Better alignment of growth in wages and productivity is threatened by labour shortages
Economist at Eesti Pank
- 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.
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