When Mr. Ionescu returned from working in Italy to Romania, he thought he had found Eden. Big companies wooed him and promised a better salary than he received in Sicily, where he worked for about 7 years.

And Mr. Ionescu knew how to implement his skills as a plumber. In Italy, they didn’t earn very well – the market was flooded by Eastern Europeans, and life was not easy at all. Inflation was high – at the beginning of the year it was about 10%, although it decreased later.

In Romania, companies wanted to hire him. And it was not difficult for him to get a job with a better salary than in southern Italy.

In Romania, real wages turned positive (outpacing inflation) this spring thanks to a large increase in wages in the private sector, as shown by published report two days ago the research department of BCR.

In the public sector, wage growth remained lower than inflation, which is controlled by the BNR. “If we look at the growth of net wages and compare March 23 with October 23 (if you remove the effect of bonuses, 13th salary and so on), then the growth of the private sector is 15.2%, while that of the public sector is only 7 .7% is below the level of inflation.” , the quoted report says.

Wages rose amid “unusually high inflation, which fueled wage negotiations with a two-quarter gap,” BCR researchers also said.

Economic theory says that periods of high inflation are accompanied by low unemployment and vice versa; high unemployment is accompanied by low inflation – this is what the Phillips curve postulates.

Simply put, the more people with jobs, the more money in the system. More money in the system should mean higher inflation.

But in the late 1960s, Nobel laureate Milton Friedman showed that central banks could not rely on the wage-price trade-off by introducing inflation to reduce unemployment, because workers would notice and demand better wages.

Ultimately, he argued, rising inflation will outpace the job gains that occurred in the US in the 1970s. Also, the Phillips curve does not account for situations where both inflation and unemployment are low, as was the case in the first half of the pandemic 2020 .

Enter NAIRA

Returning to the report of the BCR researchers, they also evaluated a very important indicator: the average unemployment rate NAIRU (Non-accelerating inflation rate of unemployment) for Romania. This NAIRU is the level of unemployment that does not create inflationary pressures (and that comes close to structural unemployment in the economy).

According to the cited report, the average NAIRU for Romania is estimated at 6.1% (for the second quarter of 2023), which is above the average BIM unemployment rate of 5.5%.

When the unemployment rate is higher than the NAIRU, there will be upward pressure on inflation. Conversely, when the unemployment rate is lower than the NAIRU, there is upward pressure on inflation

The result, achieved by BCR economists, shows that the economy is operating above potential and there is upward pressure on inflation.

According to BCR economists, real GDP growth by 1 p.p. should increase the employment rate by approximately 0.43 p.p.

This year, the unemployment rate will increase slightly to 5.8%

The unemployment rate will rise slightly to 5.8% this year due to the slowing economy and worsening economic conditions. But the trend will change next year, and unemployment may drop to 5.6% at the end of 2024.

Also, their analysis shows that if GDP increases by 1 percentage point, unemployment falls by 0.12 percentage points.

Based on our assumptions for real GDP growth (2.1% y/y in 2023 and 4.2% y/y in 2024), our model shows that the unemployment rate will rise slightly to 5.8% this year due to the economic slowdown and worsening economic conditions. But the trend will change next year, and unemployment may drop to 5.6% at the end of 2024.

We believe that the NBR should be cautious in deciding on the first rate cut, lagging behind similar CEE central banks. We see the first key rate cut in mid-2024, the report added.