Continuing wage pressures ahead

Annual growth in employment accelerated to 2.9% in the first quarter of 2015, while unemployment stood at 6.6%. The low comparison base from the first quarter of 2014 played a part in the rapid annual growth in employment. Seasonally adjusted employment was unchanged from the previous quarter.

Data from the Tax and Customs Board also showed that the number receiving taxed wage income increased in the first quarter, and official data put the rise at 1.8%. The number employed by the general government continued to fall, having started to do so in the second half of 2012, and the number of businesses registered in the commercial register rose. The number receiving wages from private companies was boosted by the employment register that was launched in July 2014.

Although unemployment was a little higher than in the previous quarter at 6.6%, seasonal factors can explain the difference, and if they are taken into account, then unemployment actually fell. Employment contracts are often changed and ended at the turn of the calendar year, and many seasonal workers in construction or agriculture for example are without work during the winter months. A little over 60% of the unemployed in Estonia are registered with Töötukassa, the unemployment insurance fund, and the data show that the number registered as unemployed is now falling at a slower rate after falling rapidly for a long time. Seasonally adjusted registered unemployment has been generally stable for half a year.

The main source of risks in the quarters ahead is continuing wage pressures, which can be seen in the notably faster growth in wages than in productivity. If this continues it could lead to a rise in unemployment. The disappearance of less productive jobs is a part of the development of the economy, but if rapid wage growth leads more jobs to lose profitability than are created, structural unemployment rises.

In the short term, employment will be boosted by the increase in economic growth resulting from the strengthening of the European economy, which will allow labour resources to be used more efficiently than earlier. In the long term, shrinking labour resources make it important to create the conditions for growth in productivity and to engage as much as possible of the working age population in the labour market. In this context the high labour force participation rate of the first quarter was particularly welcome.

Source: Bank of Estonia

Author: Orsolya Soosaar, Economist at Eesti Pank

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