Monday, January 28, 2008

Eastern Europe to feel credit squeeze

In the financial times today:

The turmoil in financial markets is turning into a nerve-racking test for the economies of central and eastern Europe and the former Soviet Union. Economists have said the fast-growing region faces a slowdown following the financial shockwaves reverberating around the globe.

But the precise impact is uncertain, especially on weaker economies. Even in the stronger countries there may be hidden dangers lurking within particular companies, notably banks, as the Société Générale debacle has highlighted.

“These countries will be hit,” said Pradeep Mitra, the World Bank’s chief economist for the region. “There is no way out of it.

“They are fundamentally strong enough to resist . . . but some are more vulnerable than others.”

The differences are registering in the financial markets. As investors reconsider their strategies, they are becoming more risk averse. Some have turned against emerging markets, including the ex-communist region. Others are discriminating more between countries. According to the European Bank for Reconstruction and Development, financing costs for less developed countries in the former Soviet Union and the Balkans have risen since last summer by far more than in the advanced states of central Europe.

The spread on five-year credit default swaps (a measure of risk) has widened by 26 basis points for the Czech Republic since last June and by 44 basis points for Poland. But for Serbia and Ukraine the increase is 151 basis points; for Kazakhstan it is 218 basis points.

Erik Berglof, the bank’s chief economist, said: “There has been a repricing of risk,” with credit costs rising most sharply in countries that are perceived to be the most vulnerable to external shocks.

The bank has trimmed its forecast for the region’s 2008 gross domestic product growth from 6.1 per cent to between 5 and 5.5 per cent.

Given the recent unprecedented credit-fuelled growth surge, this slowdown could be welcome in countries trying to cope with inflationary pressures, including Ukraine, Kazakhstan and Russia, and those facing labour shortages, such as Poland.

The benefits could be even greater in economies facing yawning current account deficits, notably the Baltic states, Romania, Serbia and Bulgaria. As Leszek Balcerowicz, the former Polish central bank governor, told a business conference this month: “We should welcome some amount of a slowdown, especially in the Baltic states, which have been growing the fastest . . . We don’t have the information that would make us predict a hard landing. Based on the current information a soft landing in the countries which have been growing fastest is more likely.”

EBRD economists argue that even though the Baltic states and some other countries have large imbalances by global standards, they are less vulnerable than other emerging economies because they benefit from the extra economic security offered by European Union membership. Investors assume greater risks than elsewhere because membership brings clear development perspectives and outside financial scrutiny.

However, things could still go wrong, either at the national or corporate level. Hungary offers a salutary warning of a country that ran into economic difficulties in spite of earlier establishing itself as a front­runner in economic reform. Successive governments allowed fiscal deficits to balloon to above 9 per cent of GDP in 2006 before Ferenc Gyurcsány, the prime minister, bit the bullet and ordered sharp cuts that have slowed GDP growth, with the loss of public sector jobs and more unemployment.

In the past year, attention has focused on the Baltics because of their particularly high inflation rates, headed by Latvia, with 14.1 per cent at the year end, the EU’s highest. But they may be less vulnerable to shocks than they appear because they began to see trouble well before the global credit crunch and have taken action. As Ilmars Rimsevics, the Latvian central bank governor, said: “We have been tested constantly for the past 12 months.”

The Balkans are also a concern. Bulgaria has the largest deficit, at over 20 per cent of GDP for 2007. Romania’s inflation rate is lower than its two neighbours but economists worry its fiscal policies are looser – and may be relaxed further with parliamentary elections due this year. International investors have voted with their wallets and driven the currency down 20 per cent against the euro from last year’s peak.

Farther east, the oil-rich governments of Russia and Kazakhstan run huge current account and budget surpluses and have public reserves to protect their financial institutions. But their international borrowing costs are rising and their stock markets suffering in the global battering.

Ukraine, an energy importer, may be more vulnerable. Even though it has kept its current account and budget deficits under control, it may struggle to cool the economy. A weak government may not be able to impose belt-tightening policies. Meanwhile, in spite of reforms, the large energy sector remains opaque and could provide cover for concealing bad debts. As elsewhere, the unknown threats to financial stability could be at least as dangerous as the threats that economists already have under watch.

Monday, January 21, 2008

Japan's Labour Market

From the FT this morning:

Japan ‘should adopt European labour model’
By David Pilling in Tokyo

Japan should use legislation to create a better balance between labour flexibility and security, according to the European Union’s employment commissioner.

Vladimir Spidla said Japan could learn from European experience of what he called “flexicurity”, a combination of flexibility and security.

Japan’s stable employment model, built on high growth after the war, has come under severe strain since its economic bubble burst in 1990, with the number of part-time workers rising from about a fifth of the total to nearly a third.

Robert Alan Feldman MS GEF post July 2007.

Aging Will Suppress Wage Growth Until
July 13, 2007

By Robert Alan Feldman | Tokyo

Labor markets are challenging the Bank of Japan (BoJ). While labor markets tighten and suggest eventual inflation pressure, actual wages per hour — which explain about 80% of actual inflation (a simple regression of CPI increase on wage per hour increase suggests that wages per hour explain 80% of the variance of core CPI. The usual caveats about econometrics apply) — are dropping. Because of the interaction of labor market rules and demographic factors, this downward pressure on wages from labor supply is likely to continue until 2011. Against this backdrop, it will be difficult for the BoJ to justify an aggressive pace of rate hikes. After 2011, as labor markets tighten severely, a faster pace of rate hikes may become likely.

BoJ’s conundrum

The BoJ has argued that tighter labor markets will eventually lead to higher inflation, and therefore that rate hikes are necessary now, before inflation accelerates. Since the BoJ started making this argument about two years ago, however, the growth of compensation per hour has actually decelerated, from a January 2006 peak of +1.2% Y/Y to the trough of -0.4% Y/Y in February 2007. Even with a mild improvement since then, the rolling one-year average of wage/hour growth remained negative in May, at -0.1% Y/Y, and the latest tick is downward (the latest single month figure, for May 2007, is -1.5% Y/Y).

