Pressure on prices from wage rises is weaker than last year

The average gross monthly wage increased in the year to the third quarter at a similar rate to that seen in the second quarter, with Statistics Estonia reporting growth of 5%. Wage growth has slowed considerably since last year, partly because of a reduction in irregular bonuses and additional payments.

From the third quarter it became compulsory for employers to register employees from their first day of work and the change probably led to a fall in the number of people working unofficially. As this affected low-paid jobs to a greater extent, and as some of those who were previously working officially may still only be receiving part of their wage officially, there may have been a slight statistical reduction in the growth of the average wage.

Wage growth slowed mainly in foreign-owned companies, where wage rises were significantly larger than in the rest of the economy last year, and it also slowed in local administration. Wages have increased at the most constant rate in companies with Estonian ownership in recent years.

It was expected that the growth in average wages would slow, as rapid wage rises at a time when the economy is growing slowly lead to a reduction in the profits of companies. As companies can save on labour costs by either cutting employment or by raising wages by less, it is better for households and the economy as a whole that the adjustment come through wages. This is particularly the case when wage pressures are supported by rises in the minimum wage, collective wage agreements and competition with foreign employers. The consequence is that labour costs have risen faster than is sustainable over the long-term for the economy.

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, Economist at Eesti Pank

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