The economy was driven on by increased employment
- For the first time in many years, labour productivity increased faster than labour costs in 2017
- A larger share of the working age population participate in the labour market in Estonia than in other countries in Europe
- Wage growth increased fastest in public administration and construction
- If demand for labour increases, wage growth will increase further
The year 2017 was a successful one for Estonian companies as profits rose for the first time in several years. For the first time in many years, labour productivity increased faster than labour costs. Faster growth in the economy was mainly based on improved labour productivity in the first half of the year, but in the second half of the year the growth was driven more by increased employment. Increased demand for labour boosted the growth in wages as there is a shortage of labour available in the labour market. Estonia has not been alone in recent years in seeing productivity grow by less than wages, as the same has occurred in Latvia and Lithuania. Labour productivity in those countries increased in 2017 by more than it did in Estonia though.
The number of people in work rose faster in most sectors in the second half of the year, and especially in industry. The number of vacancies and the employment expectations of companies already increased substantially some quarters ago. Companies are optimistic that employment will keep on rising in future, but that is difficult as the only country of the European Union where the share of people of working age in employment was higher than in Estonia in 2017 was Sweden.
Wage growth accelerated in the second half of the year in the public sector, especially public administration, probably because of the end of Estonia’s presidency of the Council of the European Union and reforms to administration. The growth in wages was given a notable lift by the strong revival of the construction industry as investment activity increased. Although the growth in nominal wages accelerated in the second half of the year, the growth in real wages was more restrained than in previous years. The situation was the same in many European countries in 2017 as wages rose faster but inflation rose even faster than that. The major exceptions were Hungary and the Czech Republic, where real growth in wages accelerated significantly.
Although a larger share of the working age population participate in the labour market in Estonia than in other countries in Europe, activity increased even further in the second half of 2017. The unemployment rate was lower than in was in the previous year even though the work ability reform had brought people into the labour market for whom it is harder to find work. Given the high labour force participation rate and low unemployment, it is likely that if demand for labour increases, wage growth will speed up further in future and act as a drag on the growth in profits.