The labor market appears to be violating basic laws of economics. Even while the economy is growing, and unemployment falling (for both males and females, young and old), wages per hour are falling. What is going on? The simple part of the answer is that supply of labor is rising faster than demand. The hard part is identifying the sources of this increase in supply. The dominant reason, in my view, is the interaction of labor market rules and demographics.

Labor market rules

The issue with labor market rules concerns the difference between (a) the mandatory retirement age for a worker at a given company and (b) the age at which the worker actually leaves the labor force. The former age is known as teinen in Japanese, and is the age at which a lump-sum retirement bonus is paid by the company. The latter is intai, and marks the age at which a person becomes a pure pensioner. A very large portion of workers continue to work betwen teinen and intai, but usually at wages much lower than just prior to teinen. (Recent surveys suggest that workers rehired by companies to do the same job in the same place take pay cuts of about 30%.)

The boomers

The demographic problem concerns the teinen for the first cohort of baby boomers. There were 1.6 million live births in 1946, but 2.6 million in 1947. This latter pace of births continued until 1950. The 1947 cohort is beginning to reach teinen age (which is often 60 but differs by company) this year. The share of workers in the 60-64 age group has risen constantly over the last two decades, but sharply between 2001-04. The modest drop of this share in 2005-06 was largely due to the sharp drop of births in 1945-46, and therefore the rise of the 60-64 group share should resume. In addition, more and more people are staying in the workforce after age 65. To the extent that 65+ workers earn even lower average wages than 60-64 aged workers, this shift in composition of the labor force puts further downward pressure on wages.

Where next for the 60-64s?

Looking forward, what is the supply of workers in the 60-64 age group? The answer depends on the interaction of falling participation rates (relative to pre-60 levels) and rising numbers in this age group. Let’s assume that participation rates decline from an average of 76% at age 59 to 21% at age 65. (These figures apply to males and females together. The assumed path for participation rates, starting at age 60 and going to age 65 is: 71%, 65%, 58%, 48%, 35%, 21%. This assumed path is the average of a linear path and a reverse S-curve path. This blend best calibrates estimates from the formula to actual outcomes in 2004-06.) Given the sizes of the cohorts, the supply of workers in the 60-64 age group rises from 4.4 million in 2006 to a peak of 5.9 million in 2011. Extra gains in the labor force will come from higher participation of over-65s as well.

Of course, many other labor supply factors will also affect wages. Upward pressure on wages will come from the shortage of young workers, the fall of participation for the very young (15-19), and tightening enforcement of rules on part-time workers. Downward pressure on wages comes from higher immigration and the increased labor participation of middle-aged and young women.

Market implications

On balance, the large rise of workers in the 60-64 age group will likely sustain major downward pressure on both wages and, by extension, prices for several more years. Since low wage pressure means low price pressure, it will be hard for the BoJ to justify aggressive rate hikes.

Although unemployment has fallen to less than 4 per cent as the economy has recovered since 2002, structural changes to the labour market have sparked a sense of crisis. Most commentators regard part-time workers as being a poorly paid, poorly trained underclass.

“I am convinced that this model of flexicurity that we have developed in Europe could be a model in Japan,” Mr Spidla told the Financial Times.

He said part-time workers – who in Japan are sometimes known by the semi-disparaging term “freeters” – found it too difficult to move into stable employment.

During Japan’s economic downturn in the 1990s, companies hung on to existing employees but stopped hiring new ones, creating an entire generation with little opportunity to enter full-time employment.

The problem is exacerbated by Japan’s inflexible hiring practices in which companies generally take on graduates and expect them to work for the company for years, or even for their entire career. However, this system is eroding and applies more to big companies than to small ones.

Mr Spidla said that policy makers should not underestimate the ability of legislation to overcome such “cultural obstacles”.

He pointed to eastern Europe, which in 15 years had moved from a communist system to one that was compatible with European Union law.

The commissioner said that individual companies could also play a role. He highlighted efforts at Toshiba, an electronics and nuclear power company, to shorten the working day and promote a better work-life balance.

“In Japan, long working hours is a tradition. But Toshiba has decided systematically to step back from that.”

and the Economist earlier this month:

Sayonara, salaryman

Once the cornerstone of the economy, the paternalistic relationship between Japan's companies and their salaried employees is crumbling.

WHEN they were young they might spend the night at the office, sleeping under their desks. For years they would go out drinking with colleagues and clients, returning home sozzled at 3am before rising at dawn to head back to the office. They accepted boring jobs or postings to provincial backwaters without question. And they did it all simply because the company asked them to. The thought of finding another employer never crossed their minds.

That is how the “salaryman” became the paragon of modern Japan, the white-collar hero who fashioned the world's second-largest economy from the ashes of war. But he is becoming a figure of the past. This has enormous implications in a country in which the company is the dominant institution in people's lives, affecting not only Japan's world of work but also wider Japanese society.

The change in the labour market gathered pace in the 1990s, as Japan's economic woes forced companies to scale back employees' benefits dramatically. Increasingly, many firms hired new staff on short-term or part-time contracts rather than treating them as members of the corporate family. Japanese businesses, harried by foreign competitors, have gained from having a more flexible workforce. Moreover, mergers and acquisitions are starting to become more common, so firms cannot offer the traditional long-term assurances to employees even if they want to. Lastly, a big generational shift is taking place. Today's young professionals refuse to make work the centre of their lives or to accept the hardships and corporate paternalism of earlier decades.

