What helps against the labour shortage in CEE?

Prof. Arnold Schuh
Prof. Arnold Schuh 14/06/2023 5 Minuten

The answer is: Professional human resource management

In recent months exploding energy prices, an unprecedented high inflation and the war in Ukraine have distracted the attention from another crisis that is keeping management in Central and Eastern Europe (CEE) busy: the labor and skills shortage. Most thought that the pandemic would alleviate the situation – and Brexit would help by reversing the brain drain. However, a strong economic recovery in 2022 made unemployment rates fall again to the lowest levels and there they stay. The Czech Republic (2.5%), Poland (2.8%) and Germany (3%) posted the lowest unemployment rates in January 2023 in the whole EU (6.1%). Firms in Austria (5.1%) are complaining about unfilled positions too. For Western manufacturers, the leading investors in CEE, outsourcing to CEE seems to be no option anymore. Empty labor markets lead to the postponement or even stop of business expansion and new investments in the region. The “CEE business model” based on available skilled labor at lower costs that guided the “going east” of Western firms has to be questioned in this context. Austrian regional players in the financial services sector like VIG or Erste Group are feeling the tight labor markets in the CEE markets as well. Unlike manufacturers, they cannot move production to another country but have to make the best out of the local market situation.

What are the main causes for labor shortage?

CEE countries are faced with a shrinking population and workforce, negative net migration and a mismatch of needed and sought after skills. Especially, Bulgaria, Romania, Croatia and Hungary are hit by falling population numbers. What is new this time is that businesses have job vacancies in nearly all functions and areas: there is a lack of people in operations and logistics, manufacturing, sales and IT. The shortage is not limited to well-educated people and IT specialists but affects all occupations. The natural response to short labor supply are rising salaries and wages. Last year, Hungary and Bulgaria led the EU countries with an increase of nominal hourly wage costs of 16% followed by Lithuania and Poland with 13%. And the shortage is spurring competition between firms for good candidates making professional HR work more crucial.

How do multinationals respond to the candidate-driven markets in CEE?

In our interviews with human resource managers of Western multinationals we identified five strategies:

  • Professional recruiting: The firms have to become more strategic and active in their recruiting. Employer branding on social networks is a necessity. Addressing segments of the labor markets that were ignored so far such as older working-age population (women, 50+) can be attracted by offering more flexible working schemes. Seeking contacts with educational institutions, entering cooperation agreements and offering internships to students is now becoming more common in CEE too. Bringing national vocational education models closer to actual business practices would help closing the skills mismatch.
  • Flexibility in work arrangements: In order to retain employees and attract new candidates providing flexibility in the working schemes plays an important role. At a brewery in Slovenia, employees can choose in accordance with their department head the work arrangement that fits them and the organization best including “work-from-home”, flextime, 4-day working week, career breaks, or annual hour contracts.
  • Importance of reskilling and upskilling: Automation and digitalization are increasingly introduced into business and production processes to improve performance and substitute for lacking workforce. This changes the qualifications needed in the job. Firms use upskilling, for instance by improving digital and foreign language skills, and reskilling to qualify staff for different tasks. Latter enhances flexibility in deployment and avoids standstills in operations. The use of artificial intelligence will soon lead to a further improvement in productivity in administration and sales.
  • Incentives and wage increases: To retain (key) employees and attract talent firms have to offer an attractive compensation package – just to rely on the firm’s reputation is not good enough.
  • Organizational culture and talents: Even in more materialistic cultures like in CEE it is not all about money. Strong performers and talents are performance-driven and want to shape and develop the business they work for. Therefore, multinationals like VIG with decentralized management structures and a focus on local entrepreneurship are highly valued by talents as they offer room for personal development.

Western multinationals are pioneers in the CEE countries when it comes to transferring professional HR techniques. Luckily, they can draw on the corporate group’s experiences and best practice examples in different markets. This is no guarantee that labor shortages will not afflict operations and performance in some markets but these regional players demonstrate that they are ready to learn and adapt to the new realities in the labor markets. And they know that professional HRM is not a single campaign but a process that has to be consequently pursued over a longer period to produce good results.

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