Despite weak GDP growth, demand for labour remained strong

  • The rise in employment did not slow down in the second half of 2015
  • Unemployment was low in 2015 at 6.2%, but the number of registered unemployed rose in the second half of the year
  • Productivity fell in the second half of 2015 while yearly growth in unit labour costs remained fast. Labour costs increased at the expense of corporate profits, making employers more vulnerable to negative shocks in the future

Despite slower GDP growth, the demand for labour remained strong in the second half of 2015 as employment grew and growth accelerated in the labour share of GDP. Part of the reason for this contradiction may be that the slowdown in GDP growth was not broadly based, as certain sectors made a significant contribution to the slowdown, but do not account for a large share of employment.

The labour force survey shows employment grew in the second half of 2015 at the same rate as at the start of the year at 2.8%, but this was because of extraordinarily high employment in the third quarter. The estimate of employment may to some extent have been boosted by the delayed effect of the registration of employees. Estimates based on data from companies put employment growth slower than in 2014, but only one survey showed employment decreasing.

Increased employment led to a fall in unemployment for 2015 as a whole to 6.2%. Data on registered unemployment from Töötukassa, the unemployment insurance fund, gave a slightly less optimistic picture than the labour force survey. The number registered as unemployed increased quarterly from the second quarter to the fourth and there was also a rise in the number of those whose working relationships ended, including those who were made redundant. More people entered the register because of redundancy than did so in 2014, but still substantially fewer than in 2013.

The working age population shrank in 2015 but participation in the labour force increased at the same time and in total the labour force in the economy increased. People are encouraged to participate in the labour market by the faster rise in wages than in social benefits and pensions. The low unemployment rate also means the chances of finding work are better, which in turn encourages people to participate in the labour force. Without this growth in the labour force, unemployment would be even lower and wage pressures even higher than they have been so far.

Labour costs continued to grow fast in the second half of 2015. Wages grew faster in the public sector, including in healthcare and education, but wage growth was lower in Estonian private companies. The main source of wage pressure was the tightness of the labour market illustrated by the low unemployment rate and the high share of the working age population in employment, though it also came from collective wage agreements in the public sector. Data on wage payments from the Tax and Customs Board show wage growth to have been faster among the lower paid, mainly because of the rise in the minimum wage. Wage growth slowed a little at the end of last year, but comparison of different indicators for labour costs does not yet give a clear message that wage growth has started to adjust to the weaker economic environment.

Labour productivity fell in the second half of 2015, while yearly growth in unit labour costs was about as fast as in the first half of the year at 5.6%. In contrast to what was forecast, it may be noted that no major adjustment in labour costs has yet taken place. Surveys of employer sentiment indicate that at the end of 2015 and the start of 2016 there was an increase in the share of companies expecting employment to rise. There was also an increase in the share of companies that consider labour shortages to be a factor impeding production. This suggests that labour shortages and the resulting pressure on wages will remain in the near future. In the longer term, rising unit labour costs mean shrinking profit margins for companies, and that in turn will make those companies more vulnerable in future to negative shocks.

Source: Bank of Estonia

Auhtor: Orsolya Soosaar, Economist at Eesti Pank

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