At the crossroads

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162 act of 2010 allows students to leave compulsory education earlier (at age 16 instead of 18), and also decreases the age at which practical vocational training begins from 16 to 14. An agreement between the Government and the Hungarian Chamber of Commerce also introduced new fast-track vocational programmes for 86 occupations, which begin at age 14 and last only three years. They are supposed to have a much higher proportion of work-based training and prepare students better for the labour market, although some experts worry that that this will actually have a negative impact on the school leavers’ reading and learning skills (Bükki et al. 2011). In 2012, Slovakia similarly tried to force a larger proportion of students to stay in vocational training by making the entry into more general tracks conditional on a grade point average in lower secondary education. From 2014, an 8-grader would need a grade point average of at least 2 (on a scale from 1 to 5) to enter academic track in upper secondary education, and at least 2.75 even for the more general secondary technical schools (Cedefop 2013). Access to higher education in Hungary and the Czech Republic is also made more difficult by the recent decisions (2011/2012) to introduce tuition fees and reduce the proportion of state-funded places. In Hungary, the reduction of state funded places by almost 20 000 (from around 54 000 in 2010) is disproportionally targeted at general programmes in social sciences, in an effort to channel more students towards technical degrees.

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163 in the manufacturing discourages capable students from acquisition of vocational skills, but the cost of additional training investments and rising wages is likely to alienate investors who see East Central Europe primarily as a reservoir of cheap labour.

On the one hand, some degree of wage convergence appears to be almost inevitable in the long run. ECE’s success in international competition and constant benchmarking with the West European locations have made the workers in the region restless, and workforce shortages have added to the wage pressures. Given the demographic outlook of the region, it seems unlikely that the initial conditions of ample labour supply can be restored, and large-scale workforce imports are equally unlikely, if for no other reason than because of EU’s restrictive immigration policy.

On the other hand, large-scale investments in training, and production adjustments which would accommodate rising wages through a shift towards more skill-intensive activities are equally difficult to orchestrate. In spite of some encouraging signs, it is clear that the region lacks adequate organisation on the industry level which would compel all, or at least the majority of companies to contribute to systematic investments into skills. Competition among the firms, the threat of free riding, and the costs of training all discourage the private sector from greater involvement (Hancké 2012; Finegold & Soskice 1988), with the result that most such initiatives have remained limited to the largest and most successful firms.

More importantly, however, manufacturers in East Central Europe are loath to relinquish the local cost advantage, and there appears to be a large majority of firms which actually prefers low skilled but cheap workers over the higher skilled, more expensive ones, perhaps with the exception of a small segment of the labour force in the highest skill echelons. It is not difficult to imagine that cooperation problems of the kind noted above could be overcome in the same way the industry has overcome problems related to the organisation of suppliers – through hierarchical enterprise networks or by importing institutional superstructure from their home countries. On the margin, there is some evidence that the firms are perfectly able to cooperate when they see a common interest in doing so. In the Czech Republic, for instance, two large

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164 German suppliers recently solved the problem of shortage in a particular skill niche by jointly founding a post-graduate programme in automotive industry management at the nearby University of Liberec in Western Czech Republic. The programme was co-designed and the teaching staff trained by the German Chamber of Commerce and Industry from across the border in Dresden (Interview DHIUK CZ 2010), and co-funded by the Czech government. As we have seen, most of the governments in the region are more than eager to involve private actors in training activities, and most provide some form of subsidy for that purpose.

