Wages and productivity are better aligned

  • Economic activity picked up and productivity growth increased at the same time that wage growth slowed
  • The fastest wage growth in the industrial sector was in construction and oil shale
  • Wage growth is slower in the service sector than in previous years
  • The purchasing power of those earning the average wage will increase more slowly because of inflation

The average gross monthly wage was 5.7% higher in the first quarter of 2017 than it was a year earlier. This was lower than the growth rate of 6.9% in the previous quarter. Growth in the productivity and wages of workers became better aligned, as economic activity picked up and productivity growth increased at the same time that wage growth slowed. This is shown both by data for exports and industrial output and by sentiment indicators.

Wage growth slowed in the service sector, but it did not change in the industrial sector. Within that sector, wage growth accelerated in construction and recovered strongly in the oil shale sector through mining and energy. A rebound in demand led construction to hire more workers and raise wages. Output increased by 20% in construction in the first quarter, with growth in the construction of buildings and in investment in infrastructure. Wage growth slowed in manufacturing however, though the number of workers in manufacturing also increased and the economic circumstances of the sector improved as growth in external demand increased.

Strong growth in private consumption and wage rises in the public sector have caused wages in the service sector to rise faster in recent years than the average for the economy, but this growth has now slowed a little. The growth did not slow in all parts of the service sector though, with wage growth increasing for example in retail and in information and communications. One-off factors played a role in this, such as the wage agreement in the health sector and smaller bonuses in the financial sector than in the previous year.

As consumer prices rise faster, the purchasing power of those earning wages will again increase markedly slower than nominal wages. Inflation stood at 3% in the first quarter, and so real wage growth was 2.6%. Looking back over a longer period, the purchasing power of the average wage has increased by 20% from before the crisis in 2008, and by some 30% since 2010, when the recession was at its deepest.

Source: Bank of Estonia

Author: Orsolya Soosaar, Economist at Eesti Pank

11,200 job vacancies in Estonia

According to Statistics Estonia, there were over 11,200 job vacancies in the enterprises, institutions and organisations of Estonia in the 1st quarter of 2017. This is the highest number of job vacancies in the past 8 years. While in the previous quarter, the number of job vacancies reached slightly above 9,000, in the 1st quarter, the number of job vacancies increased by 24%.

The number of job vacancies in the 1st quarter of 2017 was more or less the same as the record level reached in the 3rd quarter of 2016, when the number of job vacancies exceeded 11,000 for the first time in seven years. In the 1st quarter, however, the number of job vacancies exceeded the previous record by 140 vacancies. Compared to the 1st quarter of 2016, when the number of job vacancies exceeded 8,200, the number of job vacancies increased by 35%.

The share of vacant and occupied posts in the total number of posts continued to be the highest in manufacturing (19%), wholesale and retail trade (16%) and education (10%).

The rate of job vacancies, i.e. the share of job vacancies in the total number of jobs, was 2.0% in the 1st quarter of 2017, which is 0.3 percentage points higher than in the 4th quarter of 2016 and 0.5 percentage points higher than in the 1st quarter of 2016.

In the 1st quarter, the rate of job vacancies was the highest in administrative and support service activities (4.0%) and accommodation and food service activities (3.2%). The rate of job vacancies was the lowest in water supply; sewerage, waste management and remediation activities (0.9%), mining and quarrying (1.0%) and real estate activities (1.0%).

Most of the vacant posts were available in Harju county (70%) (including 57% in Tallinn), followed by Tartu county (8%) and Ida-Viru county (4%). The rate of job vacancies was the highest in Harju county (2.4%) and the lowest in Hiiu (0.5%), Saare (0.9%) and Valga (1.1%) counties.

Three quarters, or 75% of the vacant posts were in the private sector. In the 1st quarter of 2017, the rate of job vacancies was the highest in state organisations (2.7%) and foreign private-sector institutions (2.5%). The rate of job vacancies was the lowest in local government organisations (1.1%).

