Industrial competitiveness and labour market transformation in Hungary: macroeconomic developments and empirical analysis

The paper explores how employment responded to changes in competitiveness in Hungary over the last few years. First, as a background, an account of the main economic and employment trends is given, and some insight into the relationship between unemployment and the quality of labour is also provided. The second part describes the empirical results of our research. Foreign capital played a decisive role in improving competitiveness and restructuring of the economy in general. The importance of foreign investment is also clear in terms of employment. Although inactivity is still very high in Hungary even compared to most other Central and East-European countries, FDI has certainly helped ease tensions on the labour market. Rapid devaluation of obsolete skills and increasing return to education might have also contributed to better performance in terms of competitiveness. Skill-biased technological development, introduced mainly by foreign enterprises, has played an important part in helping Hungary attain its present position. The results of our empirical research show that the employment level of the Hungarian manufacturing industries is only slightly and negatively correlated with change in market shares (our competitiveness indicator) during the second half of the 1990’s and the first few years of the new Millennium. We have, however, found strong evidence that change in revenues from sales is strongly correlated with the level of employment. This suggests that during this period Hungarian manufacturing had arrived at an expansive period of development. Though we know that in some industries, particularly in some firms, productivity increased very quickly, these (typically foreign owned firms) were counterbalanced by other “sleeping” market players.