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Romania has a serious problem: it cannot find enough well-trained people for many jobs. When companies can't find employees, they react simply: they either raise wages to keep the people they have; either try not to cut staff, even if it increases their costs. These higher wages eventually translate into higher prices, according to a study published on Wednesday by the National Bank.
How much has labor shortages fueled inflation?
Mădălin Viziniuc (senior economist in the Economic Studies Department of the National Bank of Romania), who is the author of the study, shows that, in the last 7 years, the labor force deficit contributed an average of about 3 percentage points to annual inflation;
The document also shows that around 56% of wage growth is passed on to prices.
In short: When wages rise because of a lack of workers, more than half of that increase ends up in consumer bills.
The study uses the data of approximately 11,000 non-financial companies in Romania. It is representative regarding the size of the companies, the regional distribution (NUTS 2-digit), as well as for the activity sector (CAEN sections).
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What do companies actually do?
The analysis on real company data shows that companies that cannot find qualified staff pay salaries more than 10% higher than those that do not have this problem.
And even when the number of employees remains relatively stable, companies prefer to pay more than risk losing people.
That's right, the model used by the NBR shows that not all companies react in the same way when wages rise. In some sectors, it is more difficult for companies to change prices (they have long-term contracts or the competition is very high).
“An example of this is given by recreational services, where the impact of the labor shortage is almost the highest in the economy, but the transmission of its effects on price dynamics is limited, compared to other branches, such as the food industry,” the study states.
In the food industry, higher wages are reflected more quickly in prices. Simply put, bread and food products react more quickly to rising costs.
The labor shortage is a structural problem, not a temporary one
The labor shortage is not a temporary phenomenon. It comes from: massive emigration; declining population; education insufficiently adapted to the labor market and a low labor participation rate.
Viziniuc builds a complex model that shows how:
Lack of employees → raises wages
Higher wages → increase companies' costs
Higher costs → increase prices
Rising prices → persistent inflation occurs
The effects are even stronger if firms are highly dependent on imports, if sectors are weakly connected to each other, or if they cannot easily replace labor with technology.
What does this mean for the NBR?
For the NBR, the bottom line is clear: If inflation is fueled by a lack of labor (a structural problem), the central bank must be cautious and keep interest rates high enough to prevent a wage-price spiral.
