The number of people of working age rose

  • The growth in employment has been boosted by a rise in the number of entrepreneurs
  • The Work Ability Reform raised unemployment by less than forecast as demand for labour is strong
  • The number of people of working age rose for the first time in more than 20 years

The Estonian labour force survey found that the unemployment rate in Estonia rose in the first quarter of 2018 to 6.8%, as people engage more actively in the labour force. Employment rose at the same time, though at a slower rate than previously. The state of the labour market has not deteriorated from the second half of last year. Registry data suggest that the wide volatility in labour market indicators can largely be explained by the variability in the quarterly assessments of the labour force survey.

Employment was raised strongly both last year and at the start of this year by a rise in the number of one-person businesses and businesses with employees. The labour force survey shows the number of waged employees to be slightly lower than it was a year earlier. Registry data from the Tax and Customs Board show that 1.6% more people received a declared wage in the first quarter of 2018 than in the same quarter of the previous year. There was a rise in the number of employees in the private sector and a fall in the number in government institutions.

Without the Work Ability Reform, participation in the labour force would have increased more slowly and the number unemployed would have fallen. The number registered as unemployed has risen since the Work Ability Reform was launched. Now around one third of the 33,000 registered unemployed in Estonia have reduced ability to work. Leaving out random fluctuations from quarter to quarter, there has been no clear upward trend in the total unemployment rate in recent years. This is because the reform was well timed, as people with reduced ability to work can find a job more quickly at times of labour shortages than otherwise.

The updated estimate by Statistics Estonia is that the number of people aged 15-74 did not fall in 2017, but in fact rose by 0.1%. This is partly because Estonia has become a more attractive place to work for foreign labour, and partly because residents of Estonia who had previously gone to work abroad temporarily are returning. The improved migration balance means there is a larger supply of labour in the Estonian labour market and the wage pressures caused by labour shortages have been eased. The experience and skills of workers coming from abroad offer opportunities for businesses to develop.

Source: Bank of Estonia

Author: Orsolya Soosaar, Economist at Eesti Pank

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Growth in net wages leapt sharply

  • Growth in the gross wages of people earning minimum wage was slowed down by lower negotiated wages, but net wages increased considerably owing to the income tax reform
  • The cut in income tax initially benefited employees more than employers
  • Pay rises in the general government exceeded those of the private sector. If this gives a signal to the private sector, labour costs may start to accelerate, and wages would move out of line again with productivity growth

The smaller rise in the minimum wage slowed down the growth in gross wages, but the income tax reform more than offset the impact on current net wages. The minimum wage rose by 6.4% this year, which is much slower than the rate of close to 10% seen in recent years. The declared gross monthly wage of people earning minimum wage rose more slowly in the first months of 2018 than it did on average in 2017. Without the income tax rebate system for the low-paid that applied last year, which is not reflected in statistics for current wages, the rise in the tax-free threshold to 500 euros meant that those earning the minimum wage saw a rise of 18% in the pay they received.

The cut in income tax initially benefited employees more than employers. As the gross wage is generally fixed in employment contracts, it is to be expected that a fall in the tax rate will lead the net wage to rise. Over the longer term a large cut in the tax rate could reduce wage rises agreed in wage negotiations. The effect of this would slow down the growth in labour costs for employers. Employers will probably benefit less from the reform as the general shortage of labour gives employees a stronger hand in wage negotiations.

The fast rate of wage growth in the general government increases the risk of faster growth in private sector labour costs as well, meaning that the wages will move further out of line with growth in productivity again. Wages in the general government continued to rise fast, although temporary factors from last year should not have had an impact any longer. Wage growth in local government, which accelerated to 12% in the first quarter, reflected faster growth in education, but wage growth also remained strong in public administration. This may have been affected by the reform of administration, under which many employment contracts were terminated and signed.

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

2017 was the most successful since the economic crisis

  • The economy was driven upwards mainly by a burst of growth in demand
  • Increased investment is required for the economy to continue to succeed
  • An increase in employment rather than in investment has brought the labour market very close to overheating

The year 2017 was a successful one for the Estonian economy. Growth climbed to almost 5%, having been stalled in previous years, and this is one of the fastest rates since the crisis. Growth was boosted by a notable recovery in export markets and faster rises in prices there. The economy also benefited from the rapid growth in the incomes of residents of Estonia, which was reflected in household consumption. Increased demand and a higher price level in both domestic and external markets allowed companies to increase both their turnover and their profits, for the first time in some years. Data on industrial output and from corporate surveys in recent months have shown the rapid growth in the economy continuing at the start of this year too.

