The fall in GDP does not reflect in wages

Data from Statistics Estonia show that the average gross monthly wage increased by 7.3% over the year in the first quarter of 2014, and the gross hourly wage by 6%. Quarterly growth in seasonally adjusted average wages has slowed noticeably in the past half year. Given the fall in GDP, wage growth can still be considered strong. Partly this is because the fall in GDP was in less labour intensive sectors, and partly it was because wage growth was boosted by the rise in January of a little over 10% in the minimum wage.

By ownership type, the companies that saw the fastest growth in the average wage were Estonian private companies, where seasonally adjusted quarterly wage growth was more than twice as fast as the average for the whole economy. Wages paid by local authorities rose rapidly in the last quarter of last year, but they could not maintain the same speed in 2014. This indicates that part of the jump in wage growth in the fourth quarter may have been due to irregular components of wages.

In manufacturing industry, which is more dependent on the external environment than the average, the growth in average wages has slowed more than the average for the economy as a whole, and in the first quarter of 2014 it stood at 6.5%. Faster growth in labour costs than in productivity in manufacturing is more of a risk than in other sectors, as it is relatively hard to pass costs on into product prices because of competition from foreign companies. Neither are companies able to cover wage growth from profits for a long time, as Estonia needs to compete against other possible bases of production. An increase of 5-6% in the share of the payroll probably led to a reduction in profit margins for manufacturing companies. It is positive to note that there are indications from the last two quarters that an adjustment has started.

It is interesting to observe the developments in average wages in different sectors over the last economic cycle. Seasonally adjusted wages have grown most strongly in the industrial sector (see Table). Wages in the public sector and in real estate have grown more modestly from where they were before the crisis.

The impact of the weak economic environment on the labour market can be seen in a fall in the number of employed and in the slowdown in wage growth. Wage rises have slowed most sharply in the exporting sector. Wages in companies focused on the domestic market and in the public sector follow those in the exporting sector with a lag, meaning that wage growth in those sectors will slow later. In the long term the public sector should not be the leader in wage growth as it would make it hard for companies in the private sector competing for the same labour resources to match wages and productivity.

Eesti Pank observes and comments on wage developments as labour costs have a direct impact on the price of goods and services produced in Estonia and wage growth is an important indicator of price stability.

Source: Bank of Estonia

Author: Orsolya Soosaar and Natalja Viilmann, Economists at Eesti Pank

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