Wage Growth and Living Standards in the Czech Republic Will Slow Down

The Czech Republic is facing the biggest turning point in its modern history as it has exhausted all previous growth drivers, lost its competitive advantages and fallen into the so-called middle-income trap, a new study has found.

The study on Czech competitiveness was conducted by the Czech Chamber of Commerce. According to its findings, the country could face long-term economic stagnation and a slowdown in wage growth and living standards.

Further convergence with the level of more advanced European countries will be complicated given the current structure of the economy, the study also found.

“If the economy continues to converge and reach the level of Western countries, it will have to escape the middle-income trap, i.e. move towards higher value-added production. In such a situation, it is possible to remain competitive even with relatively more expensive labour,” said Chamber of Commerce President Zdeněk Zajíček.

However, according to experts, the problem with the Czech economy today is that it generates only low-added value.

Compared to other EU countries, the value added generated is one of the lowest in the EU, with the Czech Republic ranking 24th out of 27 countries. The economy has not yet escaped the middle-income trap, failing to switch to higher value-added production.

The Czech Chamber of Commerce is thus calling for a boost in investment and innovation.

“The state must play an important role in changing this trend. In addition to strategic investments in energy, transport, data, and other infrastructure, investments in science, research and education play a crucial role. The state must also motivate companies to innovative activities,” Zajíček pointed out.

While Czech companies’ research and development expenditure as a percentage of GDP reached its highest level in 2021, at 1.25% of GDP, it was still below the EU average of almost 1.5%.