Estonian companies have increased their competitiveness

At the Äriplaan 2016 conference on Wednesday, Sept.30 2015, Governor of Eesti Pank Ardo Hansson spoke of how Estonian companies have succeeded in increasing their non-price competitiveness. The need to improve competitiveness has become ever more important in coming years as higher labour costs have made production more expensive.

Despite the strong growth in wage costs, companies find that their competitiveness in the European Union market has improved. “The opinion of companies suggests that non-price competitiveness has improved and Estonia’s advantage as a producer lies in more than cheap labour resources,” explained Governor Hansson.

Non-price competitiveness shows whether companies are able to increase exports despite higher prices and labour costs by concentrating on something other than prices. Non-price factors can include innovation, product variety, recognition and quality, position in global production chains, and integration in international production networks.

However, Mr Hansson underlined that in the near future Estonian companies will have to work on developing non-price competitiveness even more than they have so far as the working age population in Estonia starts to shrink. “The number of workers has not fallen yet, but Estonia is entering a demographic autumn and the labour market will lose 30,000 people over the next five years. The decline in the working age population means that it will soon become harder for companies to find employees and wage pressures will increase. Estonian companies have done well at improving their competitiveness and this gives us the chance to become gradually more successful”, he explained.

He noted that inflation is likely to move from its level of around zero this year to 2.5-3% in the coming years. “The biggest beneficiaries so far have been companies focused on the domestic market, as cheaper energy has boosted the real purchasing power of households. If prices start to rise in the years ahead, people will find their purchasing power no longer rises so fast”.

Mr Hansson said that the Estonian economy is capable of faster growth than the current 2%, but to grow faster than 4% would need assistance from structural reforms.

He considered that another risk to economic growth alongside excessive rises in labour costs is that corporate profits may continue to decline. This would limit the ability of companies to make the investments that will provide growth in the future. He also noted the risk from the Nordic real estate markets, because if prices start to fall sharply there, the Nordic bank groups operating in Estonia could face difficulties that could mean they may not be able to continue providing loans to Estonian companies on favourable terms.

Source: Bank of Estonia

Why worry about wage growth?

• Wage growth accelerated again
• Not sustainable in the longer term
• Exports have to recover

Wage growth accelerated again
Gross wage growth has been around or above 5% since 2011. In the first half of 2015, wages increased in almost all sectors. Lower labour taxes and deflation will result in a remarkable surge in households’ purchasing power this year. Fast growth in wages is, therefore, good news for companies that sell their products or services in the Estonian market. Strong consumption and wage growth has also supported tax revenues.

Not sustainable in the longer term
The labour market is tight; thus wage growth has been strong. Employees’ bargaining power has grown, and this shows also in GDP figures; the share of labour income in GDP has grown and the share of profits has decreased. Enterprises’ financial data also show that wage growth is not in line with changes in sales, profits, or productivity. Although the situation across sectors differs, companies’ turnover and profits decreased in more than half of the sectors, while labour costs increased in most fields, in the first half of 2015.

Exports have to recover
Consumption-fuelled growth cannot last long. If export sales do not improve, the growth of wages (and consumption) will slow. While the EU’s economy is gradually recovering, demand in some of Estonia’s main export markets remains fragile. The economic situation in Russia is deteriorating, and the Finnish economy is barely growing. Enterprises’ sales in Estonia are also dampened by lower output prices. Therefore, some sectors facing weak export demand and low output prices are finding it hard to keep up with the current wage growth.

Source: Swedbank

Estonian wage growth accelerated

• Monthly gross wages amounted to 1,082 euros, +5.8%, yoy, in Q2.
• At the same time, net wages were up by 7.3% in real terms because of 0% inflation and lower labour taxes.

The growth of gross wages accelerated from 4.5% in Q1 to 5.8% in Q2. Irregular bonuses and premiums increased by 2.9% per employee and contributed to the growth of wages by 0.1 percentage points.

Wages increased in almost all sectors, except for construction which has been hit by low demand. Construction volumes have decreased for two years by now. The largest increases in average monthly wages took place in sectors that sell their products and services mainly in the domestic market, such as real estate, agriculture,  tourism, entertainment, education, and healthcare.

Households’ real purchasing power will grow markedly this year. Although the growth of gross wages will slow a bit compared to last year (+5% in 2015, according to our forecast), smaller labour taxes and deflation will result in a remarkable surge in the households’ purchasing power. Net wages were up by 7.1% in real terms in the first half of the year.

A rise in wages and social benefits will support private consumption, which will be the biggest contributor to GDP growth in 2015. Consumption is a thankworthy support to Estonia’s economic growth as exports and investments remain weak. Consumption-fuelled growth cannot last long, however. Therefore, if export sales will not improve, the growth of wages will slow.

Source: Swedbank

Estonia’s unemployment rate is 6.5 pct

According to Statistics Estonia, the unemployment rate was 6.5% and the employment rate was 65.1% in the 2nd quarter of 2015. Compared to the second quarters of the previous years, the number of long-term unemployed persons fell under 20,000 for the first time after the recession.

The number of unemployed persons changed very little compared to the first quarter and was estimated at 44,400.

Compared to 2nd quarter of 2014, the number of unemployed persons decreased approximately by 3000. As the number of short-term unemployed persons increased slightly compared to the same quarter of the previous year, the decrease in the number of long-term unemployed persons played a bigger role here. Among unemployed persons, poverty risk is the highest among the long-term unemployed, i.e. unemployed persons who have been seeking work for at least 12 months. A longer period without work will devalue a person’s human capital gained through previous work and education, and the person may lose the habit of working. Employers can also be rather sceptical about the working abilities of the long-term unemployed. In the 2nd quarter of 2015, there were approximately 19,200 persons who had been seeking work for more than 12 months.