These labour-market forces manifest themselves in several ways. They affect gender equality, as more women enter the workforce. They touch on immigration, as foreigners are called in to do jobs that the Japanese reject. They are changing the role of older people, as many pensioners rejoin the workforce. And they have distributional consequences too. Japan is one of the most egalitarian of the world's rich societies, yet it now has one of the largest shares of “working poor”—people who have jobs but can barely make ends meet. Wages have fallen by around 10% (in nominal terms) over the past decade.

The demise of the salaryman brings all these issues into stark relief. Though the term was coined in the 1920s to reflect the new managerial class that oversaw the country's industrialisation and modernisation, it became an ideal only after the second world war. Becoming a salaryman denoted success, enshrining solid middle-class status.

More importantly, it meant stability. Employment was more or less guaranteed until retirement. Wages were low at first but increased predictably until the pension arrived to see the salaryman through his silver years. Training was provided. Perks abounded. The firm looked after the employee and his family. In return, the salaryman devoted his life to the firm. A university graduate did not choose a career; he chose a company.

A night on the town
Today's older salarymen are stoical about the changes. They see that they are the last of their breed, but feel neither nostalgia for their past nor frustration at the younger generation's rejection of their ways. In private moments, indeed, the old guard question the sacrifices that led them to put work ahead of family and conformity ahead of their own interests. In a survey by a global consumer-products company, many salarymen expressed frustration at how their lives had turned out.

One night in Shimbashi, a grey, worn district of Tokyo near a big train station that feeds salarymen to the suburbs, three men in their mid-50s are huddled around their sakes and cigarettes at an outdoor bar. Akira, Sho and Hiroyuki (“Harry”) joined their firm around 30 years ago. Each wears a pin of the conglomerate's logo on his lapel. They reminisce about their lives as salarymen and the changes that have taken place, recounting their experiences ever more richly as the sake flows.

When Akira got married, he recalls, he invited his bucho, or division chief, to the wedding, as all salarymen did. And during the reception the boss made a speech to the bride, as he always did. “Your new husband is a very good worker,” he began. “He is important to the company. So please understand that he may need to work many long hours.” All the guests nodded silently. “And when he is at home, please take care of him.”

Akira says that his bride—the marriage was largely arranged by their families—was not upset by the bucho's remarks: her role of housewife was taken for granted. “But later she thought something must be wrong with the system,” he confides. Akira would return home in the small hours stumbling drunk; dutifully she would wait up, angered. The dinner is put away and the bath is cold, she might say. As he grew older, he no longer stayed out so late. But he did not share her reservations about his evening activities. “In Japan entertaining clients is a part of the job,” he explains.

A salaryman arrives in the office at 9am and ends his working day late, often around midnight. He does not dare leave the office before his supervisor—and managers stay late to show their loyalty. Is any work going on? Rarely. But long hours remain the norm.

A few times a week, at around midnight, the boss may assemble the team and go out on the town. Then the “working” day does not end until around 2am, in a bar; the journey home takes another hour or two. Drinking deep into the night was long considered part of the job; companies set aside a budget for it. But the funds were slashed during the “lost decade” and have not been replenished. Now employees bear the cost themselves.

Late-night carousing is becoming less common these days: younger colleagues treat the hours after work as their own, not the company's. Nobu, an ambitious 31-year-old salaryman, is one such. He chose a job at an American company in part so that he could work reasonable hours. He didn't count on having a manager of the old school, who kept the team in the office or in the bars. “My first year, I didn't get more than three or four hours of sleep a day,” he says. Changing jobs was not an option. “I didn't want to quit—because it was so tough,” he says. “Then I would have 'lost'.” When he got a new manager, Nobu was able to relish his free time.

The constant sleep deprivation results in a peculiar characteristic of Japanese life: sleeping in public, be it on a train or in a meeting, and its social acceptance. Nightly drinking leads to a special camaraderie, salarymen argue. This translates into better company performance, they say, because it is easier to reach a consensus—the way almost all decisions are made in Japanese companies.

Yet the rough living and working takes its toll. There is even a term, karoshi, or “death by overwork”, which has been legally recognised since the 1980s (although most victims have been industrial workers rather than salarymen). Cases of mental illness in the workplace are soaring. The country's suicide rate is among the highest in the world.

Older salarymen can appreciate the younger generation's preference for more humane hours. The government is even pushing the idea of “work-life balance” (it uses the English term). “The times have changed,” says Harry. “Shoganai,” concludes Sho, meaning “it can't be helped.”

Capitalism with a human face
Much is made in the West of the distinctive features of Japanese capitalism. First, cross-shareholdings protect companies from unwanted takeovers. Yet since 1990 the proportion of all company shares owned by business partners has fallen from around half to around a quarter. Second, a “lifetime commitment” between company and worker—usually simplified to “lifetime employment”, although it is much more than that—means that employees have more stability in their careers. This too has ebbed as the number of “regular” workers, who enjoy company benefits, has declined and the number of temporary and part-time employees has increased.

Less understood is the seniority-wage system, a third pillar of Japanese business. Salaries are based on length of service rather than performance. Employees are paid very little for most of their careers. Moreover, there is little difference between the salaries of the highest- and lowest-paid staff of the same age: generally around 25%. (An old joke among salarymen is that Japan is the only country where socialism worked.) From around 50 until the mandatory retirement age of 60 (now rising to 65), salaries grow quickly. At retirement a bonus of around three times the final annual salary is paid in a lump sum. And a steady pension kicks in—it comes partly from the state, partly from the company.

As a means of fostering solidarity in the workplace and an egalitarian society, this system is eminently practical. Yet from the perspective of individual incentives, responsibility and performance, it is inefficient and unfair; exceptional work is unrewarded, other than by a modest bonus and a bow.

The rationale for the system is that it matches a salaryman's income to his household's expenses. So when the fellow is in his 30s, the family does not require much. When he reaches 50 and the kids leave for university, his salary is commensurate with his increased bills. And when he retires, he can count on being taken care of by the company. Like so many things, however, the system is starting to fray. Some companies have introduced a bifurcated structure that grafts performance-based pay onto the traditional seniority system.

