The rapid rise in labour costs may restrict investment opportunities

The long-awaited acceleration in economic growth materialised in the second half of 2014, but unfortunately labour productivity grew more slowly than in the first half of the year. Growth accelerated mainly as additional labour was employed, while the contribution of capital to growth declined.

After a long period of sluggish economic growth the growth in labour costs started to slow down in the first half of the year, but accelerated again in the second half. Employment growth picked up in the second half of the year. Although the average wage grew notably more slowly in 2014 than in 2013, companies were able to recruit additional labour in the second half of the year at the cost of faster wage growth.

The shortage of labour due to long-term factors is preventing any reduction in wage pressure. Demographic processes mean that the number of working age people is falling by around 0.8% a year and in the coming years the smaller birth cohorts will be leaving higher education facilities. Although the net migration balance improved for the second consecutive year, Estonian employers are still having to compete in the labour market with foreign employers. The workers going abroad who get a relatively bigger wage boost by doing so are those who would be earning a relatively low wage in Estonia. Not only is the flow of new entrants to the labour market shrinking, but the utilisation of labour is already high: the share of the working age population that was employed climbed higher in the second half of 2014 than it was at the peak of the economic boom.

The faster rise in labour costs than in productivity raised the labour share in GDP, while profits decreased. This may threaten the competitiveness of exporting companies as it will put them under pressure to raise prices. If competition makes it impossible to raise prices, then their lower profitability may push companies to reduce employment in Estonia. Nominal unit labour costs have risen by 17.5% in the last three years, which is more than twice the 9% level where the alert mechanism of the European Commission’s assessment is triggered.

There was no increase in corporate financial difficulties in the second half of 2014 and early 2015. Redundancy payments remained at about the same level as in the previous years, as did the number receiving compensation because their employer had gone bankrupt, and the number of unemployed who had lost their job through redundancy or through their employer closing down. Companies are able for now to cover the rapid rise in labour costs from their own profit buffers, and this will probably be aided by expectations of a recovery in foreign demand and favourable financing conditions. The ability to increase labour costs at the expense of profits will inevitably be reduced in the longer term. Reduced profits also threaten the ability of companies to invest in higher productivity and in the human capital needed for more complex and higher-value work. The key question in the development of the Estonian economy is whether value added can be created with a smaller labour force than before but through increased human capital.

Source: Bank of Estonia

Authors: Orsolya Soosaar and Natalja Viilmann; Economists at Eesti Pank

Estonian unemployment rate below EU average

Estonia’s seasonally-adjusted 6.2 percent unemployment rate is significantly below the EU 9.8 percent and euro area (EA) 11.3 percent average, reports Eurostat.

The average unemployment rate in both EU and EA are at its lowest in years. The total number unemployed people in the union in February was estimated at slightly below 24 million. Compared to a month before, the number decreased by 91,000.

Estonia registered one of the largest decreases in a year (8.4 percent to 6.2 percent between January 2014 and January 2015), alongside Ireland and Bulgaria.

The youth unemployment, although also below EU average (21.1 percent) was a much higher 13.9 percent in January 2015.

Estonia also stands out for having a higher unemployment rate for males (6.8 percent) than females (5.6 percent).

Source: ERR News via Estonian Review

7,200 job vacancies in Q4

According to Statistics Estonia, there were 7,200 job vacancies in the enterprises, institutions and organisations of Estonia in the 4th quarter of 2014. The number of job vacancies decreased by 15.9% compared to the previous quarter and increased by 13.6% compared to the 4th quarter of 2013.

The rate of job vacancies, i.e. the share of job vacancies in the total number of jobs, was 1.3% in the 4th quarter. For the third quarter in a row, the rate of job vacancies was the highest in administrative and support service activities (2.4%). It was the lowest in mining and quarrying and in water supply, sewerage, waste management and remediation activities (0.1% in each).

