Higher wages support consumption

In Estonia, monthly gross wages amounted to 1,010 euros, up by 4.5% in Q1, yoy.
Net wages jumped by 7% in Q1 because of lower labour taxes and deflation.

The growth of gross wages decelerated from 5.5% in 2014 to 4.5% in Q1 2015. Irregular bonuses and premiums decreased by 15.6% per employee in Q1 of 2015, yoy. Without irregular bonuses and premiums, the average monthly gross wages grew by 5.3%.

Wages increased less due to worse economic situation in some sectors. Another possible reason behind the deceleration in the growth of wages was the introduction of the labour registration obligation from July 1st 2014, which increased the official number of employees in sectors, where wages are smaller (tourism, domestic trade, construction, etc.).

Gross wages increased the most in the real estate sector, followed by the public sector (education, health care). Average gross wages decreased in the construction and mining, and did not change in the energy and logistics sectors, compared with the same period last year. Households’ real purchasing power will grow markedly this year. Although the growth of gross wages will slow a bit, smaller labour taxes and very low inflation will result in a remarkable surge in the households’ purchasing power. Net wages were up by 7% in the first quarter, year on year.

Average wages were pushed higher by a 10%-increase in minimum wages in January. A rise in pensions and other social benefits will further support private consumption, which will be the biggest contributor to GDP growth in 2015. Retail trade volumes rose by as much as 8%, year on year, in the first quarter.

SOurce: Swedbank

Continuing wage pressures ahead

Annual growth in employment accelerated to 2.9% in the first quarter of 2015, while unemployment stood at 6.6%. The low comparison base from the first quarter of 2014 played a part in the rapid annual growth in employment. Seasonally adjusted employment was unchanged from the previous quarter.

Data from the Tax and Customs Board also showed that the number receiving taxed wage income increased in the first quarter, and official data put the rise at 1.8%. The number employed by the general government continued to fall, having started to do so in the second half of 2012, and the number of businesses registered in the commercial register rose. The number receiving wages from private companies was boosted by the employment register that was launched in July 2014.

Although unemployment was a little higher than in the previous quarter at 6.6%, seasonal factors can explain the difference, and if they are taken into account, then unemployment actually fell. Employment contracts are often changed and ended at the turn of the calendar year, and many seasonal workers in construction or agriculture for example are without work during the winter months. A little over 60% of the unemployed in Estonia are registered with Töötukassa, the unemployment insurance fund, and the data show that the number registered as unemployed is now falling at a slower rate after falling rapidly for a long time. Seasonally adjusted registered unemployment has been generally stable for half a year.

The main source of risks in the quarters ahead is continuing wage pressures, which can be seen in the notably faster growth in wages than in productivity. If this continues it could lead to a rise in unemployment. The disappearance of less productive jobs is a part of the development of the economy, but if rapid wage growth leads more jobs to lose profitability than are created, structural unemployment rises.

In the short term, employment will be boosted by the increase in economic growth resulting from the strengthening of the European economy, which will allow labour resources to be used more efficiently than earlier. In the long term, shrinking labour resources make it important to create the conditions for growth in productivity and to engage as much as possible of the working age population in the labour market. In this context the high labour force participation rate of the first quarter was particularly welcome.

Source: Bank of Estonia

Author: Orsolya Soosaar, Economist at Eesti Pank

Labour market is tightening

• Employment up by 2.9%, yoy, and unemployment down to 6.6% in Q1 2015
• Mounting wage pressures (+6%, yoy, in Q1, according to the Tax Board)

The labour market is expected to tighten in 2015; thus wage growth will remain strong. The working-age population is decreasing, the employment rate is already high, and the unemployment rate will drop further this year.

The working-age population decreased by 7500 persons or 0.8% in 2014. That was somewhat less than in previous years as the number of emigrants was smaller. In the first quarter of 2015, employment grew by 17 000 persons or 2.9%. One of the factors behind higher employment figures is the labour registration obligation, which will push up official employment statistics in the first half of the year.

