The chart below plots a set of indicators that, while uncommon, may help understand Poland’s economic development path. Ratios are indexed to 2002, the year Poland concluded EU accession negotiations. Data are own computations from AMECO datasets.

On the right axis, the chart plots the ratio of labour force in population, a proxy for the participation rate, its increase begun in 2012 partially explainable as population decreased during those years. Participation rate computed as labour force over 15 years of age was steadily increasing, the discrepancy between the two indicators reflecting longer term forecasts of population decline.

Also on the right axis, the ratio of labour-capital substitution to labour share of output depicts the trend in labour intensity of output. The numerator assumes values above (below) unity when labour and capital are substitutes (complementary).  Values below unity indicate a stage of development when technology leads growth, whereas values above unity imply industrial modernisation could still replace labour with capital machinery – the “engine of perpetual growth“.

The value was estimated at 0.99 in 2010 (same as in the EU) by the IMF and has since increased by 16% according to AMECO, an order of magnitude above the indicator’s growth in the EU. The substitutability between capital and labour implies Poland’s economic production is increasingly exploring economies in labour instead of strengthening its technological base as a source of competitiveness.

The observation is worrying as it implies the labour share of income shall decline as wages increase – it stands now 9 pp above the EU’s average (AMECO), steadily increasing from 2002. Investment in the Polish economy is slowing down even as the cost of labour compared with capital decreases. 

Net Fixed Capital Formation and the ratio of ULC to Capital (both plotted on the left hand axis) declined significantly after 2008, implying the economy is investing less than it should even as wages increased 250% since 2002.

Poland’s economy requires incresing capital investment to match the increasing substitutability of labour and capital. The upward trend in the participation rate further reduces the incentive to do so, particularly as intensive capital deepening has not improved productivity as measured by ULC that remains above the Union’s average (AMECO). Furthermore, the upward trend of tax burden on ULC implies the fiscal space to achieve the necessary capital deepening to comply with increasing wages.

Compared with Spain, Poland’s GVA stands at 64% of the Iberian Member-State where the labour capital elasticity of substitution stood above unity in 2010 while the ratio of wages to labour share is 34% of Spain’s. 

Henceforth, wages in Poland should increase to reflect relatively high value added of its output. A higher substitutability of labour and capital implies a compression of the labour share when there exists an incentive  to do so. Worrying factors that could lead to a trap include the slowing build-up of capital and a persistent increase in ULC (currently 4pp above the Union’s average albeit growing at a slower pace since 2002, showing the Balassa Samuelson effect is not particularly strong) even as capital deepens.

Given the already visible constraints on the fiscal space, the German Economic Advisers’ deficit control mechanism seems  unlikely to stimulate growth in Poland’s economy. Poland’s relatively high foreign value added in exports (in dark blue, compared with Spain in red and Germany in light blue, below) hints at an economy that could benefit from incorporating foreign knowledge and technology.

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