Estonian economy is becoming more labour-focused

At the Äriplaan 2017 conference on Wednesday, Governor of Eesti Pank Ardo Hansson spoke of the increased share of labour-dependent sectors in the Estonian economy, which is also illustrated by the growth in wages in recent years. This means that the market is moving ever more decisively away from business models based on cheap labour.

“In the wake of economic growth comes a change in the structure of the economy, as the share of those sectors that are based on labour has increased, and the rises in wages of recent years have been in line with changes that make the economy more focused on labour. Our working age population has been shrinking at the same time. Taken together, this means that upwards pressure on wages will remain for the time being. Business models that are built on cheap labour cannot survive for long in such circumstances, and they will be squeezed out of the market over time. It can already be seen that the lower the wage is in any sector, the harder it is for employers there to find staff”, Mr Hansson explained. He added that it is equally possible that market pressure and overly optimistic expectations have pushed companies to raise wages to a level that could lead to a reaction at some point.

The assessments by exporting companies of their own competitiveness have deteriorated in recent years as labour costs have risen, but there has been some small improvement this year. Corporate investment activity increased in the first half of the year, which gives hope that growth may pick up in the economy. “Investment alone is not enough to guarantee faster growth. Some other countries have seen their economies grow as fast as the Estonian economy with lower levels of investment. We still have room to make more efficient use of investment”, added Mr Hansson.

He emphasised that faster economic growth depends primarily on the competitiveness of companies in foreign markets, and so it is necessary to continue developing targeted products for export. “Corporate competitiveness and production potential need support from economic policy not just in Estonia but throughout Europe. Reform of labour and product markets and the business environment would help to ensure this, but such reforms are stalled in Europe. The central banks of the euro area can use monetary policy to support the economy, but this alone will not create sustainable growth”.

There will be minor gains for the global and European economic climates next year, but forecasts indicate the increase in economic activity in Estonia’s neighbourhood will be small.

Source: Bank of Estonia

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