Industrial Relations under Industrial Relocation:

The Case of Eastern Europe

Ten new countries entered the European Union in May 2004 – Estonia, Latvia, Lithuania, Slovakia, Czech Republic, Poland, Slovenia, Hungary, Cyprus and Malta.

This enlargement brought about a number of changes in the former 15 countries of the European Union, as well as in the newcomers. The European Union’s area increased by a third. Population grew from 390 million to 450 million. GDP increased by only 5% and GDP per capita decreased 18%. The number of languages spoken in the EU practically doubled. The challenge to find a fair balance among the countries became urgent (Weiss, 2006).

Accession to the European Union removed many barriers for trade, and committed the European Union to provide resources for investments in infrastructure and industrial reorganization of the new members, as had been done upon the entry of Spain, Portugal and Greece. The opening of new opportunities has contributed to economic growth of Eastern European countries. In the course of History, these countries were repeatedly massacred by Nazi and Soviet aggressors, deeply affecting their economies and the peoples’ sense of dignity.

This paper focuses on the effects of labor changes in the former communist states (EU8), the 15 European Union countries before the enlargement (EU15), and the new European Union as a whole (EU25).

The industrial relations systems of the EU8 countries are under formation. They underwent deep change in the period 1990-2005, because of the end of the communist regimes. Substantial reforms have taken place to adapt them to the market economy. Changes are still in progress. Efforts are being made to create rules, procedures and behaviors consistent with sound industrial relations systems. This long process cannot be accomplished by administrative decree. On the contrary, it largely depends on active participation of employer, worker and government representatives. In fact, the EU8 are still in the process of dismantling the centralized administrative system, to create solutions for the transition between authoritarian regimes and free market economies, and to resolve the secondary effects of the changes, in particular, unemployment.

State-owned enterprises in all EU8 countries rapidly decreased employment after the fall of the Berlin wall (1989). During the first two years of the transition, unemployment rose from zero to double digits in most EU8 countries. In 1993, it reached 12% in Hungary and Slovakia, and 10% in Slovenia. The only exception was the Czech Republic (3.5%). The highest reduction in employment occurred in Hungary (over 20%), followed by Slovakia (over 13%), Poland (over 10%), and the Czech Republic (9%).

In the economic field, the EU8 countries are beginning to take advantage of joining the European Union and the global economy. Poland has the highest GDP in the region (US$ 489 billion), followed by the Czech Republic (US$ 199 billion), Hungary (US$ 159 billion) and Slovakia (US$ 85 billion) (see Table 1). Estonia has the lowest GDP (US$ 21 billion), followed by Latvia (US$ 29 billion) and Slovenia (US$ 42 billion). However, with a small population (about 2 million people), Slovenia has the highest GDP per capita (US$ 21,600), followed by the Czech Republic (US$ 19,500) and Estonia (US$ 16,400).

The EU8´s economic growth has been fast. Latvia, for instance, grew 10.1% in 2005 and present estimates point to 13.5% in 2006; Estonia grew 7.1% in 2005 and is expected to grow 11.5% in 2006; Lithuania showed a 6.4% figure in 2005, with an estimate of 8% for 2006; the Czech Republic grew 6% in 2005 and should grow 7.8% in 2006; Slovakia, grew 5.1%, and is expected to grow 6% in 2006.

These rates are much higher than the average of EU25 countries, which, taken together, grew 1.7% in 2005 and are expected to grow 2% in 2006. Even slow pace countries have grown twice as much (or even more) as the EU15, such as Poland (3.3%, with an estimate of 5.5% in 2006), Hungary (3.8% in 2005 and 4.5% in 2006), and Slovenia (4.0% and 4.5%, respectively).

About 65% of growth results from services, a little below the figure for the UE15 countries, in which services account for about 69% of GDP, but much higher than in many Asian countries such as, for example, Indonesia, Malaysia, the Philippines and Thailand, where services account for 47% of GDP.

Export growth in the EU8 countries has reached record marks. In the period 2000-2004, exports grew from 29% to 38% of GDP. The quality of exports also improved. Today, most exports are undertaken by medium to high technology companies. The EU8 are increasing their international market share.

The investment level has been high. Whereas the EU25 invested about 19.6% of GDP in 2005, Lithuania invested 22%, Hungary, 23%, Slovenia 25%, the Czech Republic and Slovakia, 26%, Estonia, 27%, and Latvia, 30%.

Furthermore, industrial growth has been remarkable. In 2005, the rate reached 9.3% in Slovenia and 8.5% in Poland and Latvia – as compared to 1.6% in the EU25 members. In fact, participation of the labor force in the industrial sector is much higher in the EU8 countries than in the EU25 members. In Slovenia, for instance, 40% of the economically active population works in industry; in the Czech Republic and Slovakia, 38%; in Poland and Lithuania, practically 30%. In the EU25, average participation is 27%

Table 1

Basic Indicators of Former Communist Countries (2004)











Area km2









Population – millions









Population Growth - %









Life Expectancy – years









GDP – US$ billions









GDP-US$ billions PPP*









GDP p/capita-US$ 000









GDP p/capita-US$ 000 PPP









GDP Growth 2005 - % (estimate)









Labor Force – thousands









Agriculture %









Industry %









Services %









Unemployment (2005) % (estimate)









Gini Coefficient









Inflation (2005) - %









Investment/GDP - %









Foreign Debt US$ -billions









Public Debt/GDP(2005)–%









Reserves (2005) US$ billions









Industrial growth (2005) (estimate) - %









Exports (2005) US$ billions (estimate)









Imports (2005) US$ billions (estimate)













E. Kroon




Slovak Koruna


Exchange rate/US$









(*) Purchase Power Parity. Source: The World Fact Book, Washington: Central Intelligence Agency, 2004.

In the political arena, the EU8 are also in transition. Many countries have oscillated between strong state-dominated to populist-style governments. Democratic institutions are still under formation and the political situation has been unstable in several countries. For instance, the Czech Republic, following a tie in the 2006 election, is in the process of forming a new government. Weak coalitions sustain the Estonian, Latvian, and Slovenian governments. Slovakia and Poland had a sequence of populist governments, first left wing oriented, then right wing. Lithuania’s government today has a tiny majority.

Hungary has a relatively solid government supported by mainstream parties, but is in an appalling economic situation due to severe public deficits (Economist, 2006a).

The strengthening of national governments is crucial to carry out reforms that would adjust the EU8 economies to the free market style. The State continues to play a significant role in the economic and political life of most of these countries. The privatization process is incomplete in many of them, and in some cases is being opposed.

In the labor area, there is a lack of solid institutions to represent employers and employees. Political dominance during the communist regime led to a relatively homogeneous model of industrial relations in eastern European countries. The State coincided with Management and left no room for union autonomy. Free institutions could not be formed to defend the interests of entrepreneurs and workers. Both depended on the State.

Labor markets under communism diverged from free labor markets to the extent they resulted in excess demand for labor, inefficient allocations of workers, poor commitment to work, distorted wage structures, and restricted freedom to choose one’s job (Freeman, 1992). As Piore says, "the basic problem for Eastern European countries is not the transition from planned to market economies, but rather catching up with the organizational and technological revolution associated with the move from mass to flexible production. Basic enclaves of flexibility that existed in the West were much more limited in the communist system" (Piore, 1992).

Immediately following independence from communist regimes (1989), Eastern European labor ministries, politicians and trade unionists looked to Western Europe to design new industrial relations models. To a certain extent, the EU8 members started imitating western members by generating a large amount of very protective laws, expecting to get from legislation the protection they enjoyed under Party and State rule during communism. Indeed, several new detailed laws were drafted, aiming at adequate protection. To be implemented, this legislation faced economic and institutional difficulties, and "the gap between the normative level and day-to-day practice became considerably wide" (Weiss, 2006). This gap was detected ten years ago (Grozdanic, 1997) and is still present in most Eastern European countries.

Another feature of the post-communist legislation wave was the creation of a plethora of tripartite bodies. Eastern European countries invested heavily in tripartism, resembling the emergence of neo-corporatist states. However, a weak sense of class interests and the underplaying of the private sector role marked the experience of those countries with authoritarian regimes. For this reason, many analysts have pointed out that Eastern European tripartism, with a few exceptions, is an illusory corporatism. "While the facade of tripartism is present throughout the region, with duly constituted committees holding regular meetings, bringing together formal representatives of the states, trade unions, and employers, this is not bringing about... binding agreements and there is no guarantee decisions will become laws". Private owners are barely represented and when they are, this is limited do domestic owners, since most counties are soliciting foreign capital. Tripartism does not affect the sectors in which the long-term stability of industrial relations will be established "(Ost, 2001).

Building a realistic system to protect workers and employers requires strengthening the representative institutions on both sides, which is still lacking. None of the parties is sufficiently strong and representative to act as a fully effective partner (Casale, 1997).

True, the Soviet labor relations systems have been destroyed or transformed, but old attitudes and expectations persist. The mere imitation of advanced countries’ laws is not enough to create a new system (Vickerstaff and Thirkell, 1997). Under communism, tirade unions were "transmission belts" for the governments rather than voices for the workers. The "successor unions", after de transition, were not able to reform the system or to create a new system from scratch. There was a strong decline in membership and a weakening of the financial condition. In addition, the new unions were initially incapable, of negotiating in different companies and creating a more atomized environment. Under the communist regime, employers were not permitted to dismiss their employees. Under the new regime, labor codes were revised to facilitate dismissal by providing severance payment and prior notice (Boeri and Terrel, 2001).

