took place in the second and third weeks of December 2007, involved more effective bargaining as the expectations of the social partners began to converge. Firstly, the employers proposed a 4.5%–6% wage increase range, which caused the trade unions to revert to their original 9% proposal but then to gradually lower their demand to the 7%–8.5% range. Subsequently, employer organisations agreed to marginally widen their offer to 4.5%–6.5%. During a subsequent meeting, the trade unions lowered their demand to 6.5%–8%, while employer representatives made a final offer of 5%–7% and permitted any willing trade confederation to agree independently. This proposal was related to the employer representatives desire to finish negotiations before strikes began in protest against the government’s proposed reforms of the country’s health insurance scheme (HU0802029I).

Third phase

The final phase of the negotiations began with MNB’s President, Mr Simor, recommending a 7.7% actual pay rise due to his projections of a higher inflation rate of 5% and a 2.7% efficiency improvement. As is the practice in Hungary, actual wages generally increase by 1.5%–2% above the OÉT recommendation; thus, this proposal effectively called for a 6% wage increase. During this latter phase, the government strove to reach agreements with the relevant trade unions at state-owned companies. After the strikes in November and December 2007, OÉT resumed its negotiations. Finally, on 21 December, after various bilateral negotiations between employers and employees, the social partners accepted a 5%–7.5% pay rise recommendation for 2008.

Commentary

The bargaining round for the 2008 pay increase involved two uncommon interventions. The first intervention concerned the MNB’s unusually active participation in forging an agreement. The bank’s interest in facilitating a compromise was twofold. Firstly, it was interested in pushing for pay developments based exclusively on efficiency improvements and inflation, in an effort to avoid a ‘wage shock’, which could undermine the country’s convergence programme on joining the eurozone. Secondly, the MNB sought to reach an agreement on time, thus avoiding the scenario which occurred in 2007, whereby agreement was only reached in late January, leading to a serious impact on inflation expectations. The other intervention concerned the trade unions’ participation in the strikes on the government’s health insurance reforms. Although the strikes were not organised to influence directly the outcome of the wage negotiations, the employers refused to enter into negotiations during the strike, as talks on the strikers’ demands were being held between the government and trade unions at the OÉT at that time.

The main question arising from this year’s pay negotiations relates to how the social partners are going to evaluate the role of the three-year minimum wage agreement, which will determine next year’s wage negotiation round: by returning to the system of annual agreements on the national minimum wage, this evaluation can be as straightforward as it was prior to 2005; conversely, the social partners may vote for a more difficult but medium-term plan of action. This second scenario would be more favourable in light of the country’s convergence programme. However, it presupposes that the government will be able to restore the social partners’ confidence by offering assurances that the rules of the game will not change after the agreement.

Márk Edelényi and László Neumann, Institute for Political Science, Hungarian Academy of Sciences