Catching up with richer countries will need more investment than has been seen so far. Having fallen for several years, spending on fixed assets increased last year in both the corporate sector and the general government. The increase in general government investment was largely down to more efficient use of structural funds, while companies were encouraged to invest by the much improved state of foreign markets and the goal of increasing output to claim part of the growth in demand. Even so, Estonian companies put a smaller part of their value added into investment, the source of future growth in the economy, than did companies in the other countries of the euro area on average. This means there is still not enough investment activity for Estonia to catch up with the income levels of richer countries.

The labour market is very close to overheating as companies have preferred to increase their number of employees rather than making investments. Low unemployment, a rise in the number of unfilled vacancies, deepening labour shortages, and rapid growth in labour costs are all indicators that the strong growth last year was driven mainly by short-term growth in demand, not by increases in the production capacity of companies or in labour productivity. However, success in exporting and competitiveness and the overall development of the economy depend on productivity.

There has been no clear indication that the competitiveness of exports has declined because of rising wages and production costs.The market share of exported goods and services increased slightly last year and prices have risen more than those of competitors, which is one reason why the trade surplus increased last year. Surveys of exporters do not point to any decline in competitiveness either. However, given the small share that Estonian exports have in foreign markets, it is possible that success in exporting last year was mainly due to the favourable foreign environment and problems will only appear if demand weakens in Estonia’s trading partners.

The success of the economy was also reflected in the state finances. More was taken in VAT and labour taxes than was planned, though the budget for the year as a whole was in deficit and the deficit was larger than forecast. Outgoings exceeding income means that the state contributed to boosting growth in the economy alongside the private sector. Although the deficit was not large, a surplus in the budget instead would have helped to smooth the economic cycle. Forecasts show that growth in the economy will slow in the years ahead, but will still remain above its sustainable level. For this reason it would be wise to plan a surplus in the budget, so that in the longer term it would be possible to support the economy if needed without breaking the budget rules that have been set in place.

Source: Bank of Estonia

Estonian average salary was 1,221 euros in 2017

According to Statistics Estonia, in 2017, the average monthly gross wages and salaries were 1,221 euros; compared to 2016, the average monthly gross wages and salaries increased 6.5%. The annual average monthly gross wages and salaries increased in almost all economic activities. The average monthly gross wages and salaries were the highest in the 2nd and 4th quarters.

While in 2016, the annual increase in the average monthly gross wages and salaries was 7.6%, the growth slowed down in 2017, dropping close to the level of 2014 and 2015, when the annual increase remained at around 6%.

In 2017, the annual increase in the average monthly gross wages and salaries was the slowest in the 1st quarter, accelerating near the year-end.

Real wages, which take into account the influence of the change in the consumer price index, increased compared to 2016, due to growing consumer prices, slower than the average monthly gross wages and salaries. Compared to 2016, real wages rose by 3%. While in 2016, real wages increased almost as fast as the average monthly gross wages and salaries, the growth in real wages slowed down in 2017.

In 2017, compared to the previous year, irregular bonuses and premiums per employee remained relatively stable, increasing 1.7%. Without irregular bonuses and premiums, the average monthly gross wages and salaries increased 6.7%.

In 2017, the average monthly gross wages and salaries continued to be the highest in information and communication (2,094 euros) and in financial and insurance activities (1,996 euros), and the lowest in other service activities, where the average monthly gross wages and salaries were almost three times smaller.

The year-over-year increase in average monthly gross wages and salaries was the fastest in mining and quarrying (11.1%), information and communication (10.2%) and energy (9.1%). The average monthly gross wages and salaries increased in almost all economic activities, excluding agriculture, forestry and fishing, where the average monthly gross wages and salaries remained close to the level of 2016 (0.4%).

