Demand for labour remained strong in 2Q

  • The labour market indicators remained good in the second quarter
  • The employment expectations of companies improved and they felt labour shortages more sharply
  • The unemployment rate rose to 7%,
  • Growth in productivity accelerated

The Labour Force Survey shows a fall of 0.5% in the number of people employed in Estonia in the second quarter of 2017 and a rise of 0.5 percentage point in the unemployment rate to 7%. The change is not large compared to typical statistical variation, suggesting that conditions remained good in the labour market in the second quarter.

The share of people of working age who were in employment was 66.9%, and most data sources show strong demand for labour. Registry data from the Tax and Customs Board show an increase of 0.9% in the number of people declared as receiving a wage in the second quarter, driven by the private sector. The confidence survey of the Estonian Institute of Economic Research shows that companies have improved their employment expectations, and the share of the companies questioned considering labour shortages to be a factor limiting production increased. Employment expectations have particularly increased in the construction sector, where the restriction of labour shortages is also particularly felt. Households also became more optimistic and fears of increased unemployment have declined sharply during 2017.

Statistics Estonia puts the unemployment rate at 7%, which is 0.5 percentage point higher than in the second quarter of last year. Although health is keeping about the same number of people out of the labour market as a year ago, the rise in the unemployment rate probably reflects the effect of the work ability reform. Data from Eesti Töötukassa, the Estonian unemployment insurance fund, show that the number of registered unemployed with reduced ability to work approached 10,000 and a further rise in this number is expected. The data indicate that some 7% of people with reduced ability to work found work each month in 2017. The rate of finding jobs was, as expected, somewhat lower than the rate of 12% for those with full ability to work. Unfortunately around 7% of those registered with Töötukassa leave the register of their own volition or because they cannot meet its conditions. As this also means losing work ability benefit, the reasons behind this and how people are subsequently able to cope need to be analysed.

Labour productivity has now been growing for a year and the increase picked up even further in the second quarter according to data on industrial output and exports. More efficient organisation of work allows companies to improve their profitability even if wages continue to rise as quickly as they have been doing.

Source: Bank of Estonia

Author: Orsolya Soosaar, Economist at Eesti Pank

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Corporate profit grew faster than wages in the second quarter

  • Growth in wages picked up and was close to the average rate of 2016
  • Real wages  grew more slowly because of inflation
  • Wage growth is being boosted by strong demand for labour

The average gross monthly wage was up 6.8% in the second quarter of 2017 on the same quarter of the previous year. The growth rate was faster than the 5.7% seen in the first quarter and was close to the average rate seen in 2016. Faster inflation has noticeably slowed the growth in real wages, meaning that the purchasing power of those earning the average wage is growing more slowly than previously.

Despite the rapid rise in wages, corporate profit also increased. Several factors have contributed to this, including increased foreign demand, a recovery in the oil shale sector affecting mainly mining and electrical energy production, and an increase in construction activities because of large investments in infrastructure. Wages are less volatile over the business cycle than profit is, and when the economy is strengthening profits increase faster than wages do to make up for earlier declines. For labour costs to approach the share of value added seen before the economic crisis or the European Union average, growth in profits would have to exceed that in wages for some time yet.

In future the growth in wages may be accelerated even further by strong demand for labour, which is normally seen when the economy is growing rapidly. Sentiment surveys by the Estonian Institute of Economic Research show that the share of companies expecting employment to increase has grown and a shortage of labour is being cited more frequently as a factor limiting production. The danger of overheating is particularly apparent in construction, where wage growth in the second quarter was still lower than the average for the economy as a whole. It has probably been restrained partly by the employment of labour from abroad.

Source: Bank of Estonia

Author: Orsolya Soosaar, Economist at Eesti Pank

Highest number of job vacancies in the past 9 years

According to Statistics Estonia, there were nearly 12,000 job vacancies in the enterprises, institutions and organisations of Estonia in the 2nd quarter of 2017. This is the highest number of job vacancies in the past nine years.

Compared to the 2nd quarter of 2016, when the number of job vacancies reached 9,500, in the 2nd quarter of 2017, the number of job vacancies increased by 26%.

The number of job vacancies in the 2nd quarter of 2017 was slightly higher than in the 1st quarter, when the number of job vacancies was 11,200. Compared to the previous quarter, the number of job vacancies increased by 7%.

The share of vacant and occupied posts in the total number of posts continued to be the highest in manufacturing (20%), wholesale and retail trade (15%) and education (10%). The total number of posts in the 2nd quarter was over 561,000.

