Thousands of new IT specialists needed in Estonia

The Estonian IT business sector suffers from a lack of qualified personnel, yet the number of applications for IT courses in higher education has remained more or less the same. To make matters worse, only half of those taking up IT studies complete their degree.

The Tallinn University of Technology even changed its conditions of application to more carefully select students actually able to finish. Where a year ago all those were admitted who met minimum requirements, the conditions are now a lot stricter, ETV’s “Aktuaalne Kaamera” newscast reported.

Read more from ERR News

Estonian labour market improved in the second quarter

  • Employment improved despite slow economic growth
  • Registered unemployment increased in Ida-Virumaa
  • The work ability reform is expected to boost registered unemployment and the labour force participation rate

Figures from Statistics Estonia show unemployment was 6.5% in the second quarter of 2016 and employment was 2.6% higher than a year earlier. Seasonally adjusted employment also grew quarter-on-quarter. As the number of 15-74-year-old people who participated in the labour market was almost 2% higher than a year ago, the labour force in the economy grew even though the population keeps declining at a slow but steady pace.

Not all data sources indicate an increase in employment, though. Compared to the figures from the labour force survey, data from the Tax and Customs Board on the number of people receiving wages were slightly more pessimistic, as this number fell by 0.4% in the second quarter of 2016 compared to the same time a year ago. This gap may stem from different definitions of the figures (e.g. the fact that data from the Tax and Customs Board do not include the shadow economy), but also indicate that the labour force survey overestimates employment growth.

According to the data published today, the survey-based number of unemployed, which covers both registered and unregistered unemployment, did not change compared to last year. However, data from Töötukassa, the Estonian unemployment insurance fund, show that the number of registered unemployed increased by 4.9%, year-on-year. Growth was the biggest in Ida-Virumaa, with 21% more registered unemployed in the second quarter than a year ago. This was probably caused by redundancies in the oil shale and energy sector, where the output fell as a result of low energy prices. 646 or 43% more redundancy benefits were paid out in the second quarter of 2016 compared to the same time in 2015.

The number of disabled people among the registered unemployed has been climbing for some time now. It can be expected that the work ability reform launched this July will lead to an increasing number of people with reduced capacity for work registering as unemployed. This means that the growth of registered unemployment will accelerate and the share of people active in the labour market will rise even further.

Source: Bank of Estonia

Author: Orsolya Soosaar. economist at Eesti Pank

Employment growth remained surprisingly strong

The number of inactive decreased by 19,000 people, over the year, in the second quarter of this year. In addition to tight labour market, inactivity declined due to state reforms – an increase in the retirement age and the rearrangement of the social benefits system of the people with disabilities, who are now entitled to certain benefits only if they work or actively look for work. At the end of June, there were 5,000 people with reduced working ability looking for a job through the Estonian Unemployment Insurance Fund.

Employment growth remained surprisingly strong (+2.6%, after +1.1% in the first quarter, year-on-year). Estonian enterprises have handled the combination of low export demand, falling output prices and a strong wage growth relatively well, at least so far. One of the reasons behind the still rapid employment growth is the labour intensive part of the economy, i.e., the services sector, where 2/3 of the employees work, and which has enjoyed strong sales growth due to a rapid growth in consumption. Employment decreased in the mining and energy sectors where output volumes have decreased substantially due to low output prices. Employment growth should continue in the second half of the year as enterprises plan to raise the number of employees in industry as well as in the services sector.

The number of unemployed stayed at the same level as last year and unemployment rate was 6.5% in the second quarter, the same as in the previous quarter and in the second quarter of 2015. Unemployment rate might have reached its bottom (excluding seasonal decline in the third quarter).

Source: Swedbank

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

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