Read more from Statistics Estonia

Estonia’s average hourly gross salary is 7.13 euros

According to Statistics Estonia, in the 1st quarter of 2017, the average monthly gross wages and salaries were 1,153 euros and the average hourly gross wages and salaries 7.13 euros. Compared to the 1st quarter of 2016, the average monthly gross wages and salaries increased 5.7% and the average hourly gross wages and salaries 3.9%. The year-over-year growth in average monthly gross wages and salaries was 1.2 percentage points slower than in the previous quarter and the year-over-year growth decelerated for the fourth successive quarter.

The average monthly gross wages and salaries were 1,121 euros in January, 1,117 euros in February and 1,228 euros in March. Compared to the previous quarter, the average monthly gross wages and salaries fell 2.4%. This was mainly due to a decrease in irregular bonuses and premiums. Without irregular bonuses and premiums, the average monthly gross wages and salaries decreased 0.9% compared to the previous quarter.

In the 1st quarter of 2017, irregular bonuses and premiums decreased 30.1% per employee compared to the 4th quarter of 2016 and 2.4% per employee compared to the 1st quarter of 2016. Irregular bonuses and premiums affected the year-over-year increase in average monthly gross wages and salaries by 0.3 percentage points. Without irregular bonuses and premiums, the average monthly gross wages and salaries increased 6.0% compared to the 1st quarter of 2016.

Real wages, which take into account the influence of the change in the consumer price index, increased slower (2.6%) than the average monthly gross wages and salaries in the 1st quarter of 2017 compared to the 1st quarter of 2016 due to an increase 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 monthly gross wages and salaries continued to be the highest in information and communication and in financial and insurance activities, respectively 2,004 and 1,917 euros. Compared to the 1st quarter of 2016, the average monthly gross wages and salaries increased the most in other service activities (e.g. activities of membership organisations, repair of household goods, beauty treatment), where the average monthly gross wages and salaries are the lowest (640 euros). The year-over-year growth of 16% in this economic activity is mainly due the increase in minimum wages from 430 euros to 470 euros. Larger year-over-year increases in average monthly gross wages and salaries also occurred in mining and quarrying (11%), electricity, gas, steam and air conditioning supply (11%), wholesale and retail trade (9%) and in information and communication (9%). Compared to the 1st quarter of 2016, average monthly gross wages and salaries decreased or remained relatively constant in administrative and support service activities (-1.3%), agriculture, forestry and fishing (-0.8%), human health and social work activities (-0.2%) and in financial and insurance activities (0.2%).

In the 1st quarter of 2017, the year-over-year growth in average monthly gross wages and salaries was faster than average in the Estonian private sector (6.6%) and in state organisations (6.6%) and slower than average in local government organisations (5.4%) and the foreign private sector (4.2%).

In the 1st quarter of 2017, by county, the average monthly gross wages and salaries were the highest in Harju (1,284 euros) and Tartu (1,140 euros) counties and the lowest in Jõgeva (850 euros), Põlva (840 euros) and Saare (816 euros) counties. The year-over-year growth of average monthly gross wages and salaries was the fastest in Võru (8.4%), Pärnu (7.9%) and Ida-Viru (7.7%) counties.

According to the Wages and Salaries Statistics Survey, the number of employees converted to full-time units increased 6.7% compared to the 4th quarter of 2016 and 2% compared to the 1st quarter of 2016. The biggest year-over-year increase in the number of employees in full-time units occurred in real estate activities (25%), administrative and support service activities (15%) and in information and communication (12%), and the biggest year-over-year decrease occurred in other service activities (12%) and in transportation and storage (7%). Over the course of a year, the number of employees converted to full-time units increased 3% in the private sector and decreased 1% in the public sector.

In the 1st quarter of 2017, the average monthly labour costs per employee were 1,556 euros and the hourly labour costs were 10.10 euros. Compared to the 1st quarter of 2016, the average monthly labour costs per employee increased 5.5%.

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Slower growth of wages reduces macroeconomic risks

• The growth of average monthly gross wages slowed to 5.7% in the first quarter.
• We expect gross wages to grow by around 6% this year.