The rise in the number of job vacancies was the highest in professional, scientific and technical activities, where there were 2.6 times more job vacancies than in the 4th quarter of 2013.

56% of vacant and occupied posts are in Harju county (including Tallinn), followed by Tartu county (11%) and Ida-Viru county (8%). The rate of job vacancies remained the highest in Harju county (1.7%) and the lowest in Hiiu, Saare and Põlva counties (0.5% in each).

By type of ownership, 26% of job vacancies were in the public sector and 74% were in the private sector, where enterprises with Estonian ownership held the biggest share. The rate of job vacancies was 1.3% in the public sector and 1.4% in the private sector. The public sector also includes companies owned by the state or the local government.

Diagram: Rate of job vacancies

The movement of labour is characterised by labour turnover. In the 3rd quarter of 2014, a total of 89,000 employees were hired or left their jobs, which is a 9.6% increase compared to the same period of 2013. The largest increase in labour turnover compared to the 3rd quarter of 2013 occurred in agriculture, forestry and fishing and in construction (42.6% and 33.5%, respectively).

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.

The data are based on the job vacancies and labour turnover survey conducted by Statistics Estonia since 2005. In 2014, the sample included 12,267 enterprises, institutions and organisations; and the data of randomly selected units are imputed to the total population separately in each stratum.

Source:  Statistics Estonia

The purchasing power of those earning the average wage grew quickly

Data from Statistics Estonia show that the average gross monthly wage increased by 5.3% over the year in the fourth quarter of 2014, and the gross hourly wage by 6%. This growth was faster than in the previous quarter. The fall in consumer prices meant that the growth in the purchasing power of the average wage also accelerated to 5.8%.

The rise in the average wage continues to be affected by the obligation for companies to register employees, which has increased the number of workers with declared wages who had earlier been paid unofficially. This brought down the growth in the average wage because the additional workers were on average earning close to the minimum wage, according to data from the Tax and Customs Board. Without the obligation to register employees, the growth in wages would probably have been even faster.

At around 7.5%, growth in the average wage was faster in government and local government employment, with wages rising 10.1% in the health sector and 8.9% in public administration. Wage rises in these jobs are unlikely to have been affected by the obligation to register employees. Average wages in the private sector rose more slowly, increasing by a little over 7% in Estonian-owned companies, but by a more modest 2.5% in companies with foreign ownership. Wages in manufacturing rose by 4.4%, which was below the average.

Growth in the average wage will be boosted this year by the rise of 11% in the minimum wage. The minimum wage rose around twice as fast as the average wage did in 2014 and will do so again in 2015.

Net wages, which is the amount left after taxes, will rise faster this year as the tax-free minimum income is raised from 144 euros to 154 euros a month and income tax is lowered from 21% to 20%. These changes will raise the net wages of an employee on the minimum wage by around 1.7%, and those of someone on the average wage by 1.1%. For jobs where the employer and employee negotiate over a net wage, this will reduce costs to the employer and help to slow the growth in labour costs.

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

Households’ purchasing power grows rapidly

Households’ purchasing power is growing rapidly

In the 4th quarter of 2014, the average monthly gross wages were 1,039 euros (+5.3%, year on year). In 2014 as a whole, average gross wages increased to 1,001 euros (+5.5%).

The deceleration in the growth of wages was anticipated as enterprises’ economic results were modest last year. During the first nine months of 2014, the latest data we have currently, enterprises’ sales and total costs decreased by around 1%, total profits remained at around the previous year level, but labour costs increased by 8%. This trend is unsustainable in a longer term.

Another possible reason behind the deceleration in the growth of wages was the introduction of the labour registration obligation from July 1st, which increased the official number of employees in sectors, where wages are smaller (tourism, domestic trade, construction, etc.).

The growth of wages was broad-based in 2014, reaching 5% to 10% in three quarters of sectors. At the same time, the growth of employment varied substantially. For example, in finance and insurance, wages increased by 10% last year, while the number of employees decreased by 20%.

