Slower growth in wages may prove temporary

  • Wage growth was slowed by the effect of the tax reform, which changed how holiday pay is paid out and raised the average net wage
  • Upwards pressure on wages remains high
  • Wage inequality and poverty wages have declined in Estonia in recent years

Data from Statistics Estonia show that the average gross monthly wage was up 6.4% over the year in the second quarter of 2018, which is a slower rate of growth than the 7.7% in the previous quarter. The shortage of available labour kept upwards pressure on wages high, and the slower wage growth can be at least partly explained by the impact of the tax reform, which changed how holiday pay is paid out and so allowed employers to restrain the growth in gross wages a little as employees received more in their pay packets.

The new tax system made it less favourable for employees to receive holiday pay during the month in advance of their holiday, as the temporary rise in their pay would lower their tax-free allowance. The data indicate that employers agreed more frequently than last year to make all monthly payments the same size. This change had a particularly notable impact in the slower wage growth in education. Wage growth may be faster than expected in the next quarter though, as people receive more in wages during the holiday months than they did last year.

Wage inequality and in-work poverty have declined in Estonia in recent years. This has been helped by the rapid rise in the minimum wage over several years and by rises in family benefits. The risk of falling into poverty is substantially smaller for those in work than it is for the non-working. The risk of poverty is higher for single parents and those with low work intensity, and it declines with higher levels of education.

Source: Bank of Estonia

Author: Orsolya Soosaar, Economist at Eesti Pank

 

See graph here

2Q unemployment rate the lowest in 10 years

• Employment rose rapidly but only among the part-time workers
• The unemployment rate decreased more than expected
• The shortage of labour has reached the levels of last economic boom 

Employment rose rapidly but only among the part-time workers 
The number of the employed rose significantly, by 2.0%, or by 13,000 persons, over the year, in Estonia. Employment rose among the part-timers in the services’ sector and the manufacturing. According to the Estonian Tax and Customs Board, who has more detailed data on employment by sectors, employment increased the most in the construction sector.

The unemployment rate decreased more than expected 
Employment rose due to lower unemployment, the number of the inactive remained at last year’s level. The number of the unemployed decreased by the same amount as was the increase in the employment, 13,000 persons. Unemployment shrank among the short-term unemployed (up to 6 months). The unemployment rate (5.1% in Q2) would have been even lower without the ongoing work ability reform (that motivates people with a disability to look for a job). Around a third of the registered unemployed were people with decreased working ability in July.

The shortage of labour has reached the levels of last economic boom 
A shortage of labour was the most important factor restricting business for 30% of manufacturing, 36% of service companies and for 61% of construction companies in July. While the labour market indicators look more and more like during the last economic boom, the number of the working-age people is much smaller: -70,000 compared with 2006-2007.

The shortage of labour keeps wage growth rapid 
Employees feel more and more secure in the labour market. The number of employees who have left their jobs on their own initiative is growing and the rate of job vacancies is on the rise. Therefore, wage pressures will persist. Tax data show that gross wage growth remained strong in the second quarter, close to 6%, year-on-year.

Employment should continue growing in the second half of the year. Companies plan to increase the number of workers in the following months, according to a survey by the Estonian Institute of Economic Research. As demand for labour grows, but the supply of labour is limited, at least short-term, the number of job vacancies should grow. It seems that the negative impact of the work ability reform on the unemployment rate will be smaller than expected and the unemployment rate will be smaller in 2018 than in 2017.

Source: Swedbank

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

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

The gender pay gap is 21 pct

According to Statistics Estonia, in October 2017, the average gross hourly earnings of female employees were 20.9% lower than the average gross hourly earnings of male employees. After three years of decrease, the gender pay gap remained at the same level as in the previous year.

In October 2017, the average gross hourly earnings without irregular bonuses and premiums were 6.26 euros for female employees and 7.91 euros for male employees. Compared to 2016, gross hourly earnings increased 3.7% for both female and male employees. While in 2014–2016, the gross hourly earnings of female employees rose faster than the gross hourly earnings of male employees, which is the main reason for the decrease in the pay gap (the difference between the hourly earnings of male and female employees), in 2017, the rise in the gross hourly earnings was equal.

In 2017, the gender pay gap was the biggest in financial and insurance activities (38.2%), where the gross hourly earnings of male employees rose (7.3%) compared to a year earlier, while the gross hourly earnings of female employees remained relatively constant (decreased 1.1%).

After financial and insurance activities, the next biggest pay gaps were recorded in mining and quarrying (31.1%), wholesale and retail trade (28.1%), manufacturing (28.0%) and human health and social work activities (27.9%). The difference between the gross hourly earnings of male and female employees was the smallest in water supply; sewerage, waste management and remediation activities (5.9%), transportation and storage (5.1%) and other service activities (1.1%).

Compared to 2016, the gender pay gap increased the most in financial and insurance activities (5.2 percentage points), transportation and storage (5.1 percentage points) and professional, scientific and technical activities (4.2 percentage points) and decreased the most in other service activities (6.7 percentage points) and in arts, entertainment and recreation (6.6 percentage points). In the past five years, the gender pay gap has decreased the most in other service activities and in education and increased the most in human health and social work activities.

With regard to type of ownership, the pay gap in institutions and enterprises owned by the state and municipalities was smaller than in enterprises owned by Estonian or foreign private entities. This was the case also in previous years. In 2017, the pay gap in state institutions and enterprises was 18.4% and in municipal institutions and enterprises 12.2%, whereas the pay gap in the enterprises owned by Estonian private entities was 19.2% and in the enterprises owned by foreign private entities 30.8%.

The pay gap in the public sector (state and municipal institutions and enterprises) and private sector (enterprises owned by Estonian and foreign private entities) was almost the same – 22.4% and 22.0%, respectively.

In 2017, the pay gap was the biggest in Ida-Viru county (27.9%), followed by Järva (25.6%), Hiiu (25.3%) and Võru (24.0%) counties and the smallest in Saare (11.3%), Põlva (12.9%), Lääne-Viru (14.3) and Rapla (15.0%) counties.The difference between the gross hourly earnings of female and male employees, 2017

Statistics Estonia and Eurostat use different population to calculate the gender pay gap. Although Eurostat receives data from the statistical offices of the Member States, the pay gap published by Eurostat does not take into account the indicators of enterprises and institutions with fewer than 10 employees; it also excludes the earnings of employees in agriculture, forestry and fishing and in public administration and defence. According to Eurostat’s calculations, the gender pay gap in Estonia is the biggest in the European Union (25.3% in 2016). According to Statistics Estonia, the gender pay gap in Estonia in 2016 was 20.9%, taking into account all enterprises and institutions and all economic activities.

Statistics Estonia has calculated the pay gap since 1994. In 2017, the sample included around 12,300 enterprises, institutions and organisations. The gender pay gap is calculated by deducting the average gross hourly earnings of female employees from the average gross hourly earnings of male employees, divided by the average gross hourly earnings of male employees and expressed as a percentage. The calculated average gross hourly earnings do not include irregular bonuses and premiums.

The statistics are based on the questionnaire “Gender pay gap” (until 2017, the name of the statistical activity was “Wages, annex for October”), the deadline of which was 1 December 2017. For the statistical activity, 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

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)