The growth of the average gross monthly wage decelerated from 7.6% in 2016 to 5.7%, over the year, in the first quarter. 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 lack of suitable labour is the most important factor restricting business for a fifth of manufacturing and service companies and a third of construction companies, according to a quarterly survey by the Estonian Institute of Economic Research.

Slower growth of wages reduces macroeconomic risks. Too fast growth of labour costs could be dangerous in the longer term, as it reduces companies’ ability to export and invest. Last year enterprises’ profits decreased by 9.9%, whereas investment volumes declined by 12.1%. As order books and output prices should increase and labour costs grow more slowly this year, the profitability of the business sector should improve in 2017.

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 lack of qualified labour pushed up wages in trade and IT. Average wage level remained unchanged in the primary sector, health care and finance. In agriculture and health care, the rate of job vacancies is smaller than the average in the total economy.

In 2017, the growth of the average wage in real terms is expected to slow to around 3% (2013-2016 average was 6.4% per year), as nominal growth of wages will be somewhat slower and prices will rise. This, in turn, would limit households’ consumption. The substantially slower growth of wage-earners’ purchasing power will be smoothed by an increase in social transfers to pensioners, low-wage earners and children. The real growth of the average net wage rose by only 2.6% in the first quarter of this year. Domestic trade has been unaffected so far – in the first quarter, retail sales volumes grew by around the same pace as in the second half of last year.

 

Source: Swedbank

The average income per employee was 1,073 euros

According to Statistics Estonia, in 2016, the average monthly gross income per employee was 1,073 euros. The growth of gross income continued at the same rate as in previous years (6%), however, the number of people receiving income started to decrease for the first time since the years of the economic crisis.

In counties, the average monthly gross income per employee was mainly in the range 900–1,200 euros. It exceeded 1,000 euros in Harju, Tartu, Hiiu and Rapla county; only in Ida-Viru county, the monthly gross income was below 900 euros.

The average monthly gross income varied greatly among local government units. There was a two-fold difference between the local government unit with the highest and the lowest gross monthly income. The highest monthly gross income per employee was earned in the rural municipalities of Harju county, led by Viimsi rural municipality (1,505 euros). At the other end were the Tartu county rural municipalities of Piirissaare and Peipsiääre and the city of Kallaste, where the gross income was below 800 euros per month.Average monthly gross income per employee, 2016

The number of persons receiving gross income was slightly below 520,000, and it decreased by almost 350 persons compared to 2015. The main reason behind the decline in the number of income recipients is the fact that the number of young people (aged under 25) has continuously decreased in recent years. Before the financial crisis, the number of young income recipients was close to 64,000; in 2016, it was 34,000. Also in the age group 50–62, the number of income recipients decreased by 700 persons. The number of income recipients grew among the population aged 25–49 and 63 and over, but less than in the previous years.

Gross income recipients, 2003–2016

The number of income recipients decreased in most counties, with the exception of a small increase in Harju, Tartu and Saare counties. The decrease in the number of young employees was also prevalent in counties, especially in Ida-Viru and Järva counties, where the number of income recipients under 25 years of age fell by 10% compared to 2015.

Over a half (53%) of income recipients were women and their average monthly gross income was 948 euros. The average monthly gross income of men was 1,214 euros. As the dataset does not enable distinguishing between full-time and part-time employees and analysing by economic activities, the reasons for the difference in men’s and women’s monthly gross wages do not appear from the data.

The analysis is based on the data of the Estonian Tax and Customs Board as at 26 April 2017. The average monthly gross income per employee is calculated by dividing the average monthly sum of payments with the average number of persons receiving payments. In Estonia, the main representative of public interest for the survey is the Ministry of Economic Affairs and Communications, commissioned by whom Statistics Estonia analyses the data necessary for conducting the statistical activity.

Labour force participation rate 70 pct in 1stQ

Labour market performed better than expected in the first quarter. The labour force participation rate, i.e., the proportion of persons of working-age who are either employed or unemployed, reached a record level of 70.2%, considering seasonal factors. Employment substantially increased and the unemployment rate decreased further.

