Estonian wage pressures have not eased

  • An improved external environment and higher productivity are boosting economic growth
  • Rising food and energy prices will put an end in the second half of the year to the deflation that has been present for two years
  • Wage pressures have not eased, and growth in the average wage remaining close to 5% will force companies to make their production more efficient or exit the market

The Estonian economy will grow faster this year and in the next two as the external environment improves and productivity increases. Demand from trading partners has grown in the past six months at the rate that was forecast, and the data indicate that growth momentum will be maintained. In the short term growth will be boosted by increased productivity per employee, as the number of hours actually worked by the full-time employed has been temporarily reduced in expectation of improved demand to come. In the longer term it is only investment and employee development that can ensure higher productivity, and these should be supported by economic policies that favour growth and by increased competitiveness at both the state and company levels.

Increased investment alone is not enough to improve the growth capacity of the economy. The ratio of investment to GDP in Estonia is one of the highest in Europe, but the structure of investment should also be considered, and how efficiently the fixed assets acquired are used. The share of investment going into research and development in Estonia is one of the smallest in the European Union and so support for innovation is not strong. At the same time, the utilisation rate of production resources has been below the European Union average, which means that a relatively large part of the fixed assets acquired and the spending on them has been ineffective and has not supported growth.

The Estonian economy will become larger in the middle of this year than at its pre-crisis peak. The state of the economy is quite different from what it was during the boom some ten years ago, as corporate production capacity which is sustainable in the long-term is around 10% larger than the level of that time, and the economy is close to balance. Growth may still be forced slower by risks stemming from the external environment, the most important of which are the unsustainability of the growth in neighbouring countries that is founded on consumption; the migrant crisis, which is yet to be resolved; Brexit; volatility in commodities prices; complex geopolitical circumstances; and the bursting of a bubble in Swedish asset prices.

An accommodative monetary policy and access to funding aid growth in the economy, though the limited amount of labour available poses a problem. The central question for economic development is not how the supply of labour can be increased but how the actual available labour can be better used than before now. Sectors with low value added are particularly feeling the labour shortages, as their low average wages are hurting their competitiveness in the labour market.

Companies with low productivity and low wages exiting the market is a part of economic development. The movement of workers to jobs with higher productivity and higher wages will leave the structure of the economy more based on value added and will increase the incomes of residents. At the same time the changes in the structure of the economy should be in line with the redeployment of workers. Excessive pressure on companies with low productivity, one source of which could be steep rises in the minimum wage, could raise unemployment and harm the long-term outlook for growth.

Wage pressure has not eased and labour costs increased further at the start of this year at the expense of profits. Profits will stop declining when labour productivity increases. This will be aided by the flexible labour market, which has an institutional architecture that lets it adapt relatively easily compared to those in other countries. Collective agreements play only a small role beyond setting minimum wages and employers can decide directly about their wage costs. Even so it is possible that companies have been holding on to employees and raising wages because of overly optimistic expectations of growth in demand, and so wage growth could slow sharply.

Rising food and energy prices will put an end in the second half of the year to the deflation that has been present for two years, but for the year as a whole consumer prices will be at the same level as they were last year. Inflation will remain between 2% and 3% in the next two years and a large part of the rise in prices will come from tax rises, as excise increases on fuel, alcohol and tobacco. Higher inflation will restrain the rise in real household incomes, and that will then hold back growth in consumption over the next two years.

The financial situation of the Estonian general government is good and the budget has remained in surplus in recent years. However, the surplus has not been planned but has resulted from tax revenues being larger than expected or planned investment being postponed. Eesti Pank forecasts the budget position will be close to balance in the years ahead too, but there are major upside and downside risks. The structural balance rule in the State Budget Act ensures the long-term stability of state financing, but in order that companies and households not be faced with uncertainty about the future due to the government needing an unplanned additional source of funds, the government should set the target of keeping the budget in structural surplus or should allow more flexibility in its spending.