Other forms of employee care are also on the wane. University is largely a recreational interlude between the intense “cram-schools” needed to get on a degree course and the drudgery of office work to come; it is not a time for gaining professional skills. So on the first day at work, employees are often ushered into a classroom that creates a Mitsubishi man, a Matsushita man, and so forth. (Among the courses is “business etiquette”, in which new hires learn how to exchange business cards following strict protocol and practise their bows.) But as baby-boomers retire and temporary workers replace the full-time veterans, training is drying up.

For years, the three salarymen in Shimbashi placed their savings in the company's bank, which paid interest at twice the rate of an ordinary bank. The activity, a relic of the early 20th century, allowed the company to raise capital without turning to a bank by becoming a bank itself. But the practice was discontinued around 2000 when regulators feared that if these large companies were to fail, not only the employees' jobs and pensions, but also their savings, would be wiped out.

In addition the company provides housing. Of the three salarymen in Shimbashi, two live in company apartments on which the rent is subsidised, so they pay only around one-third of the market rate. Moreover, salarymen take their holidays at company-owned resorts, which cost half the normal price. These perks help explain the sprawl that is one of the curiosities of Japanese companies. A big firm may have more than 1,000 subsidiaries, from restaurants to property, partly to secure an in-house supply of a wide range of benefits to employees. (Such units also make good places to park mediocre managers for a few years before retirement.)

How much holiday?

Though the companies may own numerous onsen, or hot-spring resorts, dotted across the country, the amount of holiday is becoming a sore point with employees. Most salarymen take only a small fraction of their annual paid holiday, since to use it all seems to raise a question over the employee's devotion to the firm. For example, Sho says that he has 20 days' holiday a year. But when pressed, he admits that he takes only five. He says he does not feel badly, since it is only right to work a lot—but his robotic response and body language signal his reservations.

The consequences of breaking the unwritten code can be severe. Even a star performer who uses the full holiday may be denied pay rises and promotions. Leaving the company is treated as betrayal. All trace of the person is airbrushed from the workplace. Social norms keep people at their desks: older Japanese sniff about “job-hopping”. And the seniority-wage system means that switching jobs can be expensive. Until recently, pension contributions were company-based; portable individual-retirement accounts did not exist. And firms were not really equipped to absorb mid-career executives, preferring to hire them fresh out of university and keep them until retirement. Leaving a company meant unwinding a dense web of relationships.

Even so, much of this is changing, as younger salarymen push back. Preferring to delineate company time and personal time, more are taking their holidays. New employees are switching jobs too (see chart 2). Nobu, for instance, says that when he graduated, half his classmates joined leading Japanese companies (the others chose smaller firms or Western ones). But only around half are still in those traditional salaryman jobs. In 1960, he reckons, 90% of the class would have gunned for the top jobs. Almost all of them would have stayed with the same firm until retirement.

The structure of work, with its perks and paternalism, has had the effect of locking people into place. It creates a static environment for labour rather than a fluid one. Why? It is an important question: business efficiency is about the optimal allocation of resources, and a sclerotic labour market hampers companies' performance and restricts workers' choices.

Like many things in Japan, the answer goes back a long way. An official at the Ministry of Labour traces it to the Edo period, beginning in the 17th century. Important trading houses, some of which still exist, were founded then. They considered employees as family. But economic historians place a more recent date on the static workforce. When Japan modernised at the end of the 19th century, it needed to import technology from abroad. This new technology created a need for skilled labour in a then highly itinerant workforce. So companies got into the habit of housing and training their employees. And the investment in training meant that companies did everything they could to keep their workers.

This paternal relationship was frozen in place during the second world war, when the Japanese government leaned on companies to lock in employees as a way to guarantee production. After the war the Americans gave Japanese workers the right to unionise. This reinforced the illiquidity. Unions prized job security and supported a pay structure based on age, not merit.

Today the legacy is clear. The salarymen in Shimbashi recall enormous sacrifices as well as bountiful benefits. Both are waning. The salaryman system has buckled under the strains on the Japanese economy. Yet its decline is in turn adding to those strains. As the population ages and falls, by 2030 just two workers will have to support every pensioner. But temporary and part-time employees are paid around 40% less than regulars. Half of them make no pension contributions, placing a burden on the system today and creating a huge fiscal time-bomb.

Japan is changing, but slowly. On a commuter train outside Nagoya, in the centre of the country, five high-school girls giggle at a barrage of questions about their lives. Chihiro, who wants to be a hairdresser when she grows up, says her father usually returns home around midnight. Her mother disapproves, to no effect. He works, by chance, for the same conglomerate as the men in Shimbashi. Chihiro, asked if she also wants him home earlier, replies “shoganai”, echoing the salarymen. But when she grows up and gets married, will she let her husband do the same? Chihiro and her friends shriek: “No way!”

Nobu, the young salaryman, likes his job but plans to start his own business one day. The older men in his office struck compromises that he is not prepared to endure. “After 1945, we were left with nothing, so we had to work together, with the same goal and as one team. We were a success, and Japan grew,” he says. “But this organisation doesn't work any more. It has stayed the same for too long. The system has rusted.”

Thursday, January 17, 2008

Labour Shortages in Eastern Europe

From the Financial Times this morning:

Gone west: Why eastern Europe is labouring under an abundance of jobs
By Stefan Wagstyl, Jan Cienski, Kester Eddy and Thomas Escritt

Jan Liman does not know how to safeguard the future of Meblat, his Warsaw-based kitchen furniture company. He has good sources of timber and plenty of orders. But he is short of skilled workers.

“Two [out of 12] workers have emigrated to Ireland. A third man has resigned saying he was also going to Ireland. Trying to find replacements has been fruitless,” he says.