In the labor area, the most visible feature among these countries is the acute difference in pay levels as compared to the rest of Europe. The eastward enlargement has added a pool of about 40-odd million low-cost workers to the EU25. At the same time, low labor costs became a key factor to attract investments and promote economic growth in those countries. Other features are: the quality of labor, lower taxation, and a favorable investment climate.

Differences in average pay are huge. Table 2 shows that the average pay in the Czech Republic (US$ 4.92 per hour) is about 20% of average pay in Germany (US$ 25.07 per hour); in Estonia (US$ 3.94) it is 16%; in Slovakia (US$ 3.63) it is 15%; in Lithuania (US$ 3.06) it is 12%. Labor in Lithuania costs 12% of German levels. This is also true for qualified labor. A machine tool specialist in an automaker in Poland costs about US$ 7.00, whereas in Germany the cost is about US$ 45.00 (Moreira, 2006).

Table 2

Average pay per hour (2005)




Czech Republic










































United Kingdom



Source: EIRO, Pay Developments 2005, Dublin: European Industrial Relations Observatory

On-Line, 2006. 1 EUR = US$ 1.28.

(*) Source: Slovenia Portal of the Republic of Slovenia.

In the EU8 countries, actual working hours are longer than in the EU15 countries. Working on Saturdays and Sundays is common in most countries, whenever necessary. Overtime is frequent and overtime pay rare. In general, the gap between legal requirements and actual labor agreement terms is quite wide.

The need to control budget deficits during the 1990s led most countries to raise payroll taxes. By the end of the decade, tax rates ranged from 33% in Estonia to 38% in Slovenia, 44% in Hungary, 48% in the Czech Republic and Poland, and 50% in Slovakia. In addition, companies pay for days not worked, employer social insurance contributions, sick pay, training costs and other indirect costs that raise social cost to about 65% of salaries. The burden is becoming heavy to the extent salaries are increasing (Svenar, 2002). However, this cost is much lower in the informal sector, which is still expressive in many countries.

Productivity is reasonable. During the first stage of the transition from communism to capitalism (1990-95), productivity declined in practically all EU8 members. Under the communist regime, salaries were set independently of company performance. With the entry into market economies, this picture reversed so that in the second phase (1996-2000), overall improvements raised productivity in most countries (matching salaries), particularly in Hungary, Poland and Slovenia. Changes in Management played a major role in this process (Martin, 1998). Today, productivity in the EU8 members is not bad at all. After all, these countries have a long tradition in industrial activities, particularly, in heavy machining, metalworking, shipbuilding, machine tooling, home appliances, world-class furniture, and in pharmaceuticals, chemicals and other sectors. In 2005, average productivity reached almost 4%, whereas in the rest of the European Union, it was 1.5%.

The quality of labor is also quite reasonable. For most EU8 countries, educational achievements have been very high, even above the levels of the world’s richest countries. According to Schmid and Hafner (2005), Estonia (with 201 points achieved in the IBW 2005 international survey). The Czech Republic, Lithuania and Latvia come next (185 points), whereas Austria ranks at 182 points, closely followed by Slovenia, Slovakia and Poland (180 points), and Hungary (178 points).

Gros and Suhrcke (cited by Spagat, 2002), studying education levels in transition countries, used a cross section regression for 148 countries, finding that the EU8 countries have a much higher level of secondary and higher level enrollments than their GDP per capita could suggest.

The proportion of employees who participated in "continuing vocational training" (CVT) programs in relation to the total number of employees, has been used as a proxy of human capital. The percentage of employees who participated in the CVT courses is very high in the eastern countries. In some of them, the proportion surpasses that of the UE15 countries, as is the case of the Czech Republic (42%) and Slovenia (37%) (Perugini, Pompei and Signorelli, 2005). Other studies show the same results (UNICEF, 2000; 2001).

This data does not mean the picture is entirely rosy. These educational advantages may be insufficient to outweigh all obstacles in Education. There are substantial disparities in eastern countries due to family background, urban/rural location, ethnicity and financial resources. In addition, demands on the school systems have increased. These countries need to adapt their educational systems to the changing needs of the market economy. Progress has been made in reforming areas such as curriculum, textbooks, and pedagogy:  previously dominant political and ideological references were deleted from course content and textbooks. Curricula have been updated. A vigorous private textbook industry has emerged, and significant changes made in teacher training and evaluation practices.  Other areas are fraught with many difficulties and are, accordingly, more cumbersome to improve.  They include rationalizing the number of institutions, establishing coherent education legislation, redistributing educational property, and redefining local finance and administrative controls (Heyneman, 1995, p. 25). 

During the first transition phase, families faced devastating and mounting deterioration in their material conditions. Rising unemployment and poverty put enormous burdens on families, which, for the most part, have limited resources to allocate to their children’s education. Governments too faced budgetary constraints, which had negative impacts on access to, and quality of, Education.

Nevertheless, when compared to the situation of other emerging countries, the educational situation is reasonable. For instance, in Poland about 45% of youths are enrolled in universities. Vocational schools have had good quality for many years. Before World War I, the country already counted on highly specialized industrial labor in sectors like shipbuilding, heavy machining, transportation, and others. High technology is the aim of most companies these days. This same scenario can be seen in Hungary. Lithuania is catching up and is currently one of the best-educated countries among the EU8 members.

Salaries in the East are increasing faster than in Western Europe. In 2005, average real pay in the EU8 member countries increased by 3.6%, whereas in the EU15 countries this figure was 0.7%. The largest increases occurred in Lithuania (6.4%), Estonia (9.2%) and Latvia (10.3%). The smallest were registered in Poland (2.8%), Hungary (2.7%), Slovakia (2.1%), the Czech Republic (2.0%), and Slovenia (0.6%). Yet, the distance in relation to western salaries is enormous. In keeping this pace, eastern and western salaries may converge after one generation.

Minimum wages are also increasing, but the differences between the two blocks are enormous as shown in Table 3. For instance, the minimum wage in Latvia is US$ 145.92 per month, which is 9% of the minimum wage in France (US$ 1,608.96)! It is true that there is a larger proportion of workers earning minimum wages in the East than in the West.

Table 3

Minimum wages of adults per month (2005)

Selected Countries



Czech Republic







































Source: EIRO, Pay Developments 2005, Dublin: European Industrial Relations Observatory On-Line, 2006. 1 EUR = US$ 1.28.

With huge differences in salaries and working conditions, one would expect a massive migration of workers from the lower level countries to the higher-level ones. This has been blocked largely by a prohibition introduced in the enlargement procedures. With the exceptions of England, Ireland and Sweden, eastern workers were hindered from moving West. Although the original European Economic Community Treaty referred to the free movement of persons, European Union authorities never interpreted that principle as an actual passport for workers moving from one country to another (Barnard, 2006). Therefore, the 2004 restrictions were nothing new in the community.

The restrictions, however, applied to persons but not to businesses. In fact, moving companies from Western to Eastern Europe was taking place since the 80s and the process accelerated after the fall of the Berlin wall in 1989. With the enlargement, business relocations became easier and more attractive. The tax burden in the Eastern European countries tends to be much lower than in Western Europe. Salaries and working conditions are also more favorable. In addition, many of the new members attempt to attract new companies with subsidies and direct incentives.

Industrial Dislocations

Altogether, the eight former communist countries have a GDP of about US$ 1 trillion. This is a very small fraction (8%) of the European Union’s GDP (US$ 12 trillion). Yet, the new members are performing an important strategic role for the competitiveness of large EU countries such as Germany (which has a GDP of US$ 2.5 trillion), France (US$ 1.8 trillion), Italy (US$ 1.7 trillion) and others. Tax and labor costs are much lower and government incentives have attracted many Western European companies to Eastern Europe.

In most EU8 countries, the reasons for relocations within the region are: (1) labor costs and labor market regulations; (2) the quality of the labor force; (3) industrial relations and labor conflict; (4) tax rates; (5) explicit subsidies granted by public authorities; (6) proximity to large consumer markets, mainly the EU15 countries.

The main origin of relocated companies is: (i) Germany; (ii) France; (iii) other countries of Western Unions; (iv) the United States; (v) Japan; and (vi) South Korea.

The most attractive sectors are (i) the automobile industry; (ii) electronics; (iii) chemicals; (iv) information technology; (v) trade and engineering; (vi) banking and other services.

In the automobile sector, some cases of industrial dislocation gained the world’s attention. Several VW, Renault and Fiat plants were transferred to Eastern European countries. In 2003, the German truck facility of General Motors Corporation moved to Poland. In addition, Peugeot, Toyota, Kia and Hyundai have built (or are building) plants in Eastern and Central Europe. More recently, Russia came into focus, particularly for GM, Nissan, Toyota and VW. Ford and Renault have already moved to the country. Slovakia has received plants of Peugeot-Citroën, Kia, Ford and Volkswagen and, in 2005, produced more than 800,000 cars, becoming the largest car producer per capita in the EU25. The same is happening in other eastern countries. One out of 25 cars sold around the world now has an engine produced in Hungary. General Motors (today established in Ellesmere Port in the north of England) is finalizing a joint venture to build a plant in Poland. PSA Peugeot Citroën is already producing its 206 model in Slovakia and is considering moving the plant in Ryton (British Midlands) to an Eastern European country.

