Wages and productivity are better aligned

  • Economic activity picked up and productivity growth increased at the same time that wage growth slowed
  • The fastest wage growth in the industrial sector was in construction and oil shale
  • Wage growth is slower in the service sector than in previous years
  • The purchasing power of those earning the average wage will increase more slowly because of inflation

The average gross monthly wage was 5.7% higher in the first quarter of 2017 than it was a year earlier. This was lower than the growth rate of 6.9% in the previous quarter. Growth in the productivity and wages of workers became better aligned, as economic activity picked up and productivity growth increased at the same time that wage growth slowed. This is shown both by data for exports and industrial output and by sentiment indicators.

Wage growth slowed in the service sector, but it did not change in the industrial sector. Within that sector, wage growth accelerated in construction and recovered strongly in the oil shale sector through mining and energy. A rebound in demand led construction to hire more workers and raise wages. Output increased by 20% in construction in the first quarter, with growth in the construction of buildings and in investment in infrastructure. Wage growth slowed in manufacturing however, though the number of workers in manufacturing also increased and the economic circumstances of the sector improved as growth in external demand increased.

Strong growth in private consumption and wage rises in the public sector have caused wages in the service sector to rise faster in recent years than the average for the economy, but this growth has now slowed a little. The growth did not slow in all parts of the service sector though, with wage growth increasing for example in retail and in information and communications. One-off factors played a role in this, such as the wage agreement in the health sector and smaller bonuses in the financial sector than in the previous year.

As consumer prices rise faster, the purchasing power of those earning wages will again increase markedly slower than nominal wages. Inflation stood at 3% in the first quarter, and so real wage growth was 2.6%. Looking back over a longer period, the purchasing power of the average wage has increased by 20% from before the crisis in 2008, and by some 30% since 2010, when the recession was at its deepest.

Source: Bank of Estonia

Author: Orsolya Soosaar, Economist at Eesti Pank

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