The Polish entrepreneur’s complaints are echoed across the European Union’s new member states in central and eastern Europe. The squeeze is worst in the construction industry but is also gripping sectors as different as baking and banking. Engineers, technicians and factory hands are all in short supply.

Fuelled by strong economic growth and soaring foreign investment, employment is increasing in availability just as emigration has sucked around 5m workers from eastern to western Europe. According to Eurostat, the EU’s statistics agency, labour costs are growing at their fastest rate since the end of Communism – with a 30 per cent increase in nominal costs in Latvia in the year to last September and rises of more than 20 per cent in Romania, Estonia and Lithuania. In Poland, the largest new member, the rise was just under 12 per cent.

In real terms, average gross wages in Poland rose more than 7 per cent in the first nine months of 2007 and in Romania by nearly 16 per cent, according to the Vienna-based Wiiw research institute.

While unemployment levels in western Europe have stayed at around 8 per cent since 2002, in the east they have slid from 14 per cent to under 9 per cent. In the region’s booming capital cities, almost everybody who wants work has a job. Leszek Wronski, head of the central Europe division of KPMG, the accountant and management consultant, says: “We have a job market controlled by employees.”

For many east European workers, this control is very welcome. For 15 years they watched as company owners won much of the benefit of the post-Communist transition. Now workers are securing a bigger share of the rewards. As Donald Tusk, Poland’s prime minister, told the Financial Times recently: “The lack of labour in Poland is a problem in some industries...But it is also important for people to enjoy the fruits of economic growth.”

However, for governments and companies alike, rising labour costs and growing skills shortages raise big questions about the region’s future competitiveness. Everything from decisions on investment location to education, migration and population policies is coming under scrutiny.

There is no immediate need for panic. Even after the recent pay surges, differences between west and east Europe remain huge. In Germany, hourly labour costs are about €28 ($41.40, £21.15), compared with some €8 in the Czech Republic, €7.50 in Poland and €4 in Romania. Rafal Krasnodebski, a partner at the Warsaw office of PwC, the accountancy and consultancy group, says: “Poland and Slovakia were 70-80 per cent cheaper than western Europe in 2004. Now it’s 60-70 per cent. So it’s still cheaper [there] and likely to be cheaper for a long time to come.”

The region has since 2002 seen a particularly sharp cyclical upswing in gross domestic product growth, averaging more than 5 per cent annually. Yet while east European economies slowly converge with those of western Europe, including in labour costs, the current pay surge contains significant one-off elements. An easing of restrictions on working in western Europe, which accompanied EU enlargement, has allowed millions to emigrate, particularly from Poland and Romania, the two most populous countries. Pay has risen fastest for those in greatest demand in the west. Building workers’ wages last year rose 20 per cent in Poland, 25 per cent in Romania and 35 per cent in Latvia.

Now, with a credit squeeze hampering the US economy and clouding the western European outlook, economists are examining prospects for the EU’s new members. While most see continued solid growth, they expect a slowdown from 6.5 per cent last year to perhaps 5 per cent in 2008. Some governments and central banks in the region are in any case slowing growth by trying to reduce high inflation and current account deficits. Zbigniew Kominek, a senior economist at the European Bank for Reconstruction and Development, the multilateral bank for the ex-Communist countries, says: “The cyclical increase in economic growth will not last indefinitely.”

However, even if labour markets ease a little, there will be no return to the super-abundance of workers of five years ago. The region’s populations are ageing even faster than in western Europe and, with the added effects of migration, the number of working-age people is falling in the Baltic states and central Europe. Eurostat predicts that the population of the new member states will decline from 103.6m in 2004 to under 100.6m in 2015, with particularly sharp drops in working-age people.

So companies and governments must prepare for a long period of tight labour markets. For policymakers, the first task is to raise employment rates. The region is burdened with low rates of participation in the labour market, especially among older people. In Poland, the employment rate at the end of 2006 was just 54.5 per cent, compared with 67.5 per cent in Germany and 77.4 per cent in Denmark, the EU’s highest rate. Among people aged 55-64, the Polish employment rate was just 28.1 per cent, compared with 48.4 per cent in Germany.

The east European numbers are depressed by the use of early retirement and disability awards during the post-Communist restructuring. But political leaders are cautious about limiting access to welfare or initiating other policies that might provoke a backlash. After years of effort, the region is suffering reform fatigue.

Next, policymakers and employers will need to ensure wage labour productivity keeps pace with labour cost increases. According to a report this week by the Conference Board, a US business research organisation, labour productivity in the east is much lower than in the west. In Poland, for example, it was just 40 per cent of German levels. But the difference in unit labour costs is much greater, so employers continue to relocate labour-intensive operations from west to east – as Finland’s Nokia announced this week it would do, closing a German mobile phone plant with the loss of 2,300 jobs and expanding a Romanian factory that will employ 3,500.

However, as Capital Economics, a UK-based research group, warns in a report this week, in Poland and the Czech Republic (though not in Slovakia) recent wage increases have exceeded productivity gains. In Romania, Christian Popa, deputy central bank governor, says further labour market reforms are needed to improve flexibility and so raise productivity. “I believe this is the solution and it’s no quick fix.”

The Lisbon Council, a Brussels-based think-tank, says in a report that governments and employers must redouble efforts to raise productivity through better education and training. “The countries of central and eastern Europe lag western Europe considerably in human capital acquisition and deployment.” The report argues that while the region’s schools are broadly as effective as western Europe’s, there are big gaps in lifetime adult education, including on-the-job training. Older workers, trained in obsolete ways under Communism, face the greatest difficulties.

Companies are also responding to rising wages by demanding more from their workers. In business services, workers are being transferred to higher added-value operations involving direct contact with clients, while simpler functions are moved to China and India. Marketing and financial services groups, driven to pay €100,000 a year or more for experienced executives, are giving them tougher targets.