In 2015, gross wages will probably grow a bit less than in 2014 due to weak external economic environment. Minimum wages will grow again 2 times faster than the average wages in 2015 (+10% and +5%, respectively), lifting wages at the lower end. Households’ purchasing power will rise substantially this year, as labour income taxes were lowered by around 1.6 percentage points in January and inflation will be low. Higher wages of public workers and a rise in pensions and other social benefits will also support private consumption and thereby, economic growth.

Source: Swedbank

University of Tartu to develop ‘space grease’

The Estonian Materials Technologies Competence Centre (MATECC) has just signed an agreement with the European Space Agency to develop a nanotechnology lubricant suitable for extreme conditions.

Shuttles and equipment used in space consist of numerous elements and have several friction-prone details, the surface of which must be greased to ensure smooth operation. Due to extreme temperature, pressure and radiation conditions, conventional oils and greases cannot be used in space. Hence, special materials must be developed to achieve a sufficiently long action time and reliability required for space applications.

Now that Estonia is about to become a full member of the European Space Agency, Estonian enterprises also get the chance to contribute to space-related development. Researchers involved in the activities of the Estonian Materials Technologies Competence Centre have been studying friction mechanisms and the characteristics of materials on the nanoscale for several years already and developed novel additives to lubricant oils together with the industry. The acquired knowledge and experience will be also used in the new cooperation project with the European Space Agency, the university’s press office reports.

Martin Järvekülg, Research Fellow in Materials Science at the University of Tartu and Project Manager of the Estonian Materials Technologies Competence Centre, said that the aim of the cooperation between the centre and the European Space Agency is to develop a lubricant based on the combination of nanoparticles and ionic liquids.

“The novel lubricant must be effective under both normal pressure and under vacuum, both in high and low temperatures,” said Järvekülg. If the researchers succeed in combining the strengths of liquid and solid lubricants in the new compound material, the results of the project can be also used elsewhere, where the extreme environment or the specifics of application place higher demands on the materials.

Source: ERR News via Estonian Review

Estonia among the most talent-ready countries in the world

According to the global graduate business school, INSEAD, Estonia is among the most talent-ready countries in the world.

The second edition of the Global Talent Competitiveness Index, created by INSEAD, in partnership with Singapore’s Human Capital Leadership Institute and Adecco, placed Estonia 19th in the index, just ahead of Japan and right after Belgium.

The index measures the countries’ ability to attract and incubate talent. According to INSEAD, in the ranking of 93 countries, European states continue to dominate the list with 16 of them in the top 25.

“Switzerland maintains its number one spot, while four non-European countries are among the top ten: Singapore, the United States, Canada and Australia,” INSEAD said in a statement.

“By virtue of their small size, Switzerland, Singapore and Luxembourg – the top three – have no choice but to be open economies,” INSEAD added. “They show a high degree of openness in terms of trade, investments and people, where their small population, geography and lack of natural resources have meant that they have had to play the game of globalisation from early days.”

“Other countries which have realised that an attractive talent pool encourages multinational corporations to invest within their borders include the Nordic countries which are all in the top 20.”

In a video interview, the authors behind the index specifically singled out Estonia, by pointing out that it has made into the top 20, surpassing France (23), for example.

The top 20 talent-ready countries are:

1. Switzerland

2. Singapore

3. Luxembourg

4. United States

5. Canada

6. Sweden

7. United Kingdom

8. Denmark

9. Australia

10. Ireland

11. Norway

12. Netherlands

13. Finland

14. Germany

15. Austria

16. New Zealand

17. Iceland

18. Belgium

19. Estonia

20. Japan

INSEAD is one of the leading graduate business schools, with campuses in Europe (Fontainebleau, France), Asia (Singapore), and the Middle East (Abu Dhabi).

Source: ERR News via Estonian Review


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