Component suppliers are also moving east, providing carmakers additional competitiveness. The same is occurring in the chemical, metal-mechanical, electronics and other industries, as well as in banking and insurance services. The number of call centers is growing fast. Information and communication technology is another example. Ericsson and Nokia are now producing mobile phones in Estonia and Hungary. At home, they kept R&D, design and high-end manufacturing.

Many Western European plants, particularly in Germany and France, have not (yet) moved because the cost of closing a plant and cutting jobs is very high. Moving has proven beneficial to companies’ competitiveness. For instance, in 2004, the VW plant located in Slovakia reported savings of US$ 1.8 billion in labor and taxes.

Western companies are heavily investing to upgrade their facilities in the EU8 countries, aiming to expand production and exploit national and international markets. About 50% of the 1.7 million cars produced in Eastern Europe are already made for local markets. While it is true that Western European plants make almost ten times more cars – about 14.5 million per year – the situation is changing: consumer power is increasing and car production is growing fast in the East.

By facilitating company dislocations, the EU8 countries are guaranteeing companies facing competition problems in Germany, France, Italy, and other EU15 countries, an extended life cycle.

The inflow of foreign direct capital varies from country to country. Comparative advantages in all areas of attraction also vary. The following paragraphs present some characteristics of industrial dislocation in specific countries of the EU8 region.

The Czech Republic - Since 1992, according to the Ministry of Industry and Trade and the Czech Invest Agency, the country attracted some 500 foreign projects, totaling about US$ 18 billion. The automobile plants have been the lead projects. The cost of labor has been the key factor so far. Wage costs are approximately five times lower than the average in the EU15 countries. Several subcontractors in the auto parts business have also moved to the Czech Republic, particularly to Kolin, where workers are skilled and highly motivated and infrastructure is satisfactory. As a rule, foreign companies pay higher salaries than the domestic ones (Hála and Dokulilová, 2005).

Hungary – Hungary too has experienced a growing number of transfers to the country. The number of companies with foreign capital participation reached 27,000 in 2004 and represented about US$56 billion. About 50% of this investment went into manufacturing (automobiles, transportation, electrical equipment, chemicals, pharmaceuticals, and the food industry). The balance went into activities related to logistics (warehouses, transportation, purchasing of supplies, financial organizations, management qualification, call centers, etc.). Reinvested profits are also increasing. Most of the inbound investment comes from Germany, the Netherlands, Austria, the United States, and France (Tóth and Neumann, 2005a).

Estonia - Relocation to Estonia is not as intensive as in other EU8 countries. In the early ’90s, some companies were looking at Estonia. However, recently the situation changed. Many companies began relocating to that country, particularly, in the food, textile, leather, wood, and footwear (regular, work and safety footwear) industries. These are all labor-intensive sectors. The major reason for relocation has been good workmanship and low labor costs. Although most inbound capital came from the EU15 countries and Finland, the average difference between wages in Estonian and Finnish manufacturing industries was tenfold in 2005. Nevertheless, the nationwide average nominal monthly wages in Estonia increased more than 30% in the period 2000-2005. Many analysts see Estonia losing its low wage comparative advantage in the long run (Eamets and Philips, 2005).

Slovenia - Slovenia is going through a mixed process. Although the country has attracted many companies from abroad, in the last five years the process began to reverse. Textile and shoemaking companies, and tanneries, for example, began to look for countries with cheaper labor within the EU8 region, such as the Czech Republic, Poland, and Latvia, as well as Bulgaria, Romania and Turkey. Salaries have increased in Slovenia and labor regulations are stringent. Outer-regional relocations have been more frequent that inner-regional ones. Employer associations evaluate the Slovene business environment as unfriendly for entrepreneurship and see it as a cause of relocation. Trade unions are considering relocation as a serious problem due to its impact on the loss of jobs (Mrcela and Kajic, 2005).

Poland - In Poland, outer-regional relocation is marginal. Inner-regional relocations are quite common, mostly from France and Germany. Labor costs are the main attraction. The EU15 countries save about 40% by relocating production to Poland due to low labor costs and corporate taxes. Average salaries in Poland are lower than in many other EU8 countries. Inner-regional relocation went through two phases. At the beginning, relocation was associated with privatization. Today, it is seen in connection with green field projects (Towalski, 2005a).

Slovakia - Slovakia is one of the most attractive countries. The automotive companies are the leading force in dislocation (80%), followed by the chemical, engineering, hydraulics, computer science, steel, car components and indoor materials industries, as well as banking and other services. Most relocations are from Germany, France, the United Kingdom, Austria, the United States, and South Korea. There are about 140 foreign companies in Slovakia today. Low wages and taxation are the main reason for dislocation. Qualified labor is another. About 95% of the production of foreign companies is sold in other European Countries (Stanck, 2005).

To date (August 2006), EU15 companies have invested about US$ 150 billion in EU8 countries (Barysch, 2006). During the period 1995-2004, automakers invested about US$ 24 billion in the East, and, until 2010, expect to produce about 60% of the 14.5 million cars to roll off European Union production lines in the EU8 (Business Week, 2005). The Czech Republic and Poland are behind India and China in terms of attraction power for foreign direct investments.

The role of foreign direct investments in benefiting EU8 countries, given their potential in the modernization process, the renovation of managerial qualification, and, in particular, their qualified labor force, low wages, and good investment climate is quite important for the EU15 countries (Perugini, Pompei and Signorelli, 2005: Voice, 2006). As a whole, and in comparison with the EU15 members, the economies of the eight new members are very small. Taken together, the aggregate GDP of these countries is as big as that of the Netherlands. However, for many EU15 companies the choice was no longer between producing at home or abroad, but rather between cutting costs or losing market share. These companies had to search for new ways to guarantee and increase competitiveness.

The EU8 countries are being called the "European Lynx", a play on words with the well-known concept of "Asian Tigers". Measuring the EU8’s competitiveness in terms of export performance (volume and quality), economic structure (dominance of the service sector), and friendliness towards business (from bureaucracy to infrastructure), a study reported by the Economist (Economist, 2006b) places the "Lynx" almost at the same level as the "Tigers". Export growth is higher than in any Asian country except China. These exports result from the massive entry of foreign direct capital into the "Lynx" countries, which jumped from 29% in 2000 to 38% in 2004. In the "Tiger" countries, the ratio decreased from 26% to 19% in the same period.

Of course, market size in Eastern Europe is minimal compared with Asia, the United States or the EU25. Nevertheless, for the European Union, the EU8 countries have specific advantages. They are close to the UE15. Labor has good quality. Motivation to work is widespread because people are eagerly looking for progress, while they are willing to work hard in odd shifts and adverse conditions.

In short, Western European companies see a favorable climate to move plants and services to Eastern European countries where they can achieve profits that are no longer possible in the West, due to high taxation, high labor costs, and difficulties in negotiating with the trade unions. The East is modernizing, infrastructure is developing, housing is improving, consumer power is increasing, and life conditions are getting better.

Job Losses in Western Europe

However, moving foreign direct investment from west to east has caused considerable job losses in the EU15. In fact, this theme is controversial since the coin has two sides. The most visible consequence is job destruction in job exporting countries. However, by helping German, French or Italian companies stay competitive on a global scale, the EU8 are helping preserve large numbers of jobs in those countries.

It is difficult to say how long the current dislocation process will last. Closing plants in Western Europe hurts not only the workers, but also the economies as a whole. This situation is pushing the EU15 countries to make changes. In the area of labor, trade unions and governments are making profound concessions to avoid even bigger disasters. In 2005, General Motors decided to close its Portuguese van plant located in Azambuja, doing away with 1,100 direct jobs. The reason was lack of competitiveness: the cost of a van in Portugal (in Azambuja) is US$ 630 higher than in any Eastern European country. The Portuguese Prime Minister promised to come up with a plan to rescue the company in 2006-2007, so the decision to close was put off. Volkswagen several times threatened to move more plants from its strike-prone Spanish sites to Eastern Europe. In this case, labor contracts were changed to maintain the company’s competitive power .

It is likely the EU8 countries will remain attractive for the next ten or fifteen years. Wages in the East, although rising, are a fraction of those in the EU15. High rates of unemployment in many of the EU8 countries, particularly Poland and Slovakia, may prevent an eventual explosion of wages and salaries. Trade unions, although flexing their muscles, may continue to take friendly stances.

