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Czech Republic: Industry Chases Cheap Labor Eastward

  • Anthony Georgieff

Copenhagen, 16 January 1997 (RFE/RL) -- One of the most obvious enticements of Eastern Europe for Western European companies is the presence of a relatively well-qualified workforce able and willing to work at a fraction of Western pay levels.

This was one of the factors which in 1990 led Dansk Eternit, a Danish concern producing rooftiles, to open a company in the town of Beroun, about 30 kilometers southwest of Prague.

Dansk Eternit's director, Ernst Nielsen, told Danish media recently that the enterprise has been a success on the huge East European market because it is able to operate at lower cost levels than would have been possible in the West. Even in transportation -- an important consideration in the case of heavy rooftiles -- the cost savings were substantial.

The factory in Beroun has been producing rooftiles for 75 years and, at least on the outside, looks as though little has changed in that time. But Dansk Eternit says the new equipment is identical to that in use in the parent company and the environment protection requirements are as high as in Denmark.

A Czech worker in the factory makes about $3 an hour -- less than one fifth of the comparable salary in Denmark. The economic rationale for the move to the Czech Republic is therefore clear.

But times change, and quickly, too. In the Czech Republic, workers' pay has increased on average by 15 percent to 18 percent per year. In Denmark, by comparison, the pay-rise has been only about 4 percent, and in Germany -- the biggest Western partner to the Czech Republic -- even lower.

If such trends continue, the result is obvious: cost convergence. In the Czech Republic, one of the most advanced of the transition economies, salaries will reach the lower end of the European Union pay scales in the not too distant future. Coupled with a minuscule unemployment rate of about 3 percent, the Czech Republic's workforce may soon find itself in a dilemma, with soaring prices and inflation a constant danger.

There's a certain irony in the situation. Western companies have been moving to the Czech lands for the cheap skilled labour, thereby driving up demand for labour and putting upward pressure on wages. Meanwhile major Czech companies, caught in the squeeze of rapidly increasing costs, are trying to move work out of their own country to markets were it costs less.

Czech firms have begun outsourcing work to Russia or the Ukraine, where labour is many times cheaper, or even to the far east, for instance Thailand, where workers are versatile and highly skilled. Skoda Plzen, a leading manufacturer of nuclear reactor equipment and other heavy metallurgical items, is just one of the companies interested in this form of outsourcing.

Another phenomenon of the booming Czech economy is the influx of foreign workers to fill vacant positions. Official figures show that about 150,000 foreign guest-workers are registered with the Czech authorities, with Ukrainians the biggest group.

In addition to the registered workers, there are tens of thousands estimated to be in the republic illegally, mainly active in the construction industry and agricultural sector. The Czech government has recently introduced a system of fines for companies employing workers without permits, in an attempt to get a grip on these "grey" and "black" areas of the economy.

Czech trade unions do not seem to be particularly concerned with the inflow of foreign labour. Because unemployment among Czechs is so low, they see the influx of foreigners as a way to make the national workforce more flexible. According to them, it is impossible for Czechs, unlike Westerners, to consider relocating because of a job, the main reason being lack of available housing.

But the trade unions, whose powers have been diminished after the fall of Communism, and more so under the current government of Prime Minister Vaclav Klaus, say foreign workers should enjoy the same sort of protection as the Czechs. But back in Beroun, the long-term rise in costs is not what is immediately worrying the Danish roof tiling company. It's the fact that a similar German enterprise is opening up in a town nearby.