The rate of job vacancies, i.e. the share of job vacancies in the total number of posts was 2.1% in the 2nd quarter of 2017, which is 0.1 percentage points higher than in the previous quarter, and 0.4 percentage points higher than in the 2nd quarter of 2016.

In the 2nd quarter, the rate of job vacancies was the highest in accommodation and food service activities (4.3%) and in administrative and support service activities (3.0%). The rate of job vacancies was the lowest in real estate activities (0.7%) and in mining and quarrying (0.8%).

More than three quarters (78%) of the vacant posts were in the private sector. In the 2nd quarter of 2017, the rate of job vacancies was the highest in state organisations (2.6%) and foreign private-sector institutions (2.9%). The rate of job vacancies was the lowest in local authority organisations (1.1%).

Most of the vacant posts were in Harju county (67%) (including 51% in Tallinn), followed by Tartu county (9%) and Ida-Viru county (6%). The number of vacant posts was the lowest in Jõgeva, Hiiu and Rapla counties.

Rate of job vacancies by economic activity, 2nd quarter, 2016–2017

The movement of labour is characterised by labour turnover (the total number of engaged employees and those who have left), which amounted to nearly 78,700 in the 1st quarter of 2017, denoting a 3% decrease compared to the previous quarter and an 8% increase compared to the 1st quarter of 2016. Compared to the 1st quarter of 2016, the largest decrease in labour turnover occurred in mining and quarrying (35%) and in information and communication (20%), and the largest increase in real estate activities (41%), financial and insurance activities (31%) and manufacturing (24%). In the 1st quarter of 2017, both the number of employees hired and the number of employees who left their job were the highest in manufacturing and wholesale and retail trade.

Source: Statistics Estonia

 

Tight labour market lifts Estonian wages

• Wage growth will remain relatively high as labour demand increases more than supply.
• Nevertheless, the gap between wage and productivity growth rates will narrow this year.

The growth of the average gross wage accelerated in the second quarter (+6.8%, over the year), partly due to a base effect. According to our estimates, economic growth remained fast and the number of employed decreased in the second quarter, so the gap between the growth rates of wages and productivity continued to narrow.

Higher sales help companies cope with growing labour costs. Enterprises’ sales increased by 10% and profits grew by 22%, over the year, in the second quarter. Profits rose in most economic activities.

The rapid growth in the average wage is supported by a lack of suitable labour and a 9.3-percent increase in the minimum wage. The labour force participation rate was the highest in 20 years in the second quarter. The number of vacancies reached the highest in 8 years in the first quarter. The lack of suitable labour is the most important factor restricting business for a quarter of manufacturing and service companies and a half of construction companies, according to a survey by the Estonian Institute of Economic Research. Nevertheless, the growth of the average gross wage in the construction sector remained around the average in the whole economy in the first half of the year.

Average wages rose in most sectors. Wage growth was faster in the energy sector where wages grew modestly in the past due to a substantial decline in energy prices. The shortage of labour pushed up wages in IT. Average wages remained unchanged in the real estate sector and grew only slightly in the primary sector. In agriculture and real estate, profits have been smaller than in the past and the rate of job vacancies lower than the average in the total economy.

In 2017, the purchasing power of employees is expected to grow slower than during previous years as inflation accelerates. The real growth of the average net wage rose by 3.7% in the first quarter of this year. This will limit households’ consumption. Retail sales volumes grew by only 2.3% in the first half of the year.

In 2018, wage-earners’ labour income will jump up again, due to a substantial increase in their nontaxable income. This change in taxes could also lower their wage expectations for next year. Wage growth will remain relatively high as labour demand increases more than labour supply. Labour productivity is expected to improve and the gap between wage and productivity growth rates to narrow in 2017-2018.

Source: Swedbank

Labour force participation rate at highest

According to Statistics Estonia, in the 2nd quarter of 2017, the unemployment rate was 7%, the employment rate 66.9% and the labour force participation rate 72%. Compared to the 2nd quarter of 2016, the employment rate remained on the same level and the labour force participation rate reached its highest level for 20 years.

Compared to the 2nd quarter of 2016, the number of working-age persons continued its slow decrease, but the number of persons active in the labour market (the sum of employed and unemployed persons) remained the same (702,000). The number of employed persons decreased by 3,500 persons and the number of inactive persons by 6,200 persons, amounting in the 2nd quarter of 2017 to 653,500 and 274,000, respectively.