Employment increased the most in the services’ sector. According to the Estonian Tax and Customs Board, the number of employed grew in domestic trade, tourism and timber industry. Employment rate in Estonia is already one of the highest in the European Union. Still, there is some room to lift the employment rate to reach the levels of some Scandinavian countries or Germany.

In the first quarter of 2015, the number of unemployed declined by 12 000 compared with one year before and the unemployment rate reached 6.6%. The number of unemployed amounted to 44 000. Around 70% of the unemployed had been looking for a job for more than a year. The unemployment rate in Estonia is well below the EU average, but there are big regional differences on the tiny market, ranging from 4.8% in Southern Estonia to 11.0% in the North East.

Source: Swedbank

The rapid rise in labour costs may restrict investment opportunities

The long-awaited acceleration in economic growth materialised in the second half of 2014, but unfortunately labour productivity grew more slowly than in the first half of the year. Growth accelerated mainly as additional labour was employed, while the contribution of capital to growth declined.

After a long period of sluggish economic growth the growth in labour costs started to slow down in the first half of the year, but accelerated again in the second half. Employment growth picked up in the second half of the year. Although the average wage grew notably more slowly in 2014 than in 2013, companies were able to recruit additional labour in the second half of the year at the cost of faster wage growth.

The shortage of labour due to long-term factors is preventing any reduction in wage pressure. Demographic processes mean that the number of working age people is falling by around 0.8% a year and in the coming years the smaller birth cohorts will be leaving higher education facilities. Although the net migration balance improved for the second consecutive year, Estonian employers are still having to compete in the labour market with foreign employers. The workers going abroad who get a relatively bigger wage boost by doing so are those who would be earning a relatively low wage in Estonia. Not only is the flow of new entrants to the labour market shrinking, but the utilisation of labour is already high: the share of the working age population that was employed climbed higher in the second half of 2014 than it was at the peak of the economic boom.

The faster rise in labour costs than in productivity raised the labour share in GDP, while profits decreased. This may threaten the competitiveness of exporting companies as it will put them under pressure to raise prices. If competition makes it impossible to raise prices, then their lower profitability may push companies to reduce employment in Estonia. Nominal unit labour costs have risen by 17.5% in the last three years, which is more than twice the 9% level where the alert mechanism of the European Commission’s assessment is triggered.

There was no increase in corporate financial difficulties in the second half of 2014 and early 2015. Redundancy payments remained at about the same level as in the previous years, as did the number receiving compensation because their employer had gone bankrupt, and the number of unemployed who had lost their job through redundancy or through their employer closing down. Companies are able for now to cover the rapid rise in labour costs from their own profit buffers, and this will probably be aided by expectations of a recovery in foreign demand and favourable financing conditions. The ability to increase labour costs at the expense of profits will inevitably be reduced in the longer term. Reduced profits also threaten the ability of companies to invest in higher productivity and in the human capital needed for more complex and higher-value work. The key question in the development of the Estonian economy is whether value added can be created with a smaller labour force than before but through increased human capital.

Source: Bank of Estonia

Authors: Orsolya Soosaar and Natalja Viilmann; Economists at Eesti Pank

Estonian unemployment rate below EU average

Estonia’s seasonally-adjusted 6.2 percent unemployment rate is significantly below the EU 9.8 percent and euro area (EA) 11.3 percent average, reports Eurostat.

The average unemployment rate in both EU and EA are at its lowest in years. The total number unemployed people in the union in February was estimated at slightly below 24 million. Compared to a month before, the number decreased by 91,000.

Estonia registered one of the largest decreases in a year (8.4 percent to 6.2 percent between January 2014 and January 2015), alongside Ireland and Bulgaria.

The youth unemployment, although also below EU average (21.1 percent) was a much higher 13.9 percent in January 2015.

Estonia also stands out for having a higher unemployment rate for males (6.8 percent) than females (5.6 percent).

