Why does the Czech Republic have the lowest unemployment rate in all of Europe?

Germany is considered to be the economic dynamo of Europe and has reputation for efficiency, order and low unemployment. However, since the end of 2015, the labor market of the neighboring Czech Republic is considered to be stronger. From data published this week it turns out that the unemployment rate in the Czech Republic was no more than 2.9% in June 2017. In Germany, the unemployment rate in that month was 3.8% and in the entire European Union, the average rate was 7.7%.

So how does the ex communist state do it?

First, it might not be surprising that the cost of labor in the Czech Republic is so cheap. The average monthly wage in the Czech Republic was 10.2 Euro, much below the average of the European Union States- 25.4 Euro. However, these facts do not explain the low unemployment level in the country. In other East and Central European countries such as Bulgaria, Hungary and Poland the labor costs are even lower. Furthermore, wages in the CzechRepublic have risen sharply. For example, in the first quarter of 2017 they have risen by 5.3% or 2.8% when the calculation is adjusted for inflation.

Furthermore, the Czech Republic owes its success to its factories, which is a significant achievement in this day and age. The manufacturing industries of the country make up the largest part of the Czech economy, nearly of a third, a rate considered high compared to other countries in the European Union. Currently, automobile factories in the Czech Republic such as Toyota, Peugeot, Citroen, Skoda, Hyundai and others make up a central component of the Czech Economy.

Government incentives initiated in the 90s, such as tax exemptions for new companies and financing to creating new work places, attracted many foreign investments and those grew once the Czech Republic joined the European Union in 2004. According to David Marek, the chief economist of the Dlloyd Company in Prague, the unemployment rate in the Czech Republic is low for two reasons:

  1. It was relatively easy to create factory jobs due to government incentives that made the Czech Republic attractive to Global Companies.
  2. The Czech Business cycle is tightly linked to the financial stability of the European Union. In other words: when Europe is economically successful, the Czech Republic is even more economically successful. Currently, the European Union is in excellent condition as can be seen by its economic growth in the second quarter of 2017- 2.2%, much like the United States.

However, the root causes of the recent success of the Czech Republic can be harbingers of future trouble. The rise in salaries is a cause for concern and according to Marek, wages are rising due to the scarcity of labor. This labor shortage is stopping the economy from growing even faster. As in many states, the Czech Republic also faces an aging population base and bureaucratic difficulties that make it hard for companies to employ foreign workers.

Marek claims that the Czech Republic cannot afford to allow itself to raise wages faster than the overall productivity. According to him, the Czech Republic is the assembly line hub of Europe, not its knowledge and innovation hub. What this means is that the Czech Republic has many low wage, low skill jobs, but it is not developing the skills and knowledge required to significantly improve productivity, for example through more sophisticated processes.

He recommends maintaining the low unemployment level through structural changes to the government incentive system and the educational system. It is true that the Czech Republic currently has a large proportion of high school graduates, but few Czechs have a college degree or a professional diploma. He claims that the changes he recommends would encourage the creation of high skill, high wage workplaces.

The obvious risk attached to dependency on assembly line work is already manifesting in the form of increasing automation of industrial manufacturing. According to the OECD study, published last year, the Czech Republic faces the greatest threat to loss of workplaces due to automation. Before we raise the Czech Republic on a pedestal and proclaim it to be a model of industrial success, it is important to consider the long term implications of this success, such as the reliance on workplaces which are projected to be taken over by robots in the near future, and the need to discourage employment by foreign workers who might compete with local Czechs over these low skill, low wage jobs.

Do you want to read more on recent developments in the Czech Republic? Click here