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

Most job vacancies in public administration

According to Statistics Estonia, there were 7,300 job vacancies in the enterprises, institutions and organisations of Estonia in the 1st quarter of 2015. The number of job vacancies increased by 0.6% compared to the previous quarter and by 1.3% compared to the 1st quarter of 2014.

The rate of job vacancies, i.e. the share of job vacancies in the total number of jobs, was 1.3% in the 1st quarter of 2015, which is the same as in the previous quarter and in the 1st quarter of 2014.

The rate of job vacancies was the highest in public administration and defence and compulsory social security (2.5%) and the lowest in mining and quarrying (0.2%).

The highest share of vacant and occupied posts in the total number of jobs was held by manufacturing (20%), wholesale and retail trade (16%) and education (10%).

The rise in the number of job vacancies was the highest in education where there were 37% more job vacancies than in the 1st quarter of 2014.

56% of vacant and occupied posts were in Harju county (including Tallinn), followed by Tartu county (11%) and Ida-Viru county (8%). The rate of job vacancies was still the highest in Harju county (1.6%) and the lowest in Hiiu county (0.04%).

73% of the job vacancies (i.e. 5,300) were in the private sector and 27% were in the public sector, while in the 1st quarter of 2014 the corresponding shares were 76% and 24%. In the 1st quarter of 2015, the rate of job vacancies was 1.3% 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 2006 – 1st quarter 2015

The movement of labour is characterised by labour turnover. In the 4th quarter of 2014, a total of 68,000 employees were hired or left their jobs, which is a 10.3% increase compared to the same period of 2013. In the 4th quarter of 2014, the largest increase in labour turnover compared to the 4th quarter of 2013 occurred in accommodation and food service activities and in real estate activities (57.5% and 45.8%, respectively).

The data are based on the job vacancies and labour turnover survey conducted by Statistics Estonia since 2005. In 2015, the sample includes 12,376 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 the 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

Higher wages support consumption

In Estonia, monthly gross wages amounted to 1,010 euros, up by 4.5% in Q1, yoy.
Net wages jumped by 7% in Q1 because of lower labour taxes and deflation.

The growth of gross wages decelerated from 5.5% in 2014 to 4.5% in Q1 2015. Irregular bonuses and premiums decreased by 15.6% per employee in Q1 of 2015, yoy. Without irregular bonuses and premiums, the average monthly gross wages grew by 5.3%.

Wages increased less due to worse economic situation in some sectors. Another possible reason behind the deceleration in the growth of wages was the introduction of the labour registration obligation from July 1st 2014, which increased the official number of employees in sectors, where wages are smaller (tourism, domestic trade, construction, etc.).

Gross wages increased the most in the real estate sector, followed by the public sector (education, health care). Average gross wages decreased in the construction and mining, and did not change in the energy and logistics sectors, compared with the same period last year. Households’ real purchasing power will grow markedly this year. Although the growth of gross wages will slow a bit, smaller labour taxes and very low inflation will result in a remarkable surge in the households’ purchasing power. Net wages were up by 7% in the first quarter, year on year.

Average wages were pushed higher by a 10%-increase in minimum wages in January. A rise in pensions and other social benefits will further support private consumption, which will be the biggest contributor to GDP growth in 2015. Retail trade volumes rose by as much as 8%, year on year, in the first quarter.

SOurce: Swedbank

Continuing wage pressures ahead

Annual growth in employment accelerated to 2.9% in the first quarter of 2015, while unemployment stood at 6.6%. The low comparison base from the first quarter of 2014 played a part in the rapid annual growth in employment. Seasonally adjusted employment was unchanged from the previous quarter.

Data from the Tax and Customs Board also showed that the number receiving taxed wage income increased in the first quarter, and official data put the rise at 1.8%. The number employed by the general government continued to fall, having started to do so in the second half of 2012, and the number of businesses registered in the commercial register rose. The number receiving wages from private companies was boosted by the employment register that was launched in July 2014.

Although unemployment was a little higher than in the previous quarter at 6.6%, seasonal factors can explain the difference, and if they are taken into account, then unemployment actually fell. Employment contracts are often changed and ended at the turn of the calendar year, and many seasonal workers in construction or agriculture for example are without work during the winter months. A little over 60% of the unemployed in Estonia are registered with Töötukassa, the unemployment insurance fund, and the data show that the number registered as unemployed is now falling at a slower rate after falling rapidly for a long time. Seasonally adjusted registered unemployment has been generally stable for half a year.

The main source of risks in the quarters ahead is continuing wage pressures, which can be seen in the notably faster growth in wages than in productivity. If this continues it could lead to a rise in unemployment. The disappearance of less productive jobs is a part of the development of the economy, but if rapid wage growth leads more jobs to lose profitability than are created, structural unemployment rises.

In the short term, employment will be boosted by the increase in economic growth resulting from the strengthening of the European economy, which will allow labour resources to be used more efficiently than earlier. In the long term, shrinking labour resources make it important to create the conditions for growth in productivity and to engage as much as possible of the working age population in the labour market. In this context the high labour force participation rate of the first quarter was particularly welcome.

Source: Bank of Estonia

Author: Orsolya Soosaar, Economist at Eesti Pank

Labour market is tightening

• Employment up by 2.9%, yoy, and unemployment down to 6.6% in Q1 2015
• Mounting wage pressures (+6%, yoy, in Q1, according to the Tax Board)

The labour market is expected to tighten in 2015; thus wage growth will remain strong. The working-age population is decreasing, the employment rate is already high, and the unemployment rate will drop further this year.

The working-age population decreased by 7500 persons or 0.8% in 2014. That was somewhat less than in previous years as the number of emigrants was smaller. In the first quarter of 2015, employment grew by 17 000 persons or 2.9%. One of the factors behind higher employment figures is the labour registration obligation, which will push up official employment statistics in the first half of the year.

Employment increased the most in the services’ sector. According to the Estonian Tax and Customs Board, the number of employed grew in domestic trade, tourism and timber industry. Employment rate in Estonia is already one of the highest in the European Union. Still, there is some room to lift the employment rate to reach the levels of some Scandinavian countries or Germany.

In the first quarter of 2015, the number of unemployed declined by 12 000 compared with one year before and the unemployment rate reached 6.6%. The number of unemployed amounted to 44 000. Around 70% of the unemployed had been looking for a job for more than a year. The unemployment rate in Estonia is well below the EU average, but there are big regional differences on the tiny market, ranging from 4.8% in Southern Estonia to 11.0% in the North East.

Source: Swedbank

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

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