If there is underinvestment into skills then, the cause is more likely found not in the lack of tools, but in the lack of will on the part of companies for whom the region fulfils a different purpose. We have seen that in spite of the shortage scare of the mid-2000s, the crisis quickly turned industry’s attention back to cost considerations (Interview DIHK SK 2010, Interview CzechInvest:2010). Structurally, most of automotive employment in East Central Europe is concentrated in supplier firms – almost 70% compared to the EU 10 average of 40% - where labour costs constitute a much larger share of production costs than in final assembly (Šćepanović 2011). Changes in the occupational profiles of ECE workforce show little tendency towards an employment model that would rely predominantly on skills. On the contrary, between 1997 and 2010 the number of jobs in the category of semi-skilled plant operators grew twice as fast as the number of positions requiring skilled workers, engineers and technicians. As a consequence, the number of workers in occupations which require relatively little to no training accounted for around half of all employees in automotive industry in the late 2000s, compared to a little less than 40% in EU 9 and only 20% in Germany (Figure 5.6).

Equally worryingly, the EU 9 average actually obscures a great diversity of employment structure among the West European countries. Countries with their own manufacturing industries, such as France and Italy, are somewhat closer to the Germany type, with a larger share of skilled workers, and especially of engineers and technicians. Countries like Portugal, Spain and Belgium, on the other hand, where the industry is almost entirely foreign-owned,

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165 Figure 5.6 Composition of automotive workforce by occupation, 1997 and 2010²¹

follow a pattern more similar to East Central Europe, with a larger proportion of semi- and unskilled workers. This suggests that hyper-integrationist model of development might be limited by the multinationals’ desire to optimise division of labour within their production networks, which leads them to disregard the potential for local upgrading even if the required investments are not very large.

In the medium term, in spite of the growing dissatisfaction with skills and wages, the East Central European automotive complex is likely to remain highly competitive for a number of years. Wage costs in ECE are still at around one third of the West European levels, and the convergence is estimated to take between 20 and 70 years (PwC 2007; Bilbao-Ubillos &

Camino-Beldarrain 2008). The combination of prices and skills offered by the ECE labour markets is still among the best on offer in Europe. The “old” periphery in the European south, which attracted similar investments in the 1980s, has on average a much less educated workforce, and is still more expensive than East Central European region – although most recently the sharp internal devaluation and soaring unemployment seems to have brought an

21Categories based on 3-digit ISCO 88 classification. “Managers” include codes 110, 120, 130, “engineers and technicians” 210, 310, 220, “administrative and support staff” 230, 330, 240, 340, 410, 420, 510, 520,

“skilled and craft workers”700, 710, 720, 730 and 740, “semi-skilled workers” 800, 810, 820 and 830, and

“unskilled workers” 910 and 930.

28.6

15.7 33.5 43

14.3 33.2 38.3

42.8

30.9 25

34.6 25 12.5

15.4 11.9 14.1

22.5 17.6

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

ECE DE EU9 ECE DE EU9

1997 2010

Managers

Administrative and support staff Engineers and technicians Skilled and craft workers Semi-skilled workers Unskilled workers

Source: author’s calculations based on LFS, 3-year averages. Data for Poland only available since 2002

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166 uptick in automotive investments in Spain after years of gradual employment losses (ANE 2013c). However, it is precisely the example these countries which should worry the governments in ECE: in spite of being prime locations for automotive investment for many years, they experienced little upgrading of local production factors, and still depend heavily on low costs for their competitiveness.

These examples also make it all the more unclear whether it is at all possible to fully move towards skill-based production in the conditions of external dependence for capital and technology. What is clear is that it will demand a lot of commitment and coordination efforts by the governments, and that these countries will likely have to accept some loss of investment by firms for whom labour costs constitute a binding constraint. In that sense, the future of the employment model in East Central Europe may not be decided by majority of firms, but by a handful of key industry players, who have the power to influence direction of upgrading along the production chain. Some of them have already proven willing to enter into partnerships for skill development with local authorities, although the scale is still very limited – the larger task would be to use the influence and the hierarchical networks of these firms to promote training among a larger segment of suppliers. The good news is that a recent change of heart in European education planning could be a source of additional support for such partnerships.