In the new budget strategy the government has put smoothing the economic cycle to the forefront and achieving nominal balance has been postponed. However, it will be harder in future to achieve balance. The budget was in surplus in recent years even though government wage costs increased rapidly and social benefit payouts increased strongly. This was possible because of a fall in capital expenditure and a tax-rich economic environment. Wage growth will slow in Estonia in the years to come and therefore the tax burden will decline, while the government is planning to increase investment, meaning pressure will increase to limit costs so the budget can stay in balance.

Source: Bank of Estonia

The number of job vacancies increased in 1Q

According to Statistics Estonia, there were about 8,300 job vacancies in the enterprises, institutions and organisations of Estonia in the 1st quarter of 2016. The number of job vacancies increased by 25% compared to the previous quarter and by 14% compared to the 1st quarter of 2015.

The rate of job vacancies, i.e. the share of job vacancies in the total number of jobs, was 1.5% in the 1st quarter of 2016; this is 0.3 percentage points higher than in the 4th quarter of 2015 and 0.2 percentage points higher than in the 1st quarter of 2015.

The rate of job vacancies was the highest in the economic activity of information and communication (3.6%) and the lowest in mining and quarrying (0.1%), which had the lowest rate of all economic activities in the 1st quarter of 2015 as well.

The largest share of vacant and occupied posts in the total number of jobs was recorded in manufacturing (19%), wholesale and retail trade (15.6%) and education (10%).

The increase in the number of job vacancies was the biggest in information and communication where there were two times more job vacancies than in the 1st quarter of 2015.

57% of the vacant and occupied posts were in Harju county (including Tallinn), followed by Tartu county (11%) and Ida-Viru county (7.5%). The rate of job vacancies was still the highest in Harju county (1.8%) and the lowest in Saare county (0.7%).

6,100 job vacancies (74%) were in the private sector and 2,200 (26%)  in the public sector. In the 1st quarter of 2016, the rate of job vacancies was 1.5% in both the public and the private sector. The public sector includes companies owned by the state or local governments.Diagram: Rate of job vacancies, 1st quarter 2007 – 1st quarter 2016

The movement of labour is characterised by labour turnover. In the 4th quarter of 2015, a total of 67,000 employees were hired or left their jobs, meaning there was a 2% decrease compared to the same quarter of 2014. Compared to the 4th quarter of 2014, the largest increase in labour turnover occurred in information and communication (25.5%) and in agriculture, forestry and fishing (24.0%).

The data are based on the job vacancies and labour turnover survey conducted by Statistics Estonia since 2005. In 2016, the sample includes 12,603 enterprises, institutions and organisations; the data of randomly selected units are imputed to the total population separately in each stratum.

The number of job vacancies is the total number of job vacancies on the 15th day of the second month of a quarter. 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.

Source: Statistics Estonia

Estonian labour market review

Key developments in second half of 2015

Growth has been slow in the Estonian economy for several years now and it slowed further in 2015. Despite this, the demand for labour remained strong as employment grew and growth accelerated in the payroll of the whole economy as a share of GDP.

Part of the reason for this contradiction may be that the slowdown in GDP growth was not broadly based, as certain sectors made a significant contribution to the slowdown, but do not account for a large share of employment. In the longer term the supply of labour in the economy depends on the number of residents of working age and how actively they participate in the labour force.

The number of people of working age has been declining in Estonia for a long time now, and this trend continued in 2015. This was more than offset however by increased participation in the labour force, and overall the amount of labour in the economy grew. People are encouraged to participate in the labour market by the increased chances of finding a job and by the steadily rising wage level. Annual growth in the second half of 2015 was as fast as in the first half, but this was because of extraordinarily high employment in the third quarter.

The estimate of employment may to some extent have been boosted by the delayed effect of the registration of employees. Estimates of employment based on data from companies put employment growth slower than in 2014, but most of them still show positive growth. For the year as a whole it was only full-time equivalent employment in the wage survey that fell. At the same time, demand for labour calculated from the number employed may be overestimated as there was an increase in the number of those in employment who were working part-time, and the number of hours worked in the whole economy grew more slowly than employment did. Increased employment led to a fall in unemployment for 2015 as a whole.

