The labour market is adjusting to the weak economic environment

Data from Statistics Estonia show that the number of employed fell by 1.2% year on year in the second quarter of 2014. A low rate of participation in the labour force meant that the unemployment rate fell at the same time to 6.9%, which indicates there is a shortage of labour.

The adjustment of companies to the consistently weak economic environment is evident in the labour market. Annual growth in employment was negative for the second consecutive quarter, and wage growth has slowed. The adjustment had been expected, as it is not sustainable over the long term for labour costs to grow significantly faster than GDP. Increased productivity will help reduce the imbalance alongside slower growth in labour costs, and according to the preliminary economic growth estimate from Statistics Estonia, productivity growth was faster than expected in the second quarter.

Looking forward, the labour market will be affected more than previously by the crisis in Ukraine and the increased uncertainty caused by Russian economic sanctions. The confidence surveys of the Estonian Institute of Economic Research show that the employment expectations of manufacturing companies have become more pessimistic and companies will probably be more careful than before when making decisions on recruitment. The sanctions should not significantly reduce employment in the near term as the shortage of qualified labour means that it is costly for companies to vary the number of employees they have. Labour market statistics are likely to be affected from the third quarter by the new law on the registration of employees. Data from the Tax and Customs Board show that some 7000 employees who had not received any wage in the previous 12 months were added in July after the employment register was brought in. In addition to the newly employed, they probably include people who had earlier been working unofficially.

Source: Bank of Estonia

Author: Orsolya Soosaar, Economist at Eesti Pank

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