The labour force participation rate increased in the 2nd quarter mainly due to an increase in the number of unemployed persons, one of the reasons for which is that persons who have thus far been inactive have become active. As a result of the Work Ability Reform, the number of people inactive due to illness or injury has decreased in the past couple of years. In the 2nd quarter, compared to the 1st quarter of 2017, the number of persons inactive due to illness or injury decreased by 5,700 persons. In the past 10 years, the number of persons inactive due to ongoing studies has shown a steady decline. This is rather due to an increasing wish to work during studies or study whilst working than a decline in the number of learners. The continued decline in the number of inactive older persons (50–74-year-olds) also plays a part in the highest labour force participation rate for 20 years. The labour force participation rate for older persons was 60.7% and the unemployment rate 5.1%.

Compared to the 1st quarter of 2017, when the number of unemployed persons was relatively small, in the 2nd quarter, the number of unemployed persons increased by 10,600 persons. Compared to the same period of the previous year, the change is smaller – the number of unemployed persons increased by 3,700 persons, reaching 49,000, which is less than, e.g., in the 3rd quarter of 2016. The unemployment rate was 5.6% in the 1st quarter of 2017, 7% in the 2nd quarter and 6.5% in the 2nd quarter of 2016. In the 2nd quarter of 2017, the unemployment rate for Estonians was 5% and for non-Estonians, 11%.

As expected, the employment rate was highest among the 25–49-year-old males (88%). This is one percentage point less than in the 2nd quarter of 2016. The increase in the employment rate of females of the same age was less than one percentage point and was 77.3% in the 2nd quarter of 2017.

The share of full-time and part-time employment in the main job and the share of underemployment has changed in a year by less than 0.5 percentage points. In the 2nd quarter of 2017, there were 5,000 persons in part-time employment who would have preferred to work more than they did (the underemployed).

In conclusion, there were minor fluctuations in the labour market indicators, but nothing unusual, and the 2nd quarter of 2017 did not bring about any major changes.

Labour force participation rate, employment rate, unemployment rate

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 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

Lack of labour a growing concern

• The labour market remained tight.
• The unemployment rate increased due to a reform.

In the second quarter of 2017, the unemployment rate was 7.0%, the employment rate 66.9% and the labour force participation rate 72% in Estonia. The labour force participation rate reached its highest level in 20 years. The participation rate is on the rise due to the tight labour market and the work ability reform that motivates people with disabilities to look for a job.

The rate of job vacancies, i.e., the share of job vacancies in the total number of jobs, increased to 2.0% in the first quarter. A shortage of labour is the most important factor restricting business for a quarter of manufacturing and service companies and for a half of construction companies. Therefore, wage pressures will persist.

Employment remained around the same level as last year (-0.5%, over the year) in the second quarter. The number of employees decreased in the public sector and agriculture, while remained at last year’s level in the manufacturing industry. We expect employment to increase again in the second half of this year as demand has strengthened in the export and domestic markets.

The unemployment rate grew as expected (7.0% in the second quarter). The registered unemployment rate of 4.7% was also higher than last year. The work ability reform gradually moves the disabled from the inactive into the unemployed category in labour statistics. At the same time, the number of the unemployed not affected by the reform has decreased.

Source: Swedbank

Estonian job vacancy rates likely to increase further

Annual growth of vacancy rate second highest in the euro area 

In the first quarter of 2017, the rate of vacant jobs in Estonia was slightly above the euro area average, but the annual growth of the vacancy rate was the second highest among 19 countries. This raises the question of whether there is a boom in the labour market that could drive excessive wage growth and a possible loss in export competitiveness. In 2015, the vacancy rate in state-offered positions started to increase, and, since the beginning of 2016, the rate for private entities followed. Foreign-owned companies and the state have the highest job vacancy rates. As foreign entities pay up to 33% more and mainly produce complex products for export, there is a possible skills mismatch.

Beveridge curve suggests no major crisis yet 

Although the job vacancy rate has noticeably increased and shifted the curve upwards, there is no reason yet to believe that we are close to the next crisis. In 2007, wage growth was over 20%, while the job vacancy rate rose to 3.5%, much higher than the 2% we witnessed in the beginning of 2017. Currently, Estonia is situated in a cluster of countries experiencing low unemployment and a medium job vacancy rate.

Service-related activities take a hit 

A comparison of different sectors with their medium-term average level indicates that the situation in service-related activities, especially in administrative/support, accommodations, and food service activities, has worsened the most. The job vacancy rate for the total economy grew from 1.3% in 2010-2015 to 2% in the first quarter of this year.

Job vacancy rates likely to increase further

In Estonia, the unemployment level is rather low and below the natural rate of unemployment. At the same time, the labour force participation rate and employment rates are high. Therefore, all the existing resources have already been more or less utilised and the labour market is tight. In an economic upswing, job vacancy rates are liable to increase further.

Source: Swedbank

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