In the public sector, including state and municipal institutions and enterprises, the average monthly gross wages and salaries amounted to 1,265 euros (year-over-year growth 7.9%), and in the private sector, including enterprises owned by Estonian and foreign private entities, to 1,206 euros (year-over-year growth 6.1%).

In 2017, by county, the average monthly gross wages and salaries continued to be the highest in Harju (1,353 euros) and Tartu (1,215 euros) counties and the lowest in Hiiu (883 euros) and Saare (876 euros) counties. The year-over-year growth in monthly gross wages and salaries was the fastest in Rapla, Ida-Viru and Võru counties. The average monthly gross wages and salaries remained relatively constant compared to 2016 in Hiiu, Lääne and Saare counties.

According to the Wages and Salaries Statistics Survey, in 2017, compared to the previous year, the number of employees converted to full-time units increased 4%. The biggest year-over-year increase in the number of employees in full-time units occurred in real estate activities, administrative and support service activities, agriculture, forestry and fishing, and in information and communication. The economic activities that saw a decrease in the number of employees in 2017 include transportation and storage, professional, scientific and technical activities, and public administration and defence; compulsory social security. In 2017, compared to 2016, the number of employees converted to full-time units decreased in state institutions and enterprises (2%) and increased the most in enterprises owned by Estonian private entities (7%).

In 2017, the average hourly gross wages and salaries were 7.40 euros; compared to 2016, the hourly gross wages and salaries increased 7.2%.

In 2017, the average monthly labour costs per employee were 1,648 euros and the hourly labour costs 10.99 euros. Compared to 2016, the average monthly labour costs per employee increased 6.5%.

4th quarter of 2017

The average monthly gross wages and salaries were the highest in the 4th quarter – 1,271 euros, having increased 7.5% compared to the 4th quarter of 2016. The average monthly gross wages and salaries were 1,231 euros in October, 1,251 euros in November and 1,330 euros in December. In the 4th quarter of 2017, the average hourly gross wages and salaries were 7.67 euros, having increased 8.3% compared to the 4th quarter of 2016.

In the 4th quarter of 2017, compared to the 4th quarter of 2016, the average monthly gross wages and salaries increased the most in real estate activities (14.4%), financial and insurance activities (14%) and in public administration and defence; compulsory social security (13.4%). The annual increase in average monthly cross wages and salaries was the slowest in arts, entertainment and recreation (1.8%) and in transportation and storage (2.7%).

In the 4th quarter of 2017, compared to the 4th quarter of 2016, irregular bonuses and premiums increased 11.4% per employee. Irregular bonuses and premiums affected the year-over-year increase in average monthly gross wages and salaries of the 4th quarter by 0.2 percentage points. Without irregular bonuses and premiums, the average monthly gross wages and salaries increased 7.3% compared to the 4th quarter of 2016.Average monthly gross wages and salaries per employee and their change by economic activity, 2016–2017

Statistics Estonia conducts the Wages and Salaries Statistics Survey on the basis of an international methodology since 1992. In 2017, the sample included 12,349 enterprises, institutions and organisations. The average monthly gross wages and salaries have been given in full-time units to enable a comparison of different wages and salaries, irrespective of the length of working time. Calculations of the monthly gross wages and salaries are based on payments for time actually worked and remuneration for time not worked. The hourly gross wages and salaries do not include remuneration for time not worked (holiday pay, benefits, etc.). In short-term statistics, the average gross wages and salaries are measured as a component of labour costs. Labour costs include gross wages and salaries, employer’s contributions and employer’s imputed social contributions to employees.

The statistics are based on the questionnaire “Wages and salaries”, the deadline of which was 18 January 2018. Statistics Estonia published the quarterly summary in 30 working days. For the statistical activity “Wages and salaries”, the main representative of public interest is the Ministry of Economic Affairs and Communications, commissioned by whom Statistics Estonia collects and analyses the data necessary for conducting the statistical activity.

Source: Statistics Estonia (see better graph here)

The labour market would gain from removing the barriers

Given the exceptionally good position of the economy and the increasing demand for labour, the rise in the rate of wage growth to 7.5% can be seen as moderate. The ability to find suitable work and favourable pay conditions have increased the labour supply. Migration statistics show that workers have also been found from outside Estonia. Estimates by companies show though that they are able to offer jobs to substantially more people than are currently in work.