The number of employed increased by 2.7%, over the year, mostly in trade, and in Tallinn, as several new shopping centres were opened. Increased economic activity lifts employment this year. Manufacturing and service companies expect higher sales and plan to increase the number of employees during next three months.

The unemployment rate decreased to 5.6% in the first quarter (6.5% in the first quarter of 2016). The registered unemployment rate of 5.0% was at the same level as one year ago. Strong demand for labour supressed the number of unemployed, even when the work ability reform moved large groups of people from inactivity into the unemployed. Nevertheless, in April, the number of registered unemployed grew again, so there is no clear trend.

The number of inactive decreased by 5.7% as less people were away from the labour market due to studies, bad health or raising children. The participation rate is on the rise due to a tight labour market, the work ability reform motivating people with disabilities to look for a job, and, a smaller number of people aged 15-24.

First quarter data shows that the labour market remained tight. The amount of labour available in the market has decreased, while the rate of job vacancies has jumped. The rate of job vacancies, i.e. the share of job vacancies in the total number of jobs, was 1.7% in the fourth quarter of 2016. A shrinking working-age population reduces the amount of existing work force as well. The number of people aged 15-74 decreased by 6,000 only in 2016. Therefore, wage pressures are expected to persist.

 

Source: Swedbank

Growth accelerated in productivity

  • The alignment of growth in labour productivity and in wages improved in the second half of 2016 as growth accelerated in productivity and slowed a little in wages
  • Whether companies can improve their profitability as foreign demand recovers will depend on whether labour productivity grows further
  • People changed jobs more last year than they did the year before
  • Simultaneous increases in the number of vacancies and in unemployment indicate however that there is a worse match between labour and jobs

The economy perked up in the second half of 2016 and growth recovered in labour productivity. Employment declined at the same time, and so did wage growth a little, with the consequence that growth in labour costs slowed. This equally meant that the squeezing of corporate profit margins lessened. Whether companies can improve their profitability and overcome problems with inflated labour costs will depend on whether labour productivity grows further. Where companies have so far managed to preserve jobs and hold on to staff despite weak demand, improved demand will allow them to increase production and productivity without taking on additional labour costs. Productivity clearly depends on investment too, which has been reduced in recent years.

The rate of growth of the average wage slowed in the second half of 2016, though only a little. Wage growth was very different in different sectors of the economy, like it was in the first half of the year. Wages in oil shale and construction rose by less than the average wage, but those in the labour-intensive services sector rose faster than the average, though not as fast as in the first half of the year. The high expectations for employment in construction and in manufacturing companies revealed in sentiment surveys by the Estonian Institute of Economic Research suggest that wage growth may be pushed up in future as there is a shortage of suitable labour.

Labour shortages are illustrated by the notable increase in 2016 in the number of vacancies. The rise in the vacancy rate can partly be explained by increased movement between jobs as the number of separations initiated by the employee was 13% higher than a year earlier. Under normal circumstances a rise in the vacancy rate is accompanied by a fall in unemployment, but in the second half of 2016 the unemployment rate actually rose. There were more unemployed in Ida-Virumaa because employment was lower and in Harjumaa because of both lower employment and increased participation in the labour force. Simultaneous increases in the number of vacancies and in output indicate however that the match between labour and jobs may have deteriorated. The number of unemployed was shown by the labour force survey to have increased sharply in Ida-Virumaa, but a lot of the new jobs were created in Harjumaa.

Over the long term the labour supply is dictated by the number of people of working age and their degree of active participation in the labour market. Increased participation in the labour market will be supported in future by reforms to social insurance. The labour participation rate in Estonia is already one of the highest in Europe though, especially for the over-50s, and this will limit the effect of the reforms. The decline in the number of people of working age has slowed much more in recent years than had been forecast. Because immigration into Estonia will probably exceed emigration from Estonia in future, the amount of labour in the economy will shrink more slowly in future than was earlier forecast.

Source: Bank of Estonia
Author: Orsolya Soosaar, Economist at Eesti Pank