Growth in employee productivity has stalled

Ardo Hansson, Governor of Eesti Pank, finds that the harmonisation of Estonian incomes with those of elsewhere in Europe will slow as the productivity growth of employees in Estonia is less far above the European average than it was.

In a presentation to a conference on the Estonian economy, Mr Hansson said that the current GDP growth rate of around 2% is to be expected given the state of the economies in our trading partners. He said that the economy could grow faster than it is at present as its long-term achievable growth rate is 3-4%.

His presentation emphasised that income levels in Estonia cannot sustainably be increased by the government boosting demand. “Estonia has more than ever to gain from structural reforms that support growth. Technological development and improvement in labour productivity are the foundations for the ability to grow”.

Economic growth in Estonia since the crisis has come largely from increased employment, but employment is subsiding as a source of growth for the economy because the Estonian population is shrinking. “There has been a great leap forward in the share of the population that is active in the labour market in Estonia and we have passed Finland, but there is still space for further advances before we catch up with Sweden. Having more people participate in the labour market is one way the Estonian economy can grow”.

The purchasing power adjusted productivity of employees in Estonia has reached 63% of the European Union average, but the rate of increase has slowed in recent years. Ardo Hansson explained, “There are more than 15,000 euros of machinery and equipment per employee in Estonia, which is three times what there was in 2000, but only half as much as there is in Finland or Germany. The closer the economy comes to that ‘peak’, the more effort is required for growth”.

He said that a smaller part of income is being invested in Estonia than before, at a point where financing conditions for investment are good and Estonian companies are in a strong position financially. If the economy does not modernise faster than it has been doing, stagnation could set in.

However, Estonia still has several advantages over the rest of the European Union and the euro area, as it has a flexible labour market, the chance to bring in technology from more advanced economies, good financing conditions and a strong banking sector, lower corporate indebtedness than before, little bureaucracy, relatively low labour costs, and strong public finances and low government debt.

SOurce: Bank of Estonia

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