An article recently appeared in the business newspaper “Capital” referring to the current economic challenge taking place in Romania: is GDP growth based on wage growth sustainable?

Let’s start with the facts: civil servants will receive 22 percent higher wages in 2018 than in 2017. Overall, wages grew by 20 percent in 2018 compared to 2017, prices of goods and services are rising steadily, interest rates have tripled, and the trade imbalance has reached 2 billion in currency. The current macroeconomic experiment is technically known by economists as of the wageledgrowth i.e., of domestic growth in consumption and thus output based on a stimulus from wage growth. In fact, so far Romanian GDP has grown faster than any other nation in the European Union, and yet some questions referring to this economic policy remain unanswered: is wage growth to foster the country’s economic development sustainable in the medium/long term?

The issue divides economists into two factions and with controversial opinions. With certainty we can say that the current economic policy in Romania has so far no other comparable precedent in other countries similar in size and population. Another certain fact is the corresponding growth in inflation,financial costs, devaluation of the national currency etc.

The risk that seems to be confirmed in macroeconomic data is that wage growth translates into consumption growth (but not only of goods produced in Romania, thus increasing foreign debt) and that Romanian companies in turn transfer domestic wage growth into the price of goods and services produced, reducing the competitiveness of the Romanian economy.

If so, the only way out of the downward spiral is for the increase in wages to be matched by an equivalent increase in employee labor productivity capable of justifying, qualitatively and quantitatively, the increase itself and maintaining the competitiveness of the “Romania” system.

CM