Wage growth structure in the business sector

Wage growth is one of the most important indicators of the macroeconomic environment and inflation pressures in the economy. Wage data can be significantly affected over the business cycle by structural changes in the labour market. The aim of this box is to estimate the degree to which the recently observed relatively low growth rates of the average wage in the business sector may be due to these structural effects. This analysis draws on detailed data from the Average Earnings Information System (ISPV) from corporations with 250 employees or more combined with statement P304 (CZSO).1 The calculations of regional effects on the average wage work with data from the CZSO’s wage growth publications.

The detailed nature of the ISPV data enables us to quantify average wage growth in terms of current, leaving and new employees.2 Annual growth in the average wage of current employees in the data sample was 4.5% in the first half of 2014. Their contribution to average wage growth was thus 3.9 percentage points (see Chart 1). Growth in the average wage of leaving employees was significantly higher (8.9%) and their contribution to average wage growth was 0.6 percentage point despite their small share in the total number of employees. The AEIS data suggest that employment was also terminated in the period under review in the case of staff with higher-than-average wages. On the other hand, the contribution of new employees, whose average wage fell by 3.2% year on year, was negative (-0.8 percentage point). The recovery in employment growth in 2014 H1 thus fostered, ceteris paribus, weaker growth in the average wage, as enterprises on average paid lower wages to new employees than in the previous year.

Chart 1 (Box) Contributions to wage growth according to the AEIS
In corporations with 250 or more employees, the pick-up in wage growth in 2014 H1 was offset by a fall in wages of new employees 
(annual percentage changes; contributions in percentage points; source: AEIS, CZSO, CNB calculation)

As regards the level of wages, new employees receive around 30% lower wages on average than current ones. This difference is due not only to a lower level of skills and experience applicable in the job, but also to the qualification structure of new employees in the period under review. According to the 2014 H1 data, corporations hired relatively more employees in low-income categories, doing so to the greatest extent in the categories of plant and machine operators, elementary occupations, and service and sales workers (see Chart 2).

Chart 2 (Box) Structure of new and current employees by CZ-ISCO 
In corporations with 250 or more employees, new employees are being hired to the greatest extent in the category of plant and machine operators 
(percentage shares; source: AEIS, CZSO, CNB calculation)

Differences in average wage growth are also apparent from the regional perspective. These are due in part to the nature of the economic recovery, which is being driven mainly by manufacturing (see Chart III.3.12). The effects of individual regions (NUTS 2) on annual average wage growth were very mixed in 2014 Q3 (see Chart 3).3 National average wage growth was dampened most strongly by developments in Prague. In addition to markedly slower wage growth, the developments in Prague were characterised by rather faster growth in employment than in the rest of the country. It is likely that Prague was most affected by the above-mentioned effect of new employees, whose wages fell year on year. A hampering effect on average wage growth was also recorded in the Moravia-Silesia region, due mainly to the poor economic situation in the mining industry. In the other regions, by contrast, growth in average wages and change in employment were both above the national average.

Chart 3 (Box) Regional effects on average wage growth in the business sector 
Average wage dynamics were dampened mainly by the Prague and Moravia-Silesia regions in 2014 Q3 (percentage points; source: CZSO, CNB calculation)

1 The business sector is defined differently in the ISPV methodology than in the CZSO methodology. The ISPV data were therefore combined with the CZSO statement for non-financial institutions supplemented with financial institutions. Even so, the results are not fully comparable with the average wage in the business sector according to the CZSO, as the methodology used leads in particular to a higher-than-appropriate weight of manufacturing, where the representation of corporations with 250 employees or more is the highest.
2 As regards the number of employees converted into full-time equivalents, in the first half of 2014 about 85% of employees fall into the “current employees” category (i.e. no change in employment), 10% into the “new employees” category and 5% into the “leaving employees” category (with terminated registration with the employer in the given half-year).
2 The calculation of the effect of individual regions on average wage growth uses the “jack-knife resampling” method, which calculates the hypothetical change in the national average wage excluding a given region. The contribution of that region to national average wage growth is then computed as the difference between this hypothetical growth and the official annual growth in the national average wage.