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Economic Outlook: (Un)employment Rate in the Czech Economy

The Czech labour market frequently faces criticism for not being flexible enough, ie that the workforce does not often migrate across regions or industries. In fact, however, international comparisons show that the Czech labour market operates very well. At present, the only EU country with a lower unemployment rate is Germany. The absolute employment, employment rate and economic activity rate (the proportion of workforce to the population aged 15-64) are currently the highest in the modern history of the Czech Republic.

As the data of the Czech Statistical Office indicate, net of seasonal effects, the unemployment rate decreased to 4.7%. Given that thanks to a rapid growth in the past quarters, the economy has likely exceeded its sustainable potential, the unemployment rate is lower than the actual structural unemployment rate as defined by the NAIRU (non-accelerating inflation rate of unemployment). Based on a model estimating Okun's law parameter for the Czech Republic (ie the relation between GDP and unemployment, or the output gap and the cyclical unemployment rate), it may be estimated that structural unemployment is currently running at around 5.5%. 

Structural unemployment may be further divided into frictional unemployment, ie short-term unemployment related to the regular movements on the labour market (seasonal dismissals and recruitment, intake of fresh graduates and trainees etc), and long-term unemployment. As Eurostat data showed, in the Czech Republic, long-term unemployment (people who have been unemployed for over a year) reached 2.5% last year, which constitutes about a half of structural unemployment. Very long-term unemployment (people who have been unemployed for over two years) amounted to 1.5%. In the EU as a whole, long-term unemployment constitutes 4.7%, with very long-term unemployment at 2.9%. Nevertheless, there are countries that the Czech Republic might draw inspiration from with respect to decreasing long-term unemployment even further. These are, for example, Sweden, Denmark or Austria. 

Another positive fact is that, in the long-term perspective, regional differences are gradually being erased on the labour market. The regional variation coefficient calculated using the data of the Ministry of the Labour and Social Affairs regarding the share of unemployed people in individual regions of the Czech Republic reached 0.30 last year, while ten years ago, this was 0.40. 

One of the main problems afflicting the Czech labour market is the “unemployment/inactivity trap” arising from the interaction of taxes imposed on work and the system of welfare benefits. If the tax burden is too high and the welfare system too generous, the motivation of an unemployed person to search for a job logically decreases. Considering certain combinations of a family type (by the number of children) and the salary paid, the Czech Republic fares rather poorly in the OECD or Eurostat international comparisons. Despite the overall positive assessment of the Czech labour market, it is apparent that instead of resting on laurels, there is still room for improvement.

David Marek, Chief Economits, Deloitte