Source: ERR News via Estonian Review

7,200 job vacancies in Q4

According to Statistics Estonia, there were 7,200 job vacancies in the enterprises, institutions and organisations of Estonia in the 4th quarter of 2014. The number of job vacancies decreased by 15.9% compared to the previous quarter and increased by 13.6% compared to the 4th quarter of 2013.

The rate of job vacancies, i.e. the share of job vacancies in the total number of jobs, was 1.3% in the 4th quarter. For the third quarter in a row, the rate of job vacancies was the highest in administrative and support service activities (2.4%). It was the lowest in mining and quarrying and in water supply, sewerage, waste management and remediation activities (0.1% in each).

The rise in the number of job vacancies was the highest in professional, scientific and technical activities, where there were 2.6 times more job vacancies than in the 4th quarter of 2013.

56% of vacant and occupied posts are in Harju county (including Tallinn), followed by Tartu county (11%) and Ida-Viru county (8%). The rate of job vacancies remained the highest in Harju county (1.7%) and the lowest in Hiiu, Saare and Põlva counties (0.5% in each).

By type of ownership, 26% of job vacancies were in the public sector and 74% were in the private sector, where enterprises with Estonian ownership held the biggest share. The rate of job vacancies was 1.3% in the public sector and 1.4% in the private sector. The public sector also includes companies owned by the state or the local government.

Diagram: Rate of job vacancies

The movement of labour is characterised by labour turnover. In the 3rd quarter of 2014, a total of 89,000 employees were hired or left their jobs, which is a 9.6% increase compared to the same period of 2013. The largest increase in labour turnover compared to the 3rd quarter of 2013 occurred in agriculture, forestry and fishing and in construction (42.6% and 33.5%, respectively).

A job vacancy is a paid post that is newly created, unoccupied or becomes vacant when an employee leaves, and for which the employer is actively trying to find a suitable candidate from outside the enterprise, institution or organisation concerned.

The data are based on the job vacancies and labour turnover survey conducted by Statistics Estonia since 2005. In 2014, the sample included 12,267 enterprises, institutions and organisations; and the data of randomly selected units are imputed to the total population separately in each stratum.

Source:  Statistics Estonia

The purchasing power of those earning the average wage grew quickly

Data from Statistics Estonia show that the average gross monthly wage increased by 5.3% over the year in the fourth quarter of 2014, and the gross hourly wage by 6%. This growth was faster than in the previous quarter. The fall in consumer prices meant that the growth in the purchasing power of the average wage also accelerated to 5.8%.

The rise in the average wage continues to be affected by the obligation for companies to register employees, which has increased the number of workers with declared wages who had earlier been paid unofficially. This brought down the growth in the average wage because the additional workers were on average earning close to the minimum wage, according to data from the Tax and Customs Board. Without the obligation to register employees, the growth in wages would probably have been even faster.

At around 7.5%, growth in the average wage was faster in government and local government employment, with wages rising 10.1% in the health sector and 8.9% in public administration. Wage rises in these jobs are unlikely to have been affected by the obligation to register employees. Average wages in the private sector rose more slowly, increasing by a little over 7% in Estonian-owned companies, but by a more modest 2.5% in companies with foreign ownership. Wages in manufacturing rose by 4.4%, which was below the average.

Growth in the average wage will be boosted this year by the rise of 11% in the minimum wage. The minimum wage rose around twice as fast as the average wage did in 2014 and will do so again in 2015.

Net wages, which is the amount left after taxes, will rise faster this year as the tax-free minimum income is raised from 144 euros to 154 euros a month and income tax is lowered from 21% to 20%. These changes will raise the net wages of an employee on the minimum wage by around 1.7%, and those of someone on the average wage by 1.1%. For jobs where the employer and employee negotiate over a net wage, this will reduce costs to the employer and help to slow the growth in labour costs.


Eesti Pank observes and comments on wage developments as labour costs have a direct impact on the price of goods and services produced in Estonia and wage growth is an important indicator of price stability.

Source: Bank of Estonia

Author: Orsolya Soosaar, Economist at Eesti Pank

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