Unemployment in Estonia is markedly lower than in Latvia or Lithuania, and the reasons behind this are analysed in Box 3 of this report. The percentage of the long-term unemployed in total unemployment fell in the second half of the year. In the last quarter of the year both the labour force survey and the data on registered unemployment showed a rise in the number of short-term unemployed. Data on registered unemployment from Töötukassa, the unemployment insurance fund, gave a slightly less optimistic picture than the labour force survey.

The number registered as unemployed increased quarterly from the second quarter to the fourth and there was also a rise in the number of those whose working relationships were ended as they were made redundant. More people entered the register because of redundancy than did so in 2014, but still substantially fewer than in 2013. Unit labour costs continued to grow fast in yearly terms in the second half of the year. Wages grew fastest in the public sector, specifically in local government administration, but wage growth was lower in Estonian private companies.

Data on wages paid out show wage growth to have been fastest in the lower part of the wage distribution, probably because of the sharp rise in the minimum wage. The quarterly growth rate of the index of labour costs gives reason to think that growth in labour costs is slowing, as it fell notably at the end of 2015. Labour productivity fell in the second half of 2015, while yearly growth in unit labour costs was about as fast as in the first half of the year at 5.6%. This rise came from both the fall in productivity and the growth in labour costs per employee. In contrast to what was forecast, it may be noted that no adjustment in labour costs has yet taken place. Sentiment surveys show indeed that the expectations of companies for employment rose at the end of 2015 and the start of 2016 together with the share of companies complaining of labour shortages. In the longer term, rising unit labour costs mean shrinking profit margins for companies, and that in turn will make those companies more vulnerable in future to negative shocks.

Read more from the report made by the Bank of Estonia

Increases in bonuses are in contradiction to shrinking profits

  • Higher wages and lower consumer prices increased the capacity of households to consume
  • The growth in average wages in manufacturing accelerated from 5.4% to 8% in the fourth quarter of last year
  • Companies have had to pay out an ever bigger part of their value added created in recent years
  • The wage distribution has become more equal in recent years

Data from Statistics Estonia show that the average gross monthly wage was up 8.1% on a year earlier in the first quarter of 2016.This means average wage growth was faster than at the end of 2015. Growth in the average monthly wage accelerated faster than growth in the average hourly wage, which indicates that variable pay components like bonuses and overtime contributed to the faster growth. Higher wages and lower consumer prices increased the capacity of households to consume.

The employer ownership model that saw the fastest wage growth was foreign-owned private companies, where wages rose by 10.2%. Wage growth at foreign-owned companies was still lower in 2014-2015 than at Estonian-owned private companies. Growth in average gross monthly wages in the public sector did not speed up. In recent years the state has been able to manage wage growth in areas under its control, but wages have risen quite fast, by close to 8%, in areas under local government administration.

Changes in the average wage have varied quite widely in different fields of activity, ranging from –5.1% to +22.9%. Wages rose fastest in administrative and support activities, which covers services like rental services, labour exchange, travel agency services, security, maintenance including cleaning, and the like. Several of these were probably affected by the rise in the minimum wage, which was 10.3% this year, though this only explains a part of the increase. It can be seen from the enterprise statistics that profits increased in this sector in 2015, which probably allowed employers to pay bonuses. The growth in average wages in manufacturing also accelerated to 8% from 5.4% in the fourth quarter of last year even though profits were down last year and growth in value added was weak.

The wage distribution has become more equal in recent years. Data from the Tax and Customs Board showed that the median wage1paid out in 2015 was 80% of the average wage, which is two percentage points more than in 2009. Among wage recipients, 37% got the average wage paid out or more, which is two percentage points more people than in 2009. The data published by Statistics Estonia on average gross income also show that over time the crude gender income gap has narrowed. This has probably been helped by the minimum wage rising faster than the average wage, wages in education and healthcare rising faster than the average, and competition with foreign employers, because the relative wage gain from working abroad is largest in the lowest part of the wage distribution.