Since the crisis started, soaring levels of youth unemployment have led even the European Commission, which has long insisted on expanding higher education as a path to knowledge economy, to call on the member states to take heed of the successful German model of dual vocational training, and promised additional EU-level funding for apprenticeships (EC 2012). In the following months, six EU member states, among which Slovakia, have signed a cooperation agreement with the German Ministry of Education to receive direct assistance in setting up vocational training systems in their countries (BMBF 2013).

While there is no guarantee that any of this will help the ECEs reach the wage, high-skill model, it is almost certain that doing nothing will push ever larger numbers of young people away from manufacturing employment. In the 1990s, manufacturing jobs at the newly

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167 arrived Western multinationals had been considered among the most attractive on the market, and the companies could afford to employ the workers wither higher skill and ability profiles than is absolutely necessary for the kind of jobs they performed. As the ECE economies recovered, however, equally appealing opportunities have opened up elsewhere – abroad, in higher education, and in the service sector. Higher education still carries an enormous wage premium in the region: wages of tertiary-educated employees are on average almost twice as high as those with only upper secondary education – between 73% in Poland and 111% in Hungary, compared to the OECD average of 52%, and the wage gap has only increased since 1997 (OECD 2009a). Even on the level of upper secondary education, graduates of general academic tracks earn on average more than their counterparts from vocational programmes, although they usually take somewhat longer to find the first job (Kogan et al. 2011). Even if on the macro-level the shift out of vocational tracks has been limited by the state policy, without individual-level incentives there is nothing to keep young people in local manufacturing trades.

An analysis conducted by the Czech National Institute for Vocational Training in 2002 already noted that more than 40% of recent graduates from technical schools worked in jobs and branches that had little or nothing to do with their educational background (Festová 2003) and this is all the more likely to happen if they go abroad (Kureková 2011).

Moreover, unless the firms are willing to offer more attractive employment prospects in manufacturing industries, government efforts to tailor education to the needs of investors can become politically explosive. This is especially true of the proposed reforms of higher education:

tuition fees and limits on university enrolment have been met with furore in both Czech Republic and Hungary. Financing is not the only thing that worries the students: plans of the Czech government to replace university senates by tripartite boards consisting of representatives of the government and businesses was immediately denounced by students and teachers alike as abolishment of university autonomy and the entryway for “economic lobbies”

into higher education (Velinger 2012).

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168 It also does not help that for the last twenty years the ECE states were actually urged by most international observers to expand general, and especially higher education, in order to meet the exigencies of the rising “knowledge economy”. EU’s Lisbon Agenda explicitly stipulates that by 2020 persons with higher education should account for at least 40% of the population of EU member states, and the same metric is used in the construction of EU Innovation Scoreboard the World Economic Forum Global Competitiveness Index. So far, Poland is the only country in the region which has made a clean break from the legacies of vocational training, with the general tracks accounting for close to 80% of secondary education, and more than 40% of recent cohorts enrolled at higher education institutions. For the same reasons, Poland, as well as Estonia, are often held up as bright examples of flexible educational systems in the region (e.g.

WB 2010; OECD 2011; see also Zahorska & Walczak, 2005). In these circumstances, it is no wonder that the efforts of other regional governments to hold on to the manufacturing skills are easily perceived as anachronistic, if not outright wasteful. The difficulty of building up a reliable system of cooperative training, and the perception of manufacturing as too competitive and unstable have even sown the seeds of doubts among the local vocational experts:

“Somebody should think, what should Slovakia really look like in 2020? Really, still only automobile and electronics? But these are very strongly cyclical industries, and we have nothing to counterbalance it [...] I am very sceptical about vocational education. I think we need to say [to the employers]: I am not making you your plant operators, I am giving you just general education and then it’s up to you. It’s a bit like the Irish model, the World Bank likes that. Of course it was not possible to do in Slovakia in the 1990s because Slovakia was an industrial country and you cannot come to a country which has the strongest VET-based system in Europe and say “you should forget these schools”. But now, after 20 years of decay, I would not be able to say what is better…”

(Interview ŠIOV 2011).

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169

CHAPTER VI