Even for high-paying international banks, personnel management is a headache. Stephen van Groningen, head of the Romanian subsidiary of Raiffeisen International, the Austrian bank, says: “The situation is unsustainable. People are becoming extremely opportunistic in job hunting. People come to work for the bank and leave after three months. Three months later they want to come back – and in certain cases I have to say yes.”

Lower down the wage ladder, life is tougher for employers, particularly at smaller companies. Agnieszka Jagiela, recruitment manager at 5 a Sec, a Polish dry cleaning chain with 80 outlets, says: “High staff turnover is a constant problem even though we pay close to the national average wage and offer four kinds of bonus.” Construction is booming at a time when workers are in demand across Europe. Diwaker Singh, managing director of Copper Beech, a Romanian property developer, says: “There is a desperate shortage of labour because there are many projects happening and so many emigrants.”

Many employers are responding by improving perks, such as company cars, and trying to retain staff through loyalty bonuses, training schemes and career development. For multinationals this is familiar territory. But for inexperienced local employers it is often new. Marek Masalski, head of Grupa Konsultacyjna, an employment agency in eastern Poland, says: “Some employers are still not fully aware of the importance of non-pay factors in motivating and employing people.”

So far, rising labour costs are not affecting the region’s overall attraction. The EBRD estimates that foreign direct investment into central and south-east Europe last year totalled $44bn (£22bn, €30bn), the fourth strong year in succession. Companies that see eastern Europe as a market as well as a cheap-labour base are glad of the increased spending power that higher pay brings. Also, a lot of current FDI is being generated by multinationals already well established in eastern Europe, notably car­makers, which are bringing their component suppliers into the region.

But among more mobile, cost-conscious investors, there is a clear shift away from hotspots including Prague, Warsaw, Budapest and Bratislava, where labour is short, in favour of locations offering more scope for recruitment. Favoured regions include Silesia in Poland and large parts of Romania, while pioneers are looking further east – beyond the EU, to Ukraine and Moldova.

Textile companies, particularly sensitive to labour costs, have led the way. But other groups are not far behind, such as Genpact, a US business services provider part-owned by General Electric, which started in eastern Europe in 2002 by opening a centre in Budapest. Now it is focusing on Romania, where it launched a Bucharest operation in 2005 and another in the northern city of Cluj last year. Patrick Cogny, chief executive of Genpact in Europe, says lower labour costs, including payroll and income taxes, have been decisive in investing in Romania; now Ukraine and Moldova are on his planning horizon.

Local companies are also heading to cheaper locations. Polish furniture makers have started outsourcing work to Ukrainian and Belarussian partners. Hermes Softlab, a Slovenian software developer, has created 200 jobs in Bosnia, Serbia and Montenegro – one-quarter of its total payroll.

But just as EU accession has made it easier for workers to move west, it has made life harder for would-be migrants from further east. Ukrainians, who enjoyed visa-free travel to Poland, now face bureaucratic hurdles. Moldovans have difficulty entering Romania. Employers want an easing of restrictions. They are also recruiting labour further afield by, for example, bringing in workers from Vietnam, China and North Korea on short-term contracts.

Whatever employers do, governments will sooner or later, as in western Europe, be obliged to consider the controversial question of migration if their region is to extend its rapid economic progress.

Saturday, January 12, 2008

European Covered Bonds Temporarily Suspend Trading

From Bloomberg back in November. How could I have missed it at the time? Because I did't know what I was looking for I suppose.

European banks agreed to suspend trading in the $2.8 trillion market for mortgage debt known as covered bonds to halt a slump that has closed the region's main source of financing for home lenders.

The European Covered Bond Council, an industry group that represents securities firms and borrowers, recommended banks withdraw from trades for the first time in its three-year history until Nov. 26. Banks are still obliged to provide prices to investors, according to the statement today.

Banks including Barclays Capital, HSBC Holdings Plc and UniCredit SpA took the step as investors shun bank debt on concern lenders face more mortgage-related losses than the $50 billion disclosed. Abbey National Plc, the U.K. lender owned by Banco Santander SA, became the third financial company to cancel a sale of covered bonds in a week as investors demanded banks pay the highest interest premiums on covered bonds in five years.

``We are in a deteriorating situation,'' Patrick Amat, chairman of the Brussels-based ECBC and chief financial officer of mortgage lender Credit Immobilier de France, said in a telephone interview. ``A single sale can be like a hot potato. If repeated, this can lead to an unacceptable spread widening and you end up with an absurd situation.''

Sales Pulled

Covered bonds are securities backed by mortgages or loans to public sector institutions. The notes offer more protection to bondholders than asset-backed debt because the issuing bank is liable for repayments. They typically have the highest credit ratings.

``There's a crisis of confidence for everything but AAA government bonds,'' Arnd Stricker, a management board member at Corealcredit AG, the German commercial property lender owned by Lone Star Funds, said at a conference in Frankfurt. ``Covered bonds are being thrown in the same basket'' as mortgage securities, even though they are safer, he said.

Abbey National in London said today it postponed its sale of covered bonds because of ``poor'' demand. AIB Mortgage Bank, a unit of Dublin-based Allied Irish Banks Plc, pulled a covered bond sale in euros yesterday and Ahorro y Titulizacion, an investment unit controlled by Spanish savings banks, decided against issuing the debt on Nov. 16.

Northern Rock Plc, which suffered the first run on a U.K. bank in more than a century, may have the top credit ratings on its covered bonds cut by Moody's Investors Service, the ratings firm said yesterday.

Spreads Widen

``In light of the current market situation and in order to avoid undue over-acceleration in the widening of spreads,'' the committee of banks and borrowers ``recommends that inter-bank market making be suspended,'' the council said in an e-mailed press statement.