Companies have had to pay out in wages an ever bigger part of their value added created in recent years. In 2014 labour costs were already bigger in Estonia as a share of value added than the European Union average adjusted for structural economic differences, and faster wage growth at the start of 2016 means the difference has become wider. Paying generous bonuses is not in line with shrinking profits, which indicates that companies may be doing better than the statistics indicate.

1 The median wage is the wage which half of employees earn more than and half earn less than.

Source: Bank of Estonia

Author: Orsolya Soosaar, Economist at Eesti Pank

Estonian salaries grew 6 pct per year

According to Statistics Estonia, in 2015, the average monthly gross income per employee was 1013 euros. The increase continued at the same rate as in the previous years, i.e., at 6% per year.

In 2015 compared to the previous year, the increase in gross income was fastest in Jõgeva, Lääne, Viljandi, Võru and Põlva county (7% increase). In other counties, gross income increased 6%, except for in Ida-Viru county where the increase was 5%.

The average monthly gross income exceeded 900 euros in 8 counties and it exceeded 1,000 euros in Harju, Tartu and Hiiu county. In the other counties, the gross income was lower. In the past years, the gross income has been lowest in two counties: Ida-Viru (in 2004–2009) and Valga county (2010–2014). In 2015, the lowest gross income was earned yet again in Ida-Viru county (847 euros).

Among local government units, the average monthly gross income per employee was highest in the rural municipalities of Harju county. For years now, the highest gross income there is earned in Viimsi rural municipality, where the average monthly gross income per employee was 1,442 euros in 2015. In the capital, Tallinn, the monthly gross income in 2015 was nearly 1,100 euros. The gross income was one of the highest also in the rural municipality of Vormsi in Lääne county. On the lower end of the ranking of gross income we find three rural municipalities of Tartu county, where the gross income was below 700 euros per month (the rural municipalities of Piirissaare and Peipsiääre and the city of Kallaste).

Map: Average monthly gross income per employee in local government units, 2015

In 2015, men earned on average 270 euros per month more than women. Although the gross income of men was higher than that of women, the gross income of women increased more compared to the previous year (7% increase for women, 5% for men). In the past years, the difference between the gross incomes of men and women has started to decrease a little, as the gross income of women has increased faster.

In 2015, the number of persons earning gross income did not increase significantly. There were in total 1,630 additional earners of gross income, making the total of gross income recipients a little over 520,000 persons. In most counties, the number of gross income recipients decreased, except for in Harju, Tartu and Pärnu county. The number of gross income recipients decreased mostly for the population aged 24 and under, which was compensated for by an increase in the number of income recipients among the elderly (aged 63 and over). While a year ago, the number of gross income recipients in the younger age group decreased 2% compared to the previous year, the decrease accelerated in 2015, reaching 7%. The number of income recipients aged 24 and under decreased in all counties, while the relevant number among persons aged 63 and over increased in all counties.

Diagram: Young and elderly recipients of gross income, 2003–2015

The analysis is based on the data of the Estonian Tax and Customs Board as at 31 March 2016. The average monthly gross income per employee is calculated by dividing the monthly average sum of disbursements with the monthly average number of persons receiving disbursements.

Source: Statistics Estonia (see better graphs here)

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Estonian average salary is 1,091 euros

According to Statistics Estonia, in the 1st quarter of 2016, the average monthly gross wages and salaries were 1,091 euros and the average hourly gross wages and salaries were 6.86 euros. Compared to the 1st quarter of 2015, the average monthly gross wages and salaries increased by 8.1% and the average hourly gross wages and salaries by 7.7%. In the 1st quarter, the average annual growth of monthly gross wages and salaries was slightly faster than in the 4th quarter of 2015.

