Companies are less optimistic in their employment growth expectations
Growth in the economy was faster in Estonia in the second half of 2018 than expected, and as a result, demand for labour increased. The labour market remained hot: wage growth picked up pace, people switched jobs often, and corporate data said employment grew. However, the labour market is expected to cool down somewhat over the course of 2019 along with a slowdown in economic growth.
Economic growth in Europe and the whole world is decelerating, which will start to affect the Estonian economy and labour market more and more in the future. Demand for labour is not growing as fast as it used to, as seen by the fact that the number of vacancies stopped increasing in the second half of 2018 and companies’ expectations for employment growth are lower. The share of companies who see labour shortages as the main obstacle to expanding their business has also decreased, which means that wage pressures are smaller.
The employment rate among permanent residents is very high in Estonia compared to other European Union countries and the historical average, which will limit future employment growth more and more. Compared to the Estonian labour force survey, which is used to assess residents’ behaviour in the labour market, companies’ reports showed a larger growth in employment. The difference can be attributed to the fact that foreign labour contributed to employment growth more than it has before.
Because labour demand was high and labour supply was limited, wage growth exceeded productivity growth in the second half of 2018. Wage growth was the fastest in the public sector (education and healthcare), but in the fourth quarter of the year it was also fast in construction and the industrial sector. Wages would probably have risen even faster in 2018 without the effect of the income tax reform, which significantly increased the net wages of employees who earn below the average wage. Wage growth in the private sector was also dampened by the use of foreign labour, because it meant that shortages of local labour were less of a problem for companies looking to hire people.
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