Western and Eastern Reactions

What about people’s reactions? At the beginning of the enlargement process, the most striking feature of eastern populations was their high motivation to overcome backwardness that resulted from the predecessor authoritarian regimes – Nazism and Communism. In fact, the EU8 countries suffered repression for more than 70 years (1920-90). Each of these countries went through periods of foreign occupation and domination. All have a long history of suffering. During World War II, and under the communist regime, many families were completely disaggregated, their members losing track of each other. Torture was common practice and left traumas difficult to forget. In Warsaw, Hitler ordered a high wall built around a large district where more than 400,000 Jews lived. There was no going in, no coming out, no food, no heating. Thus was "life" in the ghetto – in the very midst of downtown Warsaw. People in the ghetto were expected to die in less than a year but, surprisingly, two thirds survived. On occasion, they were packed by the thousands into freight trains and hauled off to concentration camps - children, adults, the elderly – all innocent civilians – where they were put to death. Atrocities were randomly committed on a daily basis, victimizing innocent people who happened to fall into the hands of their oppressors. They were not formally charged and were not granted due process of law. Some of them were completely devastated, as the case of Poland, particularly Warsaw.

This type of aggression is hard to forget in two or three generations – or ever. Latvia, for instance, was occupied three times during the period 1940-1991 and had been invaded several times before that. In June 1940, Latvia was taken over by military forces of the Soviet Union. In July 1941, Nazi forces invaded the country. Then, beginning in 1944, the country was again dominated by the Soviet Union, which imposed the communist regime until 1991. During wartime occupations, Latvia exercised no sovereign power.

These successive aggressions had a cumulative effect on the people and their psyche. The totalitarian regimes destroyed lives, relationships and trust. The Soviets engaged in class warfare and the Nazis in racial cleansing. Both devastated human dignity.

What could one expect after so much suffering? What could the newcomer countries expect from the rich European Union? Would it be to become fully dignified members of the community? Would people be able to raise their children in freedom, improve material conditions and live according to spiritual and moral values?

Of course, it is too soon to anticipate what the future of these countries will be 10 or 15 years from now. Portugal and Spain, for instance, benefited considerably from entering the EU. Will that also happen to the former communist countries?

Eastern Europeans entered the European Union seeking progress and individual mobility, while working very hard to improve their lives. In a few years, economic growth became a welcome reality. Infrastructure improved. New buildings, large supermarkets and shopping centers, as well as robust house construction activity provided a feeling of progress in most countries. However, unemployment remained high. In 2005, the unemployment rate reached 18% in Poland– twice the rate of the EU15 countries. In Slovakia, it was 11.5%; in Slovenia, 9.8%; and in Czech Republic, almost 9%. Youth unemployment is over 20% in most countries. In Poland, it is 25% and 20% of the population live under the poverty line (Moreira, 2006).

How do people feel after integration? If people were optimistic at the beginning of the enlargement process, today, there are many signs of skepticism on both sides. Many of the newcomers resent treatment as second-class members. In many ways, this is in fact so. Discrimination persists. Newcomers are prohibited from emigrating to the rest of Europe (except England, Ireland and Sweden, but even so with restrictions). Salaries are much lower; health facilities are precarious; social security and unemployment insurance are poor.

Economists tend to say enlargement was a good move. Citizens seem to disagree. Although 55% of the population in the EU-25 say enlargement was positive (Eurobarometer poll of June 2006), 60% of Germans, French and Austrians oppose future accessions. About 63% think enlargement increased unemployment in the West. In Germany, 80% think it was bad for jobs (Barysch, 2006).

In the East, satisfaction varies. The Poles feel the European Union should give them more resources to build or rebuild infrastructure, particularly roads, which are bad. Latvians consider the European Union too bureaucratic. Hungarians resent receiving salaries that are less than a third of what Western Europeans are paid. Lithuanians would like to be better off, even recognizing they will take some time to reach the position of Portugal or Spain. Estonians are pragmatic: "We are a small country (1.3 million people), so, we have to be special, otherwise we are nothing". With this idea in mind, the Estonians are becoming a high-tech country, trying to imitate the neighbor Finland, one of the most developed countries in that area (and in several others).

For many, actual benefits have been much less than what was promised. Unemployment is high. Informal work is widespread. Salaries are low. Pensions are meager. Foreign companies explore cheap labor. For others, the eastern countries are in for better days in the near future. Industrial production is growing. Products are becoming sophisticated. The country is attracting foreign capital. Salaries are beginning to increase.

Eastern European countries, helped by western academics, have tried to build new societal institutions by using institutional designs developed in the West. In the area of industrial relations, this comprises the transfer of western labor legislation and labor institutions. Workers felt insecure with the first signs of a market economy. The State was no longer responsible for their jobs. As a result, the EU8 member states generated many new labor laws, hoping to obtain from legislation the protection they had from the Party and the State during communism. New laws were drafted in much more detail than western laws, pursuant to the idea that complex and wide ranging legislation would guarantee more protection (Frege and Tóth, 1998). However, "the gap between the normative level and the day-to-day practice widened considerably" (Weiss, 2006). After initial attempts, countries started to review labor codes and many are still in the process of adapting the rules to the prevailing reality. It became clear that a simple copy of western laws would not suit the situation of the East.

Moreover, key institutions are still very weak to support a complex legal system. Trade unions and employer associations are underdeveloped. During the communist regime, these organizations were mere instruments of the ruling party, with the exception of Solidarnosz in Poland. The backbone of the private sector in those countries are the small and medium businesses, in which the unions always have difficulties to organize their campaigns.

In general, union density is very low in the former communist countries. Collective bargaining remains incipient, essentially limited to large companies. This stands in contrast with the West. In the EU15 countries, labor institutions are well organized; general principles are approved for all members; each state makes its own adaptations; trade and employer associations are effective participants in social dialogue and collective bargaining. In this respect, the European Union is not a mere free trade zone but rather a supranational entity with legislative, judicial and executive powers of its own, with several regulations in the labor area (Weiss, 2006). For the Eastern European members, there is a long way to go before reaching this institutional sophistication.

In the West, however, there are many new changes in labor contracts arising from the enlargement. To avoid a massive moving from west to east, Western European companies are demanding growing concessions from trade unions. In Germany, for instance, working hours have been increased and salaries cut, in addition to several other concessions. Companies like Siemens, DaimlerChrysler and Bosch have managed to renegotiate working contracts, increasing work hours from 35 to 40 per week (with no extra pay) conditioned upon the commitment that these companies not move their plants from Germany before 2012.

The German government has slightly and gradually changed labor laws. However, at the bargaining table, changes have been more pronounced. At HAWE Hydraulics, a serious threat to move plants from Germany to Bangalore (India), resulted in workers accepting longer hours, work on Saturdays and Sundays, as well as the substitution of fixed bonuses by profit premia (Walker, 2006).

Gradually, German workers are accepting to work more for less. In fact, Western Europe used to have much shorter working hours compared to the East. People in Production used to work 35-38 hours a week, or about 1,400 hours a year. In most of the EU8, they work 2,000 hours. It is a huge difference. Moreover, the average salary of specialized labor in a car plant in Poland, for example, is US$ 7.00 per hour, while in Germany it is US$ 45.00.

Trade unions are growing increasingly concerned that West European jobs in car making are vanishing. They know that resisting change means to destroy their jobs. For many economists the use of labor in the East provided a major comparative advantage to western companies to compete in world markets (Barysch, 2006). The EU15 members are better prepared for globalization, which gives them a chance to continue investing and generating jobs. For many economists, labor flexibility is making Germany the leader in economic recovery in the European Union. In Germany, 16% of the companies expect to hire more people in 2006 as compared to 10% in 2005, and 17% plan to cut jobs as compared to 28% in the previous year (Walker, 2006).

Investment, job generation and industrial relations

The EU8 members, in general, are maintaining a favorable attitude towards foreign investment. The rate of investment may decline in times to come. However, for the next 5 to 8 years, it will stand at high levels. The following sections of this paper provide an overview of the economic situation and the industrial relations scenario in the EU8 countries.

Estonia - There are differences among the EU8 countries. Estonia’s competitiveness, for instance – as the result of a combination of technology, quality of public institutions, and the macroeconomic environment -, has ranked 20th among 10 countries analyzed by the World Economic Forum. With this ranking, Estonia is the most competitive of the EU8 members. The Estonian labor force is skilled and well educated. There are 14 universities, 19 college-level and 114 technical secondary-level institutions. This is a superb situation when one considers that Estonia is a small country (1.3 million people), with a labor force of only 1,000 people.

Employers, however, are not fully satisfied with the present level of skills. Leaders of trade unions and employer associations recognize the need to increase enrollment in vocational schools. Funds for vocational education more than doubled during the last 10 years. In spite of that, this investment is insufficient. In a social pact of sorts, trade unions, employer associations and governments agreed to reform the vocational system and to use foreign specialized workers as temporary means to relieve the shortage of qualified personnel. Funds for this type of education will increase 1.8 times more than for general education.

The Estonian Confederation of Industry and Employers and the Estonian Association of Small Business mainly represent Management. The Association of Estonian Trade Unions (EAKL) and the Estonian Employee Unions’ Confederation (TALO) represent labor. EAKL and TALO together represent about 14% of the labor force. The Estonian Employers Confederation (ETTK) is the only employers´ centralized class entity. The number of trade union members is declining and the number of employer organization members is increasing (EIRO, 2004a).

Trade unions, in general, tend to take a cooperative approach to industrial relations. Although Estonia has a very detailed labor law approved in 1992 (revised in 2004) – the Employment Contracts Act – the country has no labor restrictions in the Constitution.

