Growth slowdown should calm wage expectations

Last year, the Estonian labour market recovered from the recession. The central bank’s latest Labour Market Review reveals that employment soared in comparison with the recent past and also with other European countries. The labour participation rate posted a record and unemployment declined notably. At the same time, the share of the long-term unemployed among the unemployed increased, making up about 60% by the end of 2011.

The inhibition in economic growth at the end of 2011 may increase the share of the long-term unemployed even more in the future. Being unemployed for a long time reduces the likelihood of finding a job and increases the risk of such people losing hope of ever becoming employed again. Thus, the main task of labour market policy is to increase the competitiveness of the long-term unemployed.

Along with the recovery of employment, average wage growth accelerated in 2011. It started in the private sector, where it was also faster. Labour productivity soared when the economy started to recover, but its growth rate has been declining ever since. Productivity even dropped in the last quarter of 2011 due to the deceleration in economic growth. Should it slow in the coming quarters as well, wage growth is likely to exceed labour productivity growth again. This may pressure companies to either increase the price of their products or to reduce wage costs by decreasing the number of their employees.

In order to avoid inflationary pressures threatening the economic balance, over-optimistic wage expectations and wage claims in the currently uncertain economic environment should be avoided.

Author: Natalja Viilmann, Eesti Pank, economist

Source: Bank of Estonia

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