The extra yield, or spread, that investors demand to hold covered bonds sold by German banks instead of government debt has climbed to 38 basis points from 23 basis points six weeks ago, according to Merrill Lynch & Co. indexes. The premium is the widest in more than five years.

Some banks agreed to stop providing prices on covered bonds for half a day on Aug. 16 to stem losses from widening spreads, according to Johannes Rudolph, a covered bond analyst at HSBC in Dusseldorf. Today's suspension is the first from the industry association, ECBC's Amat said.

``Conditions have really weakened over recent days,'' said Andreas Denger, a covered bond analyst at Calyon SA in London. ``Most investors are not willing to invest in the current volatile market.''

Pfandbrief `Solidarity'

Trading in Germany's pfandbrief market was also suspended in a sign of ``solidarity,'' said Helga Bender, a spokeswoman for the German Pfandbrief Association VDP's German Market Maker and Issuer Committee. Pfandbrief bonds are a subset of covered bonds with stricter regulations.

The European covered bond market grew in out of the pfandbrief market. The first covered bond was issued in 1769 when King Frederick the Great of Prussia needed to rebuild the country after the Seven Years War against Austria an d Saxony. Spain, Ireland, Sweden, Denmark, Norway, Finland, France, Portugal, and Italy have new created laws to expand the market, according to Standard & Poor's.

The ECBC started in September an ``8-to-8 committee'' of eight banks that arrange covered bond sales and eight representatives for issuers of the debt to set recommendations in deteriorating markets.

``Without market making between banks, investors will shun the sales of new covered bonds,'' said Santiago Rubio, who oversees 14 billion euros ($21 billion) of assets as head of fixed income at La Caixa's asset management arm in Madrid.

Wednesday, January 9, 2008

Temporary Employment in Japan

From the WSJ earlier this week:

Yuka Hayashi

Five years ago, Japan chugged back into expansion mode after a decadelong slump. Yet its economy remains lethargic, its consumer spending anemic, its corporations cautious about capital spending and its stock market fragile.

With the rest of the world battered by continuing credit problems emanating from the U.S., the state of the world's No. 2 economy -- key to world economic health -- is an increasing concern.

Such worries have sparked a heavy selloff in Japanese stocks in recent months. The benchmark Nikkei stock average tumbled 4% Friday, the first trading day of the year, after falling 11.1% in 2007, its first losing year in the last five.

One reason Japan's rebound hasn't gotten traction: companies' growing reliance on temporary workers, who earn less -- and spend less -- than full-time employees. The shift in hiring can be seen at companies like Hino Motors Ltd. The truck-making unit of Toyota Motor Corp. is paying record dividends this year. But it also has been filling thousands of factory jobs with temporary workers, who start at $10 an hour and get few benefits.

"I always look for the cheapest meat to cook with, usually ground chicken or shreds of pork," says Ikkei Ikeda, 28 years old, who worked as a temp at Hino setting heavy metal discs onto machines for 2½ years before quitting in August. He says he rode his bike wherever he could to save train fare, because his monthly take-home pay averaged just $1,300. In other words, although Mr. Ikeda was employed, he wasn't doing much to boost consumer demand.

Companies across Japan have gone on a binge of hiring temps in the past few years. They earn about two-thirds of what full-timers do and can often be hired and fired with just a few days' notice. More than a third of the people in Japan's labor force are categorized as "nonpermanent" workers: part-timers, temps on fixed-term contracts and people sent to companies by temporary-staffing agencies. That compares with 23% in 1997 and 18% in 1987.

The trend has been good for Japan's economy in some ways. Use of temps gives companies flexibility and cost control, helping them succeed in highly competitive global industries like manufacturing. Big Japanese companies have reported earnings growth for five straight years.

Yet the heavy use of temps also has created an obstacle to the virtuous cycle typically seen in an expanding economy: When companies make better profits they eventually raise wages, which boosts consumer spending -- and leads to more corporate profits.

In the past decade, average wages in Japan have fallen every year except two because of an increase in temps and stagnant wages for full-timers. Consumption by working families declined on a year-on-year basis in six of the past eight quarters. This even though the Japanese are also saving less: A Bank of Japan survey showed that some 23% of households had no savings last year, compared with just 10% in 1996.

The result is sluggish domestic demand and growth that is supported by exports to a lopsided extent. In the July-September quarter, when Japan's economy grew at an annualized rate of 1.5%, exports were rising at an annualized 11% rate and domestic demand was shrinking slightly. Personal consumption is so weak in Japan that it accounts for only a little over half of the economy, compared with 70% in the U.S.

The temp-hiring trend thus adds to other elements restraining Japan's growth. The population is aging rapidly, and an increase in the number of frugal retirees has also meant lower spending on everything from clothing to electric appliances. Sharp cuts in regional public-works spending, part of the government effort to reduce its huge fiscal deficit, have hurt local economies and consumption. Capital spending by corporations has been strong until recently, propping up the economy along with exports. But there are signs that companies are also beginning to slow down their spending because of a recent rise in the yen's value and concerns about problems in the global credit market.

Its reliance on exports has left Japan's economy more vulnerable. Partly because U.S. housing-sector woes cloud the outlook for Japanese exporters, many economists have recently trimmed their forecasts for Japan's growth rate for next year.

Looking for Growth

Another slump in Japan would be bad news for the global economy, which was counting on Japan to pick up some slack as the U.S. economy stumbled. Consumption growth is also weak in Europe, leaving the world economy reliant for growth on China and other developing nations, plus stressed U.S. consumers.

As with Japan, many economists expect the euro zone's economic growth for the fourth quarter to come in at lower than in the prior one, when it was 2.6% at an annualized rate. European countries also have been relying more heavily on temporary workers, a factor that economists say may be slowing the growth of their consumption.