The increase of wages and salaries was mainly due to the irregular bonuses and premiums, which increased 32.5% per employee compared to the 1st quarter of 2015 and which affected the increase in average gross monthly wages and salaries by 0.8 percentage points. Without irregular bonuses and premiums, the average monthly gross wages and salaries increased by 7.2% in the 1st quarter. Additionally, minimum wages increased from 390 euros to 430 euros at the beginning of the year.

Real wages, which take into account the influence of the change in the consumer price index, increased faster than the average monthly gross wages and salaries (8.5%) in the 1st quarter of 2016 compared to the 1st quarter of 2015 due to the continued decrease in consumer prices. Compared to the same quarter of the previous year, real wages have been increasing since the second half of 2011.

The average gross monthly and hourly wages and salaries increased in the 1st quarter of 2016 in almost all economic activities, except in other service activities. The largest increase of monthly and hourly wages and salaries occurred in administrative and support service activities, accommodation and food service activities and in information and communication activities. Private sector was the growth driver of wages and salaries in the 1st quarter, with the annual gross wages and salaries increase of 8.8%.

According to the Wages and Salaries Statistics Survey, the number of employees converted to full-time units decreased by 1.3% compared to the 1st quarter of 2015. The largest decrease occurred in activities with wages and salaries lower than the average monthly gross wages and salaries – in real estate activities and in other service activities.

The average monthly gross wages and salaries were 1,067 euros in January, 1,058 euros in February and 1,148 euros in March.

In the 1st quarter of 2016, the average monthly labour costs per employee were 1,476 euros and the hourly labour costs were 9.75 euros, which have increased 8.5% and 8.3% respectively, compared to the 1st quarter of 2015.

Average monthly gross wages and salaries and their change compared to the same quarter of the previous year, 1st quarter 2014 – 1st quarter 2016
Year Quarter Average gross wages and salaries, euros Change compared to the same quarter of the previous year, %
2016 I 1091 8,1
2015 I 1010 4,5
II 1082 5,8
III 1045 6,9
IV 1105 6,4
2014 I 966 7,3
II 1023 4,8
III 977 5,0
IV 1039 5,3

Diagram: Average monthly gross wages and salaries

Statistics Estonia conducts the Wages and Salaries Statistics Survey on the basis of an international methodology since 1992. In 2016, the sample includes 12,350 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 actually worked time and remuneration for time not worked. The hourly gross wages and salaries do not include remuneration for time not worked (holiday leave 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.

Source: Statistics Estonia

Labour market data stronger than expected

• In Q1 2016, employment increased due to a higher number of part-time workers.
• Unemployment rate was slightly smaller than one year ago.
• We still expect unemployment rate to grow and employment to decline a bit in 2016.

First quarter’s labour market data turned out better than expected. Employment grew further and unemployment rate slightly decreased, year on year. The number of unemployed stayed around the same level as in the first quarter of 2015 but unemployment rate declined slightly to 6.5% (6.6% in Q1 2015).

The number of employed grew by 1.1% compared with the first quarter of last year. Employment increased among the part-time wage-earners in the services sector. The number of full-time employees decreased. Employment in agriculture decreased. Substantially lower output prices and the African swine fever have resulted in substantially lower production volumes in this sector.

Today’s labour market data published by Statistics Estonia differs from earlier data released by the Unemployment Insurance Fund or the Tax and Customs Board. According to the Unemployment Insurance Fund, registered unemployment rate exceeded last year’s level by 0.2 pp in the first four months of 2016. Tax revenues’ data show that the number of wage earners decreased for the 8th month in March.

In 2016, employment is expected to fall by 0.2% because of a lower supply (a shrinking working-age population) and demand of labour (weak export demand, investments in machinery). A state reform will reduce the number employed in the public sector. A cutback in the number of public workers and the reorganisation of the social benefits system for the disabled (forcing them to find jobs) will lift the number of unemployed, at least temporarily. We expect the unemployment rate of Estonia to grow from 6.2% in 2015 to 6.5% in 2016.

Source: Swedbank

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