Diagram: Unemployed and long-term unemployed

While unemployment was characterized by a moderate trend of decline, employment increased moderately. Employment rate increased compared to both the 2nd quarter of 2014 and the 1st quarter of 2015 by more than 1 percentage point and was 65.1% in the 2nd quarter of 2015. The number of employed persons increased to approximately 640,000. The increase in the number of employed persons was not only caused by the decrease in unemployment but also by an  increase in activity on the labour market. Young people influenced this increase in activity the most. In the 2nd quarter of 2015, the employment rate of 15–24-year-olds increased by nearly 5 percentage points and reached 44% compared to the same quarter of the previous year. One reason for this was the increase in the share of young people in the age where they are more likely to enter the labour market. It can be also said that the increase in youth activity on the labour market compensated for their declining overall number.

In the 2nd quarter of 2015, compared to same quarter of the previous year, the number of persons who could potentially be active on the labour market had diminished by approximately more than 7000. In the 1st quarter, labour force participation rate was the highest that it had been in 15 years in quarterly comparison. The same could be said about the 2nd quarter of 2015, when labour market participation rate of 15–74-year olds was slightly under 70%. In other words, 69.6% of the working-age population was active on the labour market either as seeking work or working. The increased activity helped to decrease the influence of overall declining numbers of working-age population. Moreover, compared to the 2nd quarter of 2014, the number of persons who were active on the labour market increased roughly as much as the number of working-age persons decreased (by more than 7,000 persons).

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.

Source: Statistics Estonia

Unemployment decreased further

• In Q2, employment up by 1.7%, yoy, and unemployment rate down to 6.5%.
• In 2016, employment is expected to fall a bit.

Estonia’s labour market tightened further in the second quarter, but at a slower space. The annual growth of employment slowed from 2.9% in Q1 to 1.7% in Q2. The number of inactive and unemployed declined compared to last year. The inactivity decreased the most among the retirees and those studying at school or university. Unemployment rate decreased to 6.5% in the second quarter (7.0% in Q2 2014).

The Estonian Unemployment Insurance Fund’s data shows that unemployment has declined at a slower space in recent months. Seasonally adjusted figures show even a slight increase in unemployment in Q2. Unemployment rate has reached a level where an additional decline of the rate is already difficult. There are around 44 000 unemployed in Estonia currently, out of which 11 000 have been looking for a job for more than 2 years. The number of people who have become unemployed recently, has grown. Some sectors, who face weak export demand and low output prices, find it hard to keep up with current wage growth.

Employment will grow this year due to the labour registration obligation, which will push up official employment statistics in the first half of the year. Also, strong consumption supports employment in the services sector. In 2016, employment is expected to fall a bit because of a lower supply and demand of labour. More expensive labour encourages investment in machinery. Some enterprises might decrease the number of employees because of low (export) demand, i.e., agriculture and specific sectors of the manufacturing industry. Unemployment rate is expected to remain low, however, although it might increase marginally next year due to decreasing working-age population and problems in certain sectors.

Source: Swedbank

Minister promises to regulate foreign doctors

Health and Labour Minister Rannar Vassiljev said he will come out with proposals on how to regulate the growing number of medical doctors from outside the EU, who are working in Estonia.

The Ida-Viru central hospital employs 160 doctors, of whom a fifth are from other former Soviet Union states, and most have arrived in recent years, Postimees reported.

Tarmo Bakler, the CEO of the hospital, said they have received more doctors from outside the EU than from the University of Tartu, which has Estonia’s biggest medical school.

Bakler said foreign doctors in Estonia are partially unregulated, which gives way to different interpretations of existent laws.

Currently, foreign doctors have to have completed a three-year residency period. Doctors in Russia must only complete a one year program in Russia, before receiving their medical licenses. That has hindered some from coming to work in Estonia, but the requirement can be substituted for an exam at the University of Tartu, or for work experience.

Source: ERR via Estonian Review

Report : smart immigration policy helps boost economic development

Estonia can use both employment reforms and other reforms as well as migration wisely and in suitable proportions as levers for improving the outlook of its economic development, a study examining the country’s options in migration policy compiled by the National Audit Office says.

“If Estonia wants to be successful in the international competition for attracting people who have the capacity to generate income, it has to guarantee for such people a suitable working and living environment that proceeds from a broad view of the world,” the study finds.

According to forecasts, the number of working-age people or people aged 20-64 in Estonia will decrease by approximately 50,000 in the next five years and by as much as 165,000 by 2040. At the same time, the number of people aged 65 and over will increase by approximately 24,000 by 2020 and by more than 88,000 by 2040.

“As someone has to maintain our pension and health insurance system as well as our state and society as a whole, we all have to figure out how to generate the income that can be used to meet society’s demands in order to preserve the standard of living and guarantee the economic development of Estonia,” the reports says.

The implementation of reforms will make it possible to bring a bigger share of the inactive part of the population to the labour market and to increase productivity, but the initiation of reforms in the nearest future will only generate results in the distant future and their impact may not be sufficient. This means that although a rather sizeable part of the state’s need for workforce can be covered internally in Estonia, it is unlikely that domestic sources can provide the entire workforce needed for the development of Estonian economy, the National Audit Office says, adding that Estonia also needs a more active and successful approach to smartly using the skills and knowledge that can be offered by the people who come to work and live in Estonia from other parts of the world.

Source: Baltic News Service


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