The state could ease the problem of labour shortages by supporting the supply of labour. Although many reforms have already been passed, and a very large share of people of working age are already in the labour market, the time is right to reduce barriers to labour market participation even further. Rules on retirement and pensions should be made flexible for workers more quickly, rather than in a couple of years. Child care options immediately after parental benefits end would help mothers return to the labour market faster. Help could also be given to make returning from abroad as simple and painless as possible. Increased return migration indicates that many of those who earlier moved abroad are thinking of returning to Estonia.

The rise in the average wage has also been driven by some temporary factors. Faster wage growth has been particularly noticeable in public administration and social insurance, which may have been due to bonuses paid for the end of the presidency of the European Union and benefits paid as part of the reform of the administration. These should not affect base wages in the general government sector and so more moderate wage growth may already be expected in the current quarter.

Source: Bank of Estonia

Author: Orsolya Soosaar, Economist at Eesti Pank

Estonian labour force participation rate is 72 pct

According to Statistics Estonia, in 2017, the unemployment rate was 5.8%, the employment rate 67.5% and the labour force participation rate 71.6%. In the 2nd quarter, unemployment increased temporarily, primarily due to an increased number of previously inactive persons entering the labour market. Employment and labour force participation remained high throughout 2017, reaching the highest levels in 20 years. In the 4th quarter, the youth (15–24-year-olds) unemployment rate was very low – 6.2%.

Labour market indicators improved throughout the most of 2017, and, in quarterly comparison, were mostly more positive than the respective indicators of the previous year. Although in Estonia, the total number of working-age persons (15–74-year-olds) is falling, the number of persons active in the labour market (the sum of employed and unemployed persons) increased by 7,000 persons, and was estimated at 699,000. The labour force participation rate increased by 1.2 and the employment rate by 1.9 percentage points. The unemployment rate decreased by 1 percentage point. The number of inactive persons continued to decline. The annual average number of inactive persons was 277,000, which is 13,500 persons less than in 2016. The number of employed persons has increased due to a fall in unemployment as well as an increase in the number of previously inactive persons entering the labour market.

In 2017, the estimated annual average number of unemployed persons was 40,000. The unemployment rate was 5.8%, which is 1 percentage point lower than in 2016. The number of unemployed persons decreased by 6,400, while 13,500 previously inactive persons entered the labour market. The unemployment rate in the 4th quarter was 5.3% and the estimated number of unemployed persons 37,000. This is respectively 1.3 percentage points and 8,000 unemployed persons less than in the 4th quarter of 2016. Based on the indicator for 2017, Estonia rather ranks among the European Union countries with lower unemployment.

The unemployed at the greatest risk of poverty are the long-term unemployed, i.e. those who have been seeking work for more than 12 months. In 2017, there were 1,300 fewer persons who had been unemployed for a long time. Also the number of persons who had been unemployed for a short time and the number of discouraged persons, i.e. persons who had lost hope of finding a job, were smaller.

In 2017, the number of inactive persons in the labour market (students, pensioners, homemakers, etc.) among the 15–74-year-olds amounted to 28%. The number of inactive persons decreased primarily due to an increase in the number of those who were inactive due to ongoing studies, pregnancy, maternity or parental leave, or retirement age. There were on average 1,000 fewer persons inactive due to illness or injury than in 2016. The labour force participation rate for older persons (50–74-year-olds) in 2017 was 60.5%, the employment rate 57% and the unemployment rate 5.2%.

The biggest change in the number of inactive persons occurred in the 2nd quarter of 2017, when the number of inactive persons fell by 17,000 persons compared to the preceding quarter. The number of inactive students in the labour market decreased by 7,200 persons and the number of persons inactive due to illness or injury by 5,700 persons. As a result, the unemployment rate increased temporarily by 1.4 percentage points.

Significant differences in labour market indicators by place of residence, sex and ethnic nationality still exist. In 2017, the highest employment rate was recorded in Harju county (74.2%). The difference with Ida-Viru county, where the lowest employment rate was recorded (53.9%), was over 20 percentage points. In addition to better job opportunities, different age structure also had an impact on the results. In 2017, compared to 2016, the employment rate for both men and women increased, but the rate for men remained 8 percentage points higher than that for women (71.6% and 63.6%, respectively). The unemployment rate for men (6.2%) exceeds the unemployment rate for women by 0.9 percentage points. In 2017, the unemployment rate for Estonians was 4.4% and for non-Estonians 8.8%.