Countries have different definitions of temporary workers. In Germany, temps last year made up 14% of the work force, according to the Organization for Economic Cooperation and Development. In the U.S., "contingent" workers -- those lacking permanent job arrangements -- totaled only about 4% of the work force in 2005, a Labor Department survey showed. By any definition, Japan's reliance on temps is among the highest in developed nations.

In Japan, the proliferation of temps is creating a new social divide. For decades, big Japanese companies hired workers fresh out of school on a full-time basis, offered years of training and all but guaranteed steady pay increases. This afforded a middle-class lifestyle to nearly everyone.

Now, the media are filled with stories about the "working poor." The number of families receiving public financial support for children is soaring. There's even a new kind of homeless people -- young folks who sleep at Internet cafés. The opposition Democratic Party of Japan scored a major election victory in July by making the growing income gap its main issue.

The rise of temps began in the 1990s as Japan entered its long slump and low-cost nations such as China posed unprecedented competition. To compete, Japanese companies shifted large chunks of their manufacturing capacities overseas. At home, cost-cutting came slowly, partly because layoffs were taboo.

Then, labor-law deregulation gave companies a new way to restructure, while keeping some of their treasured manufacturing capabilities in Japan.

Until the late '90s, worker-friendly laws forbade temporary-labor contracts except for a few specialized areas, such as computer programming. A change in 1999 allowed temp agencies to dispatch workers to many more types of jobs. And in 2004, manufacturers were allowed to use workers sent by temporary-help agencies.

That change encouraged companies such as Toyota and Canon Inc. to start hiring temps en masse. At Canon and its subsidiaries and affiliates, the number of part-timers and temps nearly quadrupled from 2003 to last June, to about 40,000, according to securities filings. Full-timers are more numerous, at 127,000, but their numbers rose a more modest 24%.

Temps find it difficult to become full-time. When the economy began recovering about five years ago and companies needed more full-time workers, they got them by hiring fresh graduates. In a 2006 survey by staffing agency Pasona Group, two-thirds of companies responding said they were reluctant to make part-timers or temps full time. Many firms cited a lack of skills. Temps rarely get much training from their employers.

Longtime temps say conditions have deteriorated. Yoko Mitome, 49, was a sales executive at a travel agency for two decades, jetting about and planning package tours to exotic spots. She lost this $50,000-a-year job in 1998 as the employer sought to cope with falling sales near the bottom of Japan's long slump. She got a temp job as an operator for international calls at a unit of phone company KDDI Corp.

Since then, the hourly wages have stayed fairly stable but the company has stopped paying transportation expenses and good-attendance bonuses, has shortened breaks and has shortened employment contracts to three or six months from a year.

The annual pay of operators comes to less than $20,000 for six-hour work days, before taxes and social security contributions. Ms. Mitome lives with her mother and works a second job but still has to economize. Long gone are her days of buying $400 suits; now she shops only at casual-clothing stores where T-shirts go for $9.

"At least I own a house and have savings from my previous job," she says. "Things are very grim for a lot of my young co-workers."

Her employer, KDDI Evolva Inc., says changes in employment conditions have come as demand for phone operators has declined. It says it has mitigated the impact by measures such as raising hourly pay to try to make up for the loss of transportation aid.

Temp agencies are proliferating. One called sends workers emails on their cellphones about short-term jobs, often for the following morning. The service is used by companies that want workers when they need them, without the trouble of recruiting them or insuring them.

One temp agency, Goodwill Inc., has been around for 12 years and says it has 2.9 million people registered for job placement. Masami Fujino has been registered with it for seven years. He has often worked a different job every day, ranging from disposing of industrial waste to stocking food warehouses.

"The absolute worst," he says, "was when I had to haul household items out of a home in foreclosure, over the heads of crying kids." A full day of work leaves Mr. Fujino with about $55 after taxes and transportation, barely enough to get by in Tokyo.

Companies are seeking more labor deregulation so they can use temp workers even more flexibly. They want to abolish a rule that says if a company fills a job with a temp for three years, it has to make that job a full-time one. Companies commonly get around this by changing the job description slightly and starting the three-year clock running again.

Age Gap

As the number of temps grows, some experts see worrying long-term effects. While many temps are older workers who lost full-time jobs, the sharpest rise is among people in their late 20s and 30s, who finished school during Japan's economic slump and never got a full-time job. Among workers aged 25 to 34, about 26% are temps, compared with 14% a decade ago.

Some companies are concerned about workplace tension in this two-tier system. As earnings have improved, a few have started to convert temp workers to full-timers. Sumitomo Mitsui Banking Corp. recently decided it would turn 2,000 temps and affiliated-company employees working as tellers or loan assistants into permanent staffers of the parent company.

Toyota's all-union labor federation has begun inviting temps and part-time workers to join, saying the increase in the number of nonpermanent workers is threatening unity in the work place.

But for companies like Hino Motors, temps remain an important resource. Between 1998 and 2002, Hino reduced full-time workers to 8,600 from 9,500. When sales picked up and it needed more workers, Hino turned to temp agencies. As of March 31, Hino had 4,770 temps and part-time workers, up from 684 in 1998.

The company doesn't disclose pay scales. According to an ad by a staffing agency, a temp job at Hino pays about $10 an hour. This translates to pretax pay of about $21,000 a year. The average pay for all of its full-time people, including executives, was about $55,000 in the year ended March 31.

"The level of our production fluctuates sharply each year," a Hino spokesman says. "Bringing in temporary people whenever we have a shortage is simply what we have to do in manufacturing."

When Mr. Ikeda failed three years ago to get a job as a teacher, he found that signing up at a temp agency swiftly landed him temp work at Hino. But when he missed work for three days because of food poisoning, the staffing company called up to say he would be asked to quit if he doesn't come back soon. Though he survived that, he quit later, and now is looking for another temp job. "I don't mind the factory work at all," he says. "But as long as I'm a temp, I have to live with the fear that the job may be gone tomorrow."