Most of Estonia’s regulations are in the Employment Contract Act, Holidays Act, Wages Act, Working and Rest Time Act, and Labor Disputes Resolution Act. These acts allow for a variety of labor contract modalities (long-term, part-time, and fixed-term. Working time is of 8 hours a day, 40 hours per week. Annual vacations are of 28 days. Conciliation committees or labor Courts resolve labor disputes.

Most such disputes are resolved though conciliation committees formed by representatives of the Estonian Employers´ Confederation (ETTK) and the Confederation of Estonian Trade Unions (EAKL). In addition, there are public conciliators at the national and local level.

If an agreement is not reached through negotiation (conflict of interests), the parties have the possibility, established in the Collective Labor Dispute Resolution Act, to request the intervention of the parties’ conciliation committees or the public conciliator. Disputes arising from the performance of a collective agreement (conflicts of rights) are resolved pursuant to the procedure prescribed in the collective agreement and in accordance with the Collective Labor Dispute Resolution Act, which include the conciliation committees and the Courts. Individual labor disputes are resolved in accordance with the Individual Labor Disputes Resolution Act (1996) which includes public conciliators and the Courts.

In Estonia, the incidence of labor disputes is very low. During the period of 1995-2005, there were only 300 cases submitted to public conciliation. About 80% were disputes over interests and 20% conflicts of rights. In 2004, Estonia had only 20 cases of labor disputes (Philips and Eamets, 2005).

Lithuania - The population of Lithuania (3.6 million) is almost three times larger than Estonia’s. The economy is growing at a fast pace - 6.5% per year. Politically, the country experienced crises when President Rolandas Paksas was removed from office, following impeachment in 2004. The country has a well-educated population. About 45% of youths are in university. The labor force has a reasonable level of skills and high motivation to work.

Most of Lithuania’s regulations are in the new Labor Code approved in 2002. This code regulates collective bargaining, which can be conducted on the national, sectorial or business levels. Conciliation committees or arbitration resolves labor disputes. Working hours are 8 hours a day and 40 hours per week. Annual vacations are of 28 days.

National, sectorial and territorial collective bargaining takes place under the supervision of the Ministry of Social Security and Labor. Collective bargaining with companies is done without supervision and carried out directly by the parties. So far, no national, sectorial or territorial agreement has been signed. One estimates that agreements with companies reached 1,500 in 2005.

Most of the national discussions take place in the Tripartite Council of the Republic of Lithuania (LRTT). Recently, LRTT approved several flexibility measures in the area of work time, particularly for part-time contracts. There are two main employer organizations - the Lithuanian Confederation of Industrialists - LPK (for large companies) and the Lithuanian Business Employers Confederation - LVDK (for small and medium size companies).

On the labor hand, the Lithuanian Trade Union Confederation (LPSK) congregates 26 sectorial organizations with over 100,000 members. Most of its actions relate to macro issues. Lithuanian wages are among the lowest of the EU8 countries. In a petition to the Prime Minister, the LPSK insisted on reviewing the national economic and social policy in order to meet the needs of the poorest individuals. Collective bargaining prevails at the local and company levels.

According to the Labor Code, conciliation committees, arbitration, or third party Courts (inoperable in practice) settle collective disputes. Conciliation committees are mandatory, whereas arbitration and third party Courts are voluntary, pursuant to the provisions of the collective agreements. There is no mediation institution in Lithuania, although the Labor Code mentions the procedures.

Lithuania has had a very low level of labor conflicts. There was not a single conflict in the period 2000-2004. Few national disputes were registered in recent times. One involved education professionals in the public sector. In 2005, workers in the health sector threatened to go on strike. (Blazienè, 2005).

Latvia - Latvia is one of the fastest growing countries of the EU8 members. Since 2000, the average annual GDP growth in Latvia was 7.7%. In 2004, GDP increased even more, by 8.5%. Moreover, in 2005, it was 10.1% (Ministry of Economics, 2005). The population is small, about 2.3 million people, but the level of education is relatively high. The largest part of the labor force has 16 or more years of schooling (medium level).

While Latvian workers are competitive in the labor market, employers are beginning to face labor force shortages due to increasing emigration. One estimates that about 50,000 Latvians are working in other EU member states, particularly in Ireland and the United Kingdom. The main reasons for emigration are low salaries and the search for better opportunities for workers and their children. Emigration has forced increases of salaries. In foreign countries, workers are willing to work for lower salaries but, even so, income is higher than in Latvia (EIRO, 2005b).

The labor area is regulated by a large, complex and extensive set of laws such as the Labor Code approved in 2002, the Labor Protection Law (2002), the Labor Disputes Law (2003), the Law on Strikes (2002), the State Labor Inspection Law (2002), the Law on Trade Unions (2003), the Law on Employer Organizations (2003) the Law on Protection of Employees in case of Employer Insolvency (2003), the Support for the Unemployed Law (2002), and the Law on Information for Employees (2002).

Latvia belongs to the Roman-German legal system that is characterized by strict laws and rules as a source of labor regulations. Collective bargaining occurs according to this law. Labor disputes are settled by conciliation committees or arbitration. Judicial decisions, which are rare, cannot be tapped as a source for labor regulation in general.

In practice, collective bargaining is limited to mostly large companies, as well as state and local government organizations. On the worker side, Latvia has the Free Trade Union Confederation (LBAS) while employers are represented by the Latvian Employers Confederation (LDDK). These organizations limit their participation to tripartite arrangements at the national level. Company bargaining is conducted by local organizations affiliated to national ones. The most active trade unions are in the public sector and in healthcare, and led by the Latvian Nurses Union (LMA).

Working hours are 8 hours a day and 40 hours per week. Annual vacation is of 4 weeks. Employer associations are looking to a tripartite agreement to reduce the vacation period and increase weekly working hours. Trade unions, however, argue the Latvians work much more than the legally stipulated time and are even willing to cancel vacation altogether to fulfill work commitments. In some sectors, such as in retailing, they work on holidays and weekends. In addition, on individual bases, Latvians agree with their employers to establish flexible working time arrangements. There are no specific regulations on this matter.

The country has a National Tripartite Cooperation Council (NTCC) to ensure the collaboration of government, employer organizations and trade unions. All legislative acts in the labor area are prepared in close collaboration with the NTCC. The law establishes strict regulations for large-scale dismissals.

According to the Labor Disputes Law, labor disputes are classified either as individual disputes over rights, collective disputes over rights, or collective disputes over interests. Disputes over rights may arise in the process of executing, modifying, or terminating a collective agreement, or in applying or interpreting norms or legal acts, or collective agreements on working regulations. Disputes of interests may arise in the process of collective negotiations when establishing new working conditions or employment rules. Disputes of interests must be solved pursuant to the norms of the existing collective agreement. If there is no provision in this field, or the collective agreement does not exist, then conflicts must be resolved by the conciliation method or arbitration. The parties involved in disputes must submit the case, initially, to the reconciliation committees. Decisions of these committees are binding. Data on the number of disputes is not available. Nevertheless, Latvia analysts consider the incidence rate very low (Karnite, 2005).

Slovakia - After 42 years of communist rule, Slovakia went through political reform when Vaclav Havel became President of Czechoslovakia in 1989. However, by 1991, the Czech and Slovak political leaders started discussing whether the two republics should combine. Following the 1992 election, it was decided to create two separate countries. The Republic of Slovakia came into existence on January 1, 1993. Populist Vladmir Merciar, who served 3 times as Slovakia’s Prime Minister, exhibited increasingly authoritarian behavior and was cited as the reason why Slovakia was eliminated as a candidate for admission to the EU. Therefore, the country experienced a very low influx of direct foreign investment. In 1998, Mikulás Dzurinda was elected and, with tough economic measures, was able to open the economy and attract investment.

Slovakia has a population of 5.4 million with a labor force of 2.3 million. The country has experienced one of the lowest economic growth rates (3.7% in 2005). It is interesting to notice that Slovakia is considered a reform star in Eastern Europe, with its flat tax innovation, currency stability, privatization program, labor flexibilization, and a solid pension system, reformed in 2004. These factors have attracted carmakers from Western Europe.

The World Bank named Slovakia the world’s top reformer for improving the investment climate in the period 2000-2004, thus joining the ranking of the top 20 economies that most facilitate doing business. The country’s low cost, in combination with its skilled labor force, low taxes, a liberal labor code, and a favorable geographical location helped it become one of Europe’s favorite investment destinations (World Bank 2005).

Slovakia’s workforce has a strong tradition in engineering and mechanical production. Most workers are highly educated and technically skilled, particularly, in heavy industry. Companies usually praise the motivation and abilities of younger workers who also reasonably master languages and computer skills. About 85% of the people, aged 25-64 have, at least, high-school level. Slovaks achieved very high scores in mathematics and sciences in student evaluations (State Department, 2005), and, yet, Slovaks’ average income is only about 13% (???) of the Germans’.

The country, however, has the second highest unemployment rate (11.5%), after Poland (18%). Good macroeconomic, but poor social conditions have resulted in people’s discontent with government. According to the Public Opinion Research Institute of the Statistical Office of the Slovak Republic, 82% of the people listed unemployment as the most serious problem of the country, followed by healthcare (69%).

