Increases in bonuses are in contradiction to shrinking profits

  • Higher wages and lower consumer prices increased the capacity of households to consume
  • The growth in average wages in manufacturing accelerated from 5.4% to 8% in the fourth quarter of last year
  • Companies have had to pay out an ever bigger part of their value added created in recent years
  • The wage distribution has become more equal in recent years

Data from Statistics Estonia show that the average gross monthly wage was up 8.1% on a year earlier in the first quarter of 2016.This means average wage growth was faster than at the end of 2015. Growth in the average monthly wage accelerated faster than growth in the average hourly wage, which indicates that variable pay components like bonuses and overtime contributed to the faster growth. Higher wages and lower consumer prices increased the capacity of households to consume.

The employer ownership model that saw the fastest wage growth was foreign-owned private companies, where wages rose by 10.2%. Wage growth at foreign-owned companies was still lower in 2014-2015 than at Estonian-owned private companies. Growth in average gross monthly wages in the public sector did not speed up. In recent years the state has been able to manage wage growth in areas under its control, but wages have risen quite fast, by close to 8%, in areas under local government administration.

Changes in the average wage have varied quite widely in different fields of activity, ranging from –5.1% to +22.9%. Wages rose fastest in administrative and support activities, which covers services like rental services, labour exchange, travel agency services, security, maintenance including cleaning, and the like. Several of these were probably affected by the rise in the minimum wage, which was 10.3% this year, though this only explains a part of the increase. It can be seen from the enterprise statistics that profits increased in this sector in 2015, which probably allowed employers to pay bonuses. The growth in average wages in manufacturing also accelerated to 8% from 5.4% in the fourth quarter of last year even though profits were down last year and growth in value added was weak.

The wage distribution has become more equal in recent years. Data from the Tax and Customs Board showed that the median wage1paid out in 2015 was 80% of the average wage, which is two percentage points more than in 2009. Among wage recipients, 37% got the average wage paid out or more, which is two percentage points more people than in 2009. The data published by Statistics Estonia on average gross income also show that over time the crude gender income gap has narrowed. This has probably been helped by the minimum wage rising faster than the average wage, wages in education and healthcare rising faster than the average, and competition with foreign employers, because the relative wage gain from working abroad is largest in the lowest part of the wage distribution.

Companies have had to pay out in wages an ever bigger part of their value added created in recent years. In 2014 labour costs were already bigger in Estonia as a share of value added than the European Union average adjusted for structural economic differences, and faster wage growth at the start of 2016 means the difference has become wider. Paying generous bonuses is not in line with shrinking profits, which indicates that companies may be doing better than the statistics indicate.

1 The median wage is the wage which half of employees earn more than and half earn less than.

Source: Bank of Estonia

Author: Orsolya Soosaar, Economist at Eesti Pank

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