High growth pays dividend in form of record low unemployment

The Labour and Social Affairs Minister Petr Necas said this weekend that if the government's public finance reforms are adopted, unemployment could fall below five percent. It's certainly not an unrealistic target - Czech unemployment dropped to 6.8 percent in April, the lowest figure since new calculation methods were adopted in 2004. The country's jobless data also compare favourably to its neighbours - booming Slovakia, for example, still has 16 percent unemployment and even the EU average is 8.2 percent. So who should receive the credit for these encouraging figures? That's a question we put to Tomas Sedlacek, chief economic strategist at CSOB bank.

"The one thing that we can really thank for our falling unemployment is our growth. The Czech Republic has really experienced a very long period of historically the biggest growth we've ever had. So whoever contributed to the increase of our GDP is to be thanked by the decrease in unemployment."

Analysts often point that there are lot of people in the Czech Republic working in the so-called "grey economy". Does that have an influence on the accuracy of these unemployment figures?

"Well, it's always very difficult to estimate the percentage who are actually working in the grey sector. We know for sure that there is a certain percentage of the Czech workforce employed in that area. However, when you look at the international comparisons, it is no larger than France or Germany. So there are reserves in that respect, but it is virtually impossible for any government to get completely rid of the grey sector. What helps, surely, is decreasing the social and tax contributions, which is something that this government will have to do, if it wants to keep its international reputation as a country where wages are competitive and low."

Labour and Social Affairs Minister Petr Necas says if his government's reforms are passed, then that too will have a positive impact on unemployment. He says it could fall to below five percent in the future. Is that really realistic?

"I think if we have a combination of factors, it is possible to see unemployment in the vicinity of five percent. We would need to sustain our growth, perhaps even help it a little bit. We would need to see significant improvement in our social security system, in terms of making it a little more difficult for those people that do not necessarily the social contributions to access them. And the third part is the reforms that we spoke of. I think if the government is successful, if it steers the country very well, then we could see unemployment around five percent."

All these figures together - record foreign direct investment, unemployment low and falling, real wages rising - will Czechs look back at this period in a few years and say those were the good old days of the Czech economy?

"That's a good question. I think we're living in good times. There's really very little social insecurity. We have the lowest number of relative poor in all of the OECD countries, and the wind is blowing in our direction, we have the wind in our backs so to speak, and everything seems to be quite easy. This is the ideal time for reforms, because we have a natural momentum - the economy has a velocity of its own. Ironically, however, it is politically most difficult to carry out these reforms at this moment because everything seems to be quite fine. So if we now use the Old Testament parable of seven fat years and seven years of famine - these are the seven fat years, and a wise governor should use these seven years and invest in the future. If we do that, then we don't need to look back and say - oh, those were the good old days. We can say - those were the days when we prepared ourselves for the future, we did well, and we're doing better than our neighbours."