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Labor market tightness risks strong performance in Eastern Europe

Labor market tightness risks strong performance in Eastern Europe

The International Monetary Fund (IMF) has cautioned that the rapid wage increases observed in central and eastern Europe could undermine the region's competitiveness.

While incomes have surged by double-digit percentages in many countries, the IMF notes a lack of corresponding productivity growth. The head of the European department at the IMF, Alfred Kammer, warns against complacency, emphasizing that recent wage hikes may lead to a competitiveness challenge.

Eastern European governments, however, have long seen higher wages as a key benefit of EU membership, and the IMF's stance is expected to clash with these governments.

Labor shortages in central and eastern Europe are exacerbating economic challenges, prompting concerns about the region's competitiveness. The IMF's warning about the disconnect between rapid wage increases and stagnant productivity is particularly relevant as eastern European nations have traditionally attracted foreign direct investment due to the competitiveness of their workforce.

Rising wages without a proportional increase in productivity could impact the region's attractiveness for businesses, potentially leading to a slowdown in foreign investment. The fund urges policymakers to address budget deficits and implement measures to enhance worker relocation, boost labor force participation, and improve overall productivity to mitigate the adverse effects of labor shortages on economic growth.

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