The average number of young people (15–24-year-olds) seeking work in 2017 amounted to 7,000. The annual average labour force participation rate for the young was 45.2% and the unemployment rate 12.1% (in 2016, the respective figures were 42.4% and 13.4%). The unemployment rate is the share of the unemployed in the persons active in the labour market, i.e. in those who work or are seeking work. Compared to the 4th quarter of 2016, the number of unemployed young people and that of inactive persons fell at the end of the year. The decrease in the number of inactive persons is partly due to a decrease in the total number of youngsters. The youth unemployment rate dropped to 6.2%, which is an extremely low level for that age group (in the 4th quarter of 2016, it stood at 12.7%). This is the lowest youth unemployment rate in 20 years, i.e. even lower than in the 4th quarter of 2007.

The labour force participation rate for 20–64-year-olds – one of the indicators in the Europe 2020 strategy, according to which, the aim of Estonia is 76% – was 78.5% in 2017. The target level for Estonia was reached already in 2015.

Employment rate and unemployment rate by age group, 2008–2017

The unemployment rate is the share of the unemployed in the labour force (the sum of employed and unemployed persons). The employment rate is the share of the employed in the working-age population (aged 15–74). The labour force participation rate shows the share of the labour force in the population aged 15–74. The employment gap is the difference between employment rates in percentage points. The estimates are based on the data of the Labour Force Survey.

Statistics Estonia has been conducting the Labour Force Survey since 1995 and every quarter, 5,000 persons participate in the survey. The Labour Force Survey is carried out by statistical organisations in all the European Union Member States on the basis of a harmonised methodology. In Estonia, the main representative of public interest is the Ministry of Social Affairs, commissioned by whom Statistics Estonia collects and analyses the data necessary for conducting the statistical activity.

Source: Statistics Estonia

The labour market remains favourable for employees

  • The labour market favoured employees very much in the fourth quarter of 2017
  • The unemployment rate was 5.3%
  • Labour shortages have deepened for companies
  • Companies that cannot improve productivity or raise wages are losing competitiveness as employers

The Estonian labour force survey shows that the number of people in employment was 4.6% higher in the fourth quarter of 2017 than a year earlier and the number of employees was 4% higher. This is probably not due to any sharp acceleration in the growth in employment at the end of the year as the Tax and Customs Board reports that the number receiving a declared wage was up by 1.3% over the year in the same quarter. The Labour Force Survey estimates can be quite volatile from quarter to quarter. The full-year data in the Labour Force Survey found the number of waged employees grew 1.3%, which is about the same as in the data from the Tax and Customs Board, where it was 1.1%.

Last year was a good year for the labour market in Estonia. The participation of working age people in the labour market increased to 71.6%, while the unemployment rate fell to 5.8%. Unemployment was notably higher in the European Union on average at 7.7% than in Estonia. The share of people of working age participating in the labour market was smaller in the European Union at 65% than it was in Estonia.

Estonian employers are still concerned about labour shortages. The share of companies that consider labour shortages to be a factor impeding growth in production increased in the fourth quarter. At the same time companies were more optimistic about future increases in employment than they were in previous years. Labour shortages and higher consumer price inflation boosted the growth in wages in the second half of the year as the average wage declared to the Tax and Customs Board was up 8.5% in the fourth quarter.

Labour shortages are a consequence of the favourable position of the economic cycle, and this is amplified by the decline in the working age population. Employment has climbed in the decade since the major economic crisis and has added more than 90,000 people from its low point. If the external environment remains stable, the economy will probably adjust smoothly to the shortage of labour. Employees will leave jobs with low value added and low wages and it will not be possible to find new employees to replace them. Companies that cannot improve productivity or raise wages will disappear. This will be partly offset by Estonia becoming a more attractive destination for immigrants and returning emigrants, and by people’s health letting them remain longer in the labour market.

Author: Orsolya Soosaar, Economist at Eesti Pank

Source: Bank of Estonia