Romanian migration raises concerns over labour shortage

High economic growth and a vast labour exodus to Western Europe have created a labour shortage in many sectors of Romania’s economy.

As a result, growing wage pressures could have a negative impact on foreign direct investment, slowing the country’s economic growth.

Businesses in some sectors have difficulties in finding skilled workers, while facing rising labour costs. However, mounting wages and remittances from abroad has led to rising consumer demand.

Issue

In light of Romania’s accession to the EU in January 2007, the country is facing labour shortages in a number of sectors:

• Apart from Finland and Sweden, all EU-15 countries made use of the transitional clause in the accession treaty and restricted the free movement of Romanian workers for up to seven years;
• Most EU-countries, however, have introduced sector specific quotas for Romanian workers. The UK, for example, has allowed unlimited numbers of highly skilled workers and an annual quota of 19,750 blue collar workers for specific sectors.

In order to tackle the labour crisis, the Romanian government is encouraging repatriation, while attracting workers from outside the EU to fill gaps in the labour market. Businesses are facing lower profits due to production losses and higher wages.

Importance

Romania’s current labour shortage results from the combined effects of the country’s economic boom and mass exodus of labour migrants:

• Romania has seen unprecedented economic growth, driven by FDI inflows, with an average growth of 6.0% between 2001 and 2006. Consequently, the number of job openings has increased amounting to 98,627 in the first quarter of 2007;

Number of job vacancies and harmonised unemployment: 2006-2007

Source: Eurostat.

• Many Romanians opted to leave the country in order to work in Western Europe or the USA, where wages and the standard of living are higher. While the minimum wage in Romania amounted to €114 in the first quarter of 2007, minimum wages in the UK and the USA were €1,361 and €676 respectively;
• Since 1989 Romania has lost between 2.0 and 2.5 million of its workforce. Considering Romania’s population of 21.6 million in 2006, this is about 10% of the country’s population.

While businesses in some sectors are under wage pressures and have started to employ foreign workers, Romania’s consumer purchasing power is continuing to rise due to high economic growth and workers’ remittances from abroad.

Implications

While migration keeps unemployment low and remittances high, shortages in the labour market cause economic losses and create wage pressures for businesses:

• The country’s unemployment rate was 6.9% in June 2007. Although joblessness is growing in certain fields, labour migration is exporting unemployment;
• Remittances from migrant workers represent an important source of Romania’s income amounting to US$4.7 billion in 2005;
• Remittances help improving the standard of living of many Romanian consumers as they increase their purchasing power and stimulate consumer demand for goods and services;
• The gap in the labour market is generating economic losses for businesses as it causes wage pressures and cuts in production volume, especially in the manufacturing and construction sectors. A clothing factory in Romania’s textile centre Bacau, for example, hired 670 Chinese workers in April 2007 after failing to attract local staff despite offering double the average minimum wage;
• FDI inflows have been a main driver for Romania’s economic growth. Between 2001 and 2006, the country received US$26.0 billion in FDI inflows. Foreign businesses were attracted by Romania’s skilled labour force and low wages. The labour shortages could now deter them;

Romania FDI inflows and minimum wages: 2002-2006

• The migration of Romania’s labour force concerns mainly skilled white and blue collar workers. The country’s labour market is lacking staff in the healthcare, agricultural and construction sectors.

In light of Romania’s labour emigration and rising wage pressures, the country will become less attractive to foreign investors, causing the economy to grow at a slower pace. However, increased remittances from abroad will help to raise consumer purchasing power.

Future scenarios

Romania’s government has undertaken a number of initiatives in order to tackle the labour crisis and encourage Romanians to stay or return to the country:

• In November 2006, an inter-agency working group was set up to devise a strategy for informing Romanians abroad of improved wage conditions;
• For 2007, the healthcare and education sectors have been granted an increase in wages of 20%–24% from the state budget.

The sheer size of Romania’s emigrated workforce, however, can make this enterprise only a partial success.

By 2014, all restrictions on the free movement of people within the EU will have been removed, thus, contributing to another wave of labour migration from Romania. Between 2006 and 2020, Romania’s population is expected to decrease by 5.7% from 21.6 million to 20.4 million:

• Although Romanian wages are rising, they will remain lower than those in Western European countries, so that migration incentives will remain high for Romanians.

Romania’s labour exodus is likely to result in the country becoming an attractive destination for migrants from non-EU countries. While businesses will compete for skilled Romanian workers, they will also have the option to employ foreign workers at lower wages. Consumers will rely even more on foreign remittances as wages of unskilled workers will compete with those of foreign migrants.

The Romanian government plans to spend EU structural funds on rural development. According to its National Action Plan for Employment from July 2006, it intends to create 140,000 jobs and undertake professional training of 15,000 people in rural areas, which will help regional development.