The effect of the crisis is that labour shortages will be replaced by shortages of jobs
At the end of the first quarter of this year the coronavirus crisis hit the global economy, including Estonia, and had a major impact on the labour market. Demand for labour fell at companies that were hit most by the crisis, as economic activity was hindered by restrictions introduced in Estonia and in other countries. Fear of infection by the virus also affected people’s behaviour. This meant the ability of companies to produce goods and services suffered a blow, while demand for those goods and services fell at the same time.
The fall in demand for labour was seen in a sharp drop in the number of employment contracts and a sharp rise in registered unemployment. The workload of those employed in sectors hit by the crisis also shrank.
The service sector was the first to be hit
The crisis first hit hardest in the service sector, where employment and wages were rising fast immediately before the emergency. The falls were particularly severe in accommodation and catering, and in culture and leisure services, which suffered from the loss of foreign tourism, limits on opening hours and alcohol sales, the closure of shopping centres, a drop in demand following the move to remote learning and remote work, and a decline in eating out because of fear of the virus and the restrictions. The number of employment contracts in accommodation and catering in the register of employees was 15% lower than before the crisis and around 60% of those employed in the sector were awarded wage compensation in April. Other sectors besides accommodation and catering that were seriously affected by the restrictions were service sectors such as retail, and transportation and storage.
The majority of the restrictions have by now been lifted in Estonia and society is moving back towards normal functioning, which gives hope that domestic demand will recover.
How the crisis will affect industry is not yet clear
In contrast to the service sector, activity in industry was already growing more slowly before the coronavirus crisis started as the external environment cooled. This was partly due to oil shale production, where competitiveness in electricity production was lost because of a sharp rise in the price of CO2 quotas. Although industrial companies were not closed under the emergency measures in Estonia, the crisis affected the sector through difficulties in supply chains and a drop in demand. The full extent of the impact of the crisis on the industrial sector is not yet clear, as it will depend largely on how far demand for Estonian manufactured products falls in foreign markets in a general