Estonian labour market review

Key developments in second half of 2015

Growth has been slow in the Estonian economy for several years now and it slowed further in 2015. Despite this, the demand for labour remained strong as employment grew and growth accelerated in the payroll of the whole economy as a 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. In the longer term the supply of labour in the economy depends on the number of residents of working age and how actively they participate in the labour force.

The number of people of working age has been declining in Estonia for a long time now, and this trend continued in 2015. This was more than offset however by increased participation in the labour force, and overall the amount of labour in the economy grew. People are encouraged to participate in the labour market by the increased chances of finding a job and by the steadily rising wage level. Annual growth in the second half of 2015 was as fast as in the first half, 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 of employment based on data from companies put employment growth slower than in 2014, but most of them still show positive growth. For the year as a whole it was only full-time equivalent employment in the wage survey that fell. At the same time, demand for labour calculated from the number employed may be overestimated as there was an increase in the number of those in employment who were working part-time, and the number of hours worked in the whole economy grew more slowly than employment did. Increased employment led to a fall in unemployment for 2015 as a whole.

Unemployment in Estonia is markedly lower than in Latvia or Lithuania, and the reasons behind this are analysed in Box 3 of this report. The percentage of the long-term unemployed in total unemployment fell in the second half of the year. In the last quarter of the year both the labour force survey and the data on registered unemployment showed a rise in the number of short-term unemployed. 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 were ended as they were made redundant. More people entered the register because of redundancy than did so in 2014, but still substantially fewer than in 2013. Unit labour costs continued to grow fast in yearly terms in the second half of the year. Wages grew fastest in the public sector, specifically in local government administration, but wage growth was lower in Estonian private companies.

Data on wages paid out show wage growth to have been fastest in the lower part of the wage distribution, probably because of the sharp rise in the minimum wage. The quarterly growth rate of the index of labour costs gives reason to think that growth in labour costs is slowing, as it fell notably at the end of 2015. 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%. This rise came from both the fall in productivity and the growth in labour costs per employee. In contrast to what was forecast, it may be noted that no adjustment in labour costs has yet taken place. Sentiment surveys show indeed that the expectations of companies for employment rose at the end of 2015 and the start of 2016 together with the share of companies complaining of labour shortages. 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.

Read more from the report made by the Bank of Estonia


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