Despite good conditions in the labour market, the number of jobs may be reduced in future
Economist at Eesti Pank
Rapid wage rises have encouraged people to participate in the labour market more actively: despite the decline in the working age population the labour force increased in the first half of the year.
Annual growth in employment was fast in the first half of 2015, but this was affected by the introduction of the employment register in July 2014.
Unemployment has stopped falling: the seasonally adjusted unemployment rate rose in the second quarter of 2015 and the number of newly-registered unemployed whose employment contracts had ended rose in the third quarter.
Productivity fell in the first half of 2015 while unit labour costs grew faster. Although several sectors were affected negatively by external factors that are probably temporary, the profits that companies have earlier built up are not necessarily enough to see them through difficulties. Rising unit labour costs increase the risk that employers will cut jobs and so unemployment will rise.
Despite the decline in the working age population the labour force increased in the first half of the year. The position of employees in wage negotiations strengthened, which is indicated by higher wages being paid for work where productivity has not changed. This is then encouraging people to participate in the labour market.
Annual growth in employment was fast in the first half of 2015, but this was probably affected by the introduction of the employment register in July 2014. The requirement to register moved some employees who had previously been in the shadow economy into official employment. Quarterly growth has slowed markedly in 2015 as GDP growth has slowed.
Unemployment is significantly lower than in neighbouring countries or in the European Union on average, and it is also lower than the long-term average in Estonia. Long-term and short-term unemployment have fallen at similar rates, indicating that structural unemployment has declined. Unemployment has stopped falling though, and the seasonally adjusted unemployment rate rose in the second quarter of 2015. This was probably because of more active participation in the labour force. In the third quarter the inflow from employment to unemployment may have increased as well because more people whose working relationship had ended registered as unemployed than in the second quarter.
Average gross monthly wages rose markedly more slowly in the first half of 2015 than in 2013, but slightly faster than in mid-2014. Wages rose faster partly because of collective agreements in the public sector covering education and medicine. Wage rises have been more modest in Estonian private companies, which has helped them maintain their competitiveness, particularly among exporters. An effect of the employment register has been to add more low-paid employees, so the statistics may be showing the slowdown in wage growth to be larger than it actually was.
The autumn 2015 revision of data by Statistics Estonia put the growth in unit labour costs in 2013 and 2014 lower than had been previously estimated, and productivity growth higher. Productivity fell in the first half of 2015 however, while annual growth in unit labour costs picked up. Unit labour costs increased in the first half of 2015 because of wage pressures caused by labour shortages, and also because of external shocks in several sectors that hurt the profits of companies. Such shocks were low energy prices on world markets that affected the energy sector, low milk prices and a swine flu epidemic that hit agriculture, and Russian sanctions that reduced the transit trade for the transport business. Although some of the shocks will probably prove temporary and corporate profits will recover as they pass, the buffers built up earlier may not necessarily be enough to see companies through difficult times. Rising unit labour costs increase the risk that employers will cut jobs and so unemployment will rise.
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