As the result of cuts in public services and higher unemployment, voters elected a socialist government in June 2006, which promised to review reforms. In the labor area, the new Prime Minister Robert Fico, of the Smer Party, will be called to live up to commitments made in exchange for support of the trade unions. The first such commitment will probably be modifications to the country’s Labor Code, which has turned Slovakia into one of the most flexible labor forces in the European Union.

However, good economic reforms seldom create immediate political support. Post-communist era voters seem to have short memories and short fuses. Frustration over unemployment and the lack of participation in economic life largely explains the re-emergence of left-wing governments, and not only in Slovakia. The prevailing political argument is that people have grown tired of liberal reforms linked to globalization and international competition.

Slovakia has stood out for its fast growing (about 5% per year) economically active population. Passive labor market policies prevailed until 2002. About 57% of the unemployed depended on social assistance. An ineffective social system prevailed, which lacked the means to foster entrepreneurship. The reform of the Labor Code and the Social Security System, in 2003, aimed at reducing these distortions. The retirement age increased from 60 years for men and 57 for women to 62 years for both genders.

The Labor Code (reformed in 2002) is the main source of regulation in Slovakia. This law provides rules for several types of contracts. Employers are able to choose among several different types of labor contracts depending on their requirements: regular employment contracts, part-time contracts, on-the-job performance agreements with students, trial periods, fixed term contracts, work at home arrangements, temporary jobs, etc. Most of the special contracts have a limited term while employers are given the right to extend them without any legal justification requirement. Overtime allowance is for 400 hours per year (previously, 150 hours), depending on agreement provisions between employers and employees. Termination of employment requires payment of two monthly salaries. For employees who have worked in the same company for more than 5 years, payment is 3 times the average salary (EIRO, 2003a).

Collective redundancies are limited and strictly regulated. Working hours are fixed by law at 8 hours per day and 40 hours per week, with compensation provisions set forth in collective agreements. Annual vacation is of 4 weeks. In 2003, the government abolished the Tripartite Arrangement which resulted in ongoing, wearisome and little effective discussions among the three parties. Considered in its entirety, the Labor Code has made Slovakia one of the most liberal countries in Europe, allowing layoffs to occur in synchrony with economic cycles.

Sectorial negotiations (46 agreements) are the main source of labor contracts. About 37% of all companies are subject to such contracts. In addition, company agreements are common. About 850 agreements with companies were concluded in 2005. Civil servants can also negotiate at the local level. Legal working hours are 8 per day and 40 per week. The average total weekly work hours collectively agreed upon are 39.73 hours.

The Federation of Employer Associations (AZZZ), which was the only high-level organization to be spun off in 2004 into the National Union of Employers (RUZ). About 50% of the members of AZZZ joined RUZ, which comprises 10 employer associations and 7 individual big and strong private companies, employing about 270,000 people (EIRO, 2004b). This has created a problem for the employers’ representation in the tripartite bodies of Slovakia such as, for example, the Economic and Social Concentration Council (RHSD) that has responsibility to undertake negotiations on key national labor issues (minimum wage, working hours, rest periods, health and safety, etc.). In the labor area, the leading organization is the Confederation of Trade Unions (KOZ).

About 80% of the collective bargaining takes place at the company level. Strikes are relatively rare in Slovakia. The last significant stoppage was the railway workers´ strike in 2003. There have also been strikes in the public sector.

The Collective Bargaining Act governs the resolution of labor disputes. Slovakia makes a distinction between disputes over interests and disputes over rights. Disputes over interests dominate at the sectorial level. Disputes over interests are also common at the company level. Most disputes over rights occur at the company level. During the period 2000-05, the majority of collective conflicts concerned disputes over interests.

Mediation and arbitration are used to resolve disputes. Most collective disputes are settled with the help of mediators. Mediation is a necessary step to take prior to resorting to arbitration, strike or lockout. Regional Courts have the competence to decide on the legality of strikes or lockouts. When an arbitrator decision is not accepted by any given party, an appeal can be brought before a civil Court.

The number of collective disputes has been very small. In 2004, the Ministry of Labor registered only 28 cases (Cziria, 2005).

Hungary – The Hungarian economy has been downgraded as the result of deterioration of the country’s finances and quickly rising debt, albeit fiscal consolidation through raising taxes seems unlikely to succeed. The Hungarian economy suffers from a painful hangover following years of overspending. Joining the European Union in 2004 posed new problems for the governing left-liberal coalition made up of the Hungarian Socialist Party (MSZP) and its junior partner, the Alliance of Free Democrats (SZDSZ). The Alliance of Young Democrats-Hungarian Civic Party (FIDESZ), which is the major right-wing opposition party, demanded more state protection and restoration of government subsidies in many areas, as well as the decrease in utility and medicine prices. This campaign helped the opposition win the elections for representatives to the European Parliament in June 2004. In August, The Hungarian Prime Minister, Peter Medgyessy, resigned, making room for a more populist government under the leadership of Prime Minister Ferenc Gyucsány. The new government put side several costly and risky reforms implemented in 2002, such as the healthcare reform and reorganization of public administration.

The distance between the Hungarian and the EU economies is colossal. Hungarian GDP per capita is US$ 15,500 against US$ 28,100 in the European Union. To close this gap requires a 10% increase in exporting capacity and an increase in the labor market activity rate from currently 57% to 60%, which implies the creation of 200,000 jobs (EIRO, 2005c)

According to the Hungarian Labor Code (1992 and amended in 2004), working hours are 8 per day and 40 per week. However, company agreements have provisions for monetary compensation in case of overtime work. Overtime is limited to 144 hours per calendar year, or a maximum of 200 hours if otherwise stipulated in the collective agreement. As in most eastern countries, overtime work without extra pay is quite common.

The vacation period is of 20 workdays per year. However, it increases to (a) 21 days if the employee is over 25 years of age; (b) 22 days if the employee is over 28 years of age; (c) 23 days if the employee is over 31 years of age; (d) 24 days if the employee is over 33 years of age; (e) 25 days if the employee is over 35 years of age; (f) 26 days if the employee is over 37 years of age; (g) 27 days if the employee is over 39 years of age; (h) 28 days if the employee is over 41 years of age; (i) 29 days if the employee is over 43 years of age; (j) 30 days if the employee is over 45 years of age.

Collective bargaining is mostly done locally. In 2004, there were 15 sectorial agreements and 3,293 company contracts. Benchmarks for ages are negotiated with a tripartite body - the National Interest Reconciliation Council (OÉT), which in 2004 recommended a 7% to 8% wage increase. Collective agreements at the company level seldom have provisions concerning wage increases. They tend to be limited to other working conditions. Out of 3,293 contracts signed in 2004, only 390 had specific clauses on wage increases. Disputes originated from the collective bargaining procedure are settled by the parties themselves - through conciliation or with the help of mediation or arbitration. The Government provides mediation services through the Interest Conciliation Council. Legal disputes are decided by the Courts.

According to the Labor Code, termination of an employment relationship requires employers to provide an explanation. In the event of disagreement, the decision on giving notice must be justified by the employer. The period of notice is of at least 30 days, and may not exceed one year. The 30-day notice period is extended by (a) five days after three years of employment; (b) 15 days after five years of employment; (c) 20 days after eight years of employment; (d) 25 days after ten years of employment (e) 30 days after 15 years of employment; (f) 40 days after 18 years of employment; and (g) 60 days after 20 years of employment.

Employees are entitled to severance pay according to the following criteria: (a) one month's average wage for a minimum of three years; (b) two months' average wage for a minimum of five years; (c) three months' average wage for a minimum of ten years; (d) four months' average wage for a minimum of 15 years; (e) five months' average wage for a minimum of 20 years; (f) six months' average wage for a minimum of 25 years.

The new Labor Code (2004) allows enough flexibility for working time. Unions are entitled to collective bargaining if they have more than 25% of the employees as effective members. Union density has been declining. It today is at 16%, down from 19% in 2001. About 33% of workers report trade union presence at their workplace, down from 37% in 2001. Strikes have been rare, particularly in the private sector.

In 2004. The Economic and Social Council was established to discuss major programs at the national level in the area of labor and other economic issues. Employer and employee organizations, for different reasons, are demanding deep changes in the Labor Code. Labor lawyers equally argue that the many changes introduced between 1992 and 2004 negatively affected coherence of the law, making the Code difficult to apply by small and medium companies and to adapt Hungarian laws to the needs of the globalized economy. The present Code was designed for the classical "Fordist" manufacturing model. There is a need to introduce rules for "independence" and "confidentiality". In short, the new law should take into account the widespread use of "atypical work". The principles of "flex security" should orient the new Code (EIRO, 2005d).

Hungarian law recognizes conflicts of interests and conflicts of rights. For the former, the country uses conciliation, mediation and arbitration. In 1996, a national tripartite body set up the Labor Mediation and Arbitration Service. The labor Courts have exclusive authority to resolve conflicts of rights. There have been few conflicts. At the end of the 1990s, for a labor force of about 5 million people, Hungary had about 10,000 labor disputes. After 2000, the labor Courts gained competence to resolve cases of social security and disputes increased to 20,000 (Tóth and Neumann, 2005b).

Poland - Poland is the largest of the newcomers to the European Union, with a population of about 40 million. In the first quarter of 2006, the country grew faster than expected at a rate of 5.2%, exceeding the 3.3% rate of 2005. It is the fifth most attractive country for international corporations, after China, India, the Czech Republic and Singapore. The main attractions are low operating costs, a qualified workforce and a favorable investment climate. Qualified labor is available not only in Warsaw but also in the interior. The Microsoft Innovation Center, for instance, located in Poznan was set up in cooperation with the Poznan University of Technology. This project involves scientists, entrepreneurs, programmers, IT specialists, students and the local government. Among young workers, language proficiency is also high.

Poland has a long tradition of technical education. In 2005, the country had 5,801 vocational schools in operation, which assisted more than 800,000 students (Eurydice Unit, 2005). These schools prepare students for work in blue-collar and equivalent occupations. The period of instruction varies according to the occupation. For most occupations, the duration is two and a half to three years. There are two forms of vocational education. The most popular is based on an employment contract between the employer and the young worker. The employer is responsible for providing training on company premises or at a specialized school. The young worker is paid for his/her work. Under certain circumstances, employers can receive a refund of the wages paid to young workers, along with the respective social security charges.

The other form is practiced by the schools themselves, specifically, when the employer is unable to provide the training facilities. In 2002, the requirement for on-the-job training was imposed for all workers under the age of 18. The signing of an agreement between the Government and the Federation of Polish Employers in 2003 created a better basis for the future development of vocational education in Poland.

In 2005, Poland attracted 79 new investment projects in the electronics, automotive, chemical, heavy machining, food and services industries, which are expected to result in about 44,000 direct jobs (Ratajczyk, 2006).

Poland has become a modern and prosperous country. Exports rose from US$ 61 billion to US$ 95 billion in the short period 2003-2005.

Polish analysts say there are two "Polands". One is the Poland of scrappy entrepreneurs; hardworking, well-educated factory hands, in combination with eager foreign investors who have poured about US$ 14 billion into the country in the last 15 years. The other is a quasi-dysfunctional political system grafted onto a communist-era welfare state and a happy bureaucracy of a bad public administration system (Economist, 2006d). The cost of setting up a firm, for example, is equal to 22% of GDP per capita and takes 322 days, against an average of 13% and 252 days in the rest of the EU8 countries. As a reminiscence of communist times, the public sector is fat and employs about 30% of the employed population (Central Statistical Office, 2006).

The main problem of Poland is the extremely high unemployment rate (18%). Youth unemployment runs at 40%. The number of jobless who lost their right to receive unemployment benefits has increased. In 2004, about 85% of the jobless were in this situation due to long unemployment periods (Ministry of the Economy and Labor, 2004). This condition dramatically raised the risk of their joining the ranks of the poor.

With better economic performance in the first quarter of 2006, unemployment will probably decrease a little. Nevertheless, it will be the number one problem for the population. With a labor force of about 17 million, Poland had 3 million unemployed people in the first quarter of 2006. Compared to 2005, data showed a reduction of 230,000 people. This scenario may reverse a strong trend towards emigration. Since 2004, about 200,000 Poles have gone to Ireland and 500,000 to Britain. The main reason is the shortage of jobs at home. The big concern is that the outflow will deprive the country of its best brains.

Salaries are low but indirect costs are high in Poland. Pension and other social costs add up to 42%, the third-highest level in the industrialized world.

With the amendment of 2002, the Polish Labor Code (1992) became less rigid. The unions affiliated to the All-Poland Alliance of Trade Unions (OPZZ) gave broader support to the changes as compared to the Independent and Self-Governing Trade Union Solidarnosc (NSZZ Solidarnosc), which opposed the amendment.

The new Labor Code (2002) allows for agreements to be concluded with companies facing financial difficulties, which temporarily suspend the application of provisions of 'in-house' instruments such as collective agreements, compensation rules, or work bylaws (all of which are considered 'labor law instruments' ).

Such temporary suspension does not apply to the Labor Code. The possibility of suspension only applies to provisions that grant employees privileges beyond what is required by the Labor Code, i.e., provisions as set forth in relevant collective agreements and/or employment contracts. The Act makes it clear, however, that such agreements may not reduce pay below the minimum wage level, and that they may not modify the rates for additional compensation (e.g. for overtime work) set forth in the Labor Code.

The problem is that trade union density is low in Poland (14%), making it difficult to negotiate new agreements in times of difficulties. To deal with this problem, the legislator has introduce 'via the back door' a new industrial relations institution, providing that, in non-unionized employment situations, any agreement concerning the suspension of collective agreements and other labor law rules can be made with the endorsement of relevant 'district committees for social dialogue', whose members include union representatives. These committees play a pivotal role in any agreements to suspend labor law provisions.

However, many businesses and trade unions routinely violate labor laws in Poland. Under these circumstances, limited participation of the SME sector in these agreements can be expected. This has been the result of that change. Trade unions have also had difficulties to appoint employee representatives and to register the relevant agreements with the State Labor Inspection Authority and the district committees.

On the Management side, the Confederation of Polish Employers, established in 1989, is the largest employer representation, which encompasses 55 organizations congregating 5,000 companies, ranging from small, family-run businesses to the largest companies in the country. Representation is also effected by the Polish Confederation of Private Employers Lewiatan (PKPP Lewiatan), founded in 1999. This confederation represents the employers in European Union institutions. On the Labor side, the National Committee of Independent Self-Governing Trade Unions - Solidaenosc (NSZZ), established based on the Gdansk worker protests in the 1980’s, is the main organization, and there is also the All-Poland Alliance of Trade Unions (OPZZ).

Poland has a Tripartite Committee for social and economic issues, to which parties have presented a variety of proposals, including changes to the Labor Code. Labor disputes are resolved according to the Law on the Solution of Collective Bargaining Disputes, which establishes mediation and arbitration for issues under negotiation, and arbitration and the Courts for agreed upon issues concerning collective contracts or when foreseen in the laws.

In Poland, the law requires both the employer and the employee to undertake efforts to resolve labor disputes in an amicable manner. Before going to Court, employees have the right to demand a special conciliation committee hear their case, provided there is such a committee at the workplace. The employer and the local trade union jointly call the conciliation session. If no union is present at the workplace, the employer calls the session, with the approval of the employees - although the law does not specify how to obtain such approval (EIRO, 2003b).

The number of disputes has been very small. In 2003, there were 165 collective cases. Before cases are presented in Court, disputes are submitted pursuant to a pre-court procedure, involving workplace conciliation and mediation or a collegiate of arbitrators. Most collective disputes were resolved with the help of mediators (Towalski, 2005).

The Czech Republic - The Czech Republic is a landlocked country with a population of about 10 million people and a per capita income of US$ 19,500 (at purchase power parity). The country is growing at a rate of 6% a year. In the first quarter of 2006, industrial production became very dynamic (13% more than in 2005), especially due to accelerated production of transportation, electrical and optical equipment, as well as basic metals. New order volumes during the first quarter of 2006 were higher than in 2005, particularly, for motor vehicles (+42%), chemical products (+36%), machinery and equipment (+34%), and radio, TV and communication equipment (31%).

Compared to 2005, in the first quarter of 2006, industrial production increased for consumer durables (+37%), capital goods (+31%), intermediate goods (+11%), non-durable consumer goods (+4%) and energy (+3%). Direct export sales of industrial companies increased by 16%, while foreign company sales grew 26%. In that period, there were 1,971 foreign-controlled companies in the Czech Republic, directly employing 470,000 workers. Labor productivity went up by 13% - more than average monthly wages (Czech Statistical Office, 2006a).

Unemployment in 2005 was 8.8%. It is expected to decrease in 2006. Salaries increased 4% in real terms from 2005 to the first quarter of 2006 (Czech Statistical Office, 2006b). The quality of labor in the Czech Republic is relatively high. About 14% of employees have university degrees, 36% completed senior high school, including vocational courses, and 43% have junior high school diplomas, whereas 6% completed only primary school.

The Czech Labor Code was approved in 1992 and revised in 2002. Hours of work are 8 per day and 40 per week. Overtime may not exceed 150 hours per year, although the local authority can authorize longer periods. Annual vacation varies from 4 to 8 weeks depending on the occupation.

Dismissals are very expensive. Compensation is generally calculated based on two months’ salary, on average. Notice periods are also long. In the Czech Republic, the notice period for an employee is generally two months. For the employer, the notice period may be either two or three months, depending on the reason for employment termination.

Collective disputes are resolved with the help of mediators and arbitrators. Courts can review arbitrators´ decisions. If parties do not come to an agreement on the choice of an arbitrator, the Ministry of Labor and Social Affairs will appoint one. Individual disputes regarding a collective agreement are settled in the Courts under civil law procedures. The number of labor disputes is small. In 2004, for example, there were only 8 requests for mediators and 6 for arbitrators (Hála and Kroupa, 2005).

Most workers are members of unions affiliated with the Czech-Moravian Chamber of Trade Unions (CMKOS). The CMKOS is a democratically oriented, republic-wide umbrella organization for branch unions. On the Management side, the main organization is the Confederation of Industry and Transport of the Czech Republic.

Slovenia - Slovenia is a small country (2 million people), but is developing quickly. In March 2006, there were 814,000 people working, of which 731,000 were employed and 83,000 self-employed. About 83,000 were unemployed (10.1%). The country is considered a model of economic success and stability. Slovenia has good infrastructure and an excellent central location. The country enjoys the highest GDP per capita of the EU8 countries.

However, the country faces growing challenges. Much of the economy remains under state control and foreign direct investment is one of the lowest in the EU on a per capita basis. Taxes are relatively high, the labor market is often viewed as inflexible, and legacy industries are losing sales to more competitive companies in China, India, and elsewhere. In late 2005, the government's new Committee for Economic Reforms was elevated to cabinet-level status. The Committee's program includes plans for lowering the tax burden, privatizing state-controlled companies, improving labor market flexibility, and increasing government efficiency.

The quality of the labor force is very high. Forty percent work in industry, 55% in commerce and services, and only 5% in agriculture. Industrial workers are concentrated in ferrous metallurgy and aluminum products, lead and zinc smelting; electronics (including military electronics), trucks, electric power equipment, wood products, textiles, chemicals, and machine tools.

Slovenia is particularly concerned with continued education. Albeit a small country, Slovenia has more than 300 programs in the areas of general education, general needs and leisure, vocational training specialization, and vocational training. By attending these programs, participants obtain a qualification for employment or broader general education. These programs are attended by 326,000 people, in a labor force of about 960,000 workers (Slovenia Statistical Office, 2006).

Collective bargaining is poorly developed but agreements have been very generous in terms of benefits. In 2004 overall, 26 sectorial agreements were concluded or amended because of tripartite agreement on pay policy in the private sector for the period 2004-05, which is widely regarded as a major improvement to the system of wage bargaining in Slovenia. Among the benefits agreed to, workers have the right to paid leave (for educational courses and exams) and reimbursement of costs for education in the employer’s interest at all levels up to a doctoral degree. Workers who decide to study on their own initiative have the right to paid and unpaid leave (EIRO, 2005e).

According to the Labor Code, working hours may not exceed 8 per day and 40 per week. Overtime cannot exceed 20 hours per week and 180 per year. Upon termination of an employment relationship, the employer must notify the reason for dismissal to the employee. If requested by the worker, the employer must inform the trade union, which may oppose the termination. In case of impasse, the Courts are called on to resolve the problem. The period of notice for an employee who has worked less than 5 years in a company is 30 days or 45, 75 and 150 if the employee worked in the company at least 5, 15 or 25 years. Severance payment is set at 20% of the average monthly wage for a worker with less than 5 years with a company, or 25% for a period of 5 to15 years, and 33% for more than 25 years. Disputes of interests are settled by arbitration or, if that procedure fails, in labor Court.

A number of changes affecting the labor area were introduced to legislation in 2004 such as, for example, the Equal Treatment Act, the Act on Rehabilitation and Employment of Disabled People, new Personal and Corporate Income Tax Acts and new rules on health and safety requirements.

Disputes over the application of employment and labor laws are resolved in labor Courts. The government covers most of the costs involved. However, before taking issues to Court, a pre-court conciliation procedure must be attempted. The collective agreements may establish procedures for individual and collective disputes. The Slovenian regulations also provide the Labor Inspectorate a wide range of competencies to intervene in cases of breaches of legal regulations. If an employer does not respond to a worker's claim within a certain time limit, either side may suggest intervention of a labor inspector for the purpose of mediation.

The law does not differentiate collective legal disputes from disputes over rights and disputes over interests. However, the law grants any formal or informal worker organization, which can prove that it legitimately represents the common interests of a group of workers, the right to initiate a collective labor dispute.

In Slovenia, arbitration and conciliation are solely regulated by collective agreements. Legislation requires that in disputes over the conclusion of a collective agreement, an arbitration council will decide on impasses. If necessary, the parties may choose arbitrators from lists submitted by the government. The majority collective agreements at company-level also include conciliation and arbitration. Most disputes are resolved through these procedures. Mediation has not been established in practice (EIRO, 2003b).


In conclusion, most of the EU8 countries show high rates of economic growth. With the exception of Slovenia, the EU8 have been able to attract companies from Europe, the United States, and Asia. Infrastructure is developing fast and overall living conditions of the people are improving. The quality of labor and low salaries have so far been the key factors in attracting foreign direct investment. In general, education has a good standard and is crucial to guarantee high labor productivity. Salaries are rising slowly. The difference in relation to Western Europe, however, remains enormous.

Labor institutions have a long way to go to reach the level of UE15 countries. Trade unions and employer organizations are emerging at a slow pace. Significant imbalance persists in working conditions between Eastern and Western Europe. Industry relocations occurred from west to east. In this sense, plants in Eastern Europe have played a strategic role in maintaining competitiveness of the respective parent companies in the West. To avoid further dislocation, Western European companies and trade unions are negotiating a series of new labor agreements, mostly aimed at lowering salaries and benefits.

However, it seems unrealistic to expect full convergence of salaries in the East and the West in the short run. Previous historical experience has shown this is a very slow process. Wage differentials between the nine European Community countries of 1973 and Greece, Portugal, and Spain exceeded several times over the differentials that existed among other Community members following the Treaty of Rome (Flanagan, 1993). Salary differences have decreased in the last 25 years but are still very pronounced, suggesting that present differences between East and West will diminish, but will remain high for a long time.

Even at a slow pace, the eventual convergence between East and West will be a painful process, particularly for the Western European countries. As a rule, the West expects a good life and full coverage against all risks at minimum cost. In fact, risk aversion seems to be the central feature in the largest European countries. Europeans tend to be more risk averse than Americans and, particularly, the Eastern Europeans. However, on both sides of the continent, the proportion of people who would like to have public jobs is quite high.

The 2006 French reaction against the first employment program was eloquent. Risk aversion was manifested in a very profound way. People expect a kind of protection that neither the companies nor the State can provide. There is conflict between workers who demand this kind of protection and companies in need of flexibility. The point is to protect workers and not to protect jobs. The lobby of insiders tends to retard the necessary changes in this field. On the opposite side, the existing tolerance and even enthusiasm of the eastern workers to work and earn a salary from a well-organized company may accelerate current plant migration in years to come. To the extent insiders keep on rejecting reforms, companies will keep on moving to Eastern Europe – and Asia and Latin America as well. Risk does not disappear just because the insiders do not like it.

However, integration in Europe will not materialize without careful treatment of the social dimension, especially the creation of new and solid institutions, particularly in the East. Furthermore, integration will require cooperation and social dialogue. These needs were anticipated a long time ago (Langewiesche and Aintila, 1997). If western companies keep on going east solely to save labor costs, a climate of distrust and confrontation is likely to ensue, which will stand in contradiction to social dialogue cultivated by westerners in Europe.

In the area of industrial relations, six trends seem to prevail in Eastern European countries. First, the continuing involvement of the State, primarily through tripartite arrangements. Second, worker organizations, although weak, are improving participation in national economic decisions. Third, employer organizations are still reluctant. Fourth, there is an embryonic regulation of the private sector. Fifth, collective bargaining is moving more and more toward the company level. Sixth, frustration over high unemployment and low salaries is creating a fertile culture for populist regimes, which may jeopardize the task of organizing institutions for a free market economy.

Many analysts see the insufficient labor market flexibility, as well as imperfections and regulations in other areas (housing market, transportation, infrastructure, capital markets, corporate governance, and legal framework) as important factors which may delay economic and job growth in the next few years (Svejnar, 2002).

Demographic problems must also be considered to anticipate transformations in the labor market and social security systems. The populations in the EU8 are aging before the countries are getting rich. Usually, fertility rates are higher in poorer countries. This is not the case in Eastern European countries. Fertility rates are very low (Table 1). In general, the region will face labor shortage in years to come. This phenomenon will operate as an additional force to press for higher wages and more benefits. The present competitive advantage of EU8 countries may be reduced.

In the medium term, the continuation of large-scale industrial dislocation will have consequences for emerging countries. Low labor costs, good education, high productivity, amicable labor relations, low level of labor conflict, simple conflict resolution systems, government subsidies, low taxation and geographical proximity, and a single economic block (European Union) are strong attractive forces for capital migration from Western to Eastern Europe. This may affect the present flux of capital from Europe to Latin America or even to Asia.

Taking Brazil as an example: Labor costs (including salaries and indirect costs) of specialized workers are similar to those in EU8 countries. However, other incentives are not available. The level of education is much lower than in the EU8 countries; productivity is limited; bureaucracy is complex; taxation and real interest rates are very high; and the long distance from Europe is a disadvantage.

This scenario places several challenges before emerging countries. Changes must be accelerated to place those countries at the competitive pole of the global economy. In the area of labor, hiring costs add up to 103.46% of nominal wages; the country has 2.5 million suits in its labor Courts; the average period to resolve a conflict is 7 years, while the level of informal work is at 60%. Altogether, these factors are not favorable for productive investments. No wonder most of the current foreign investment is directed to the speculative sector, mainly the public bond markets, which pay 10% in annual interest in real terms. In summary, competitive pressures from Eastern European countries, as well as from Asia, are clear signs of the need to transform speculative capitals to productive capitals and, hence, good quality employment opportunities. This requires urgent reforms in the areas of education, taxation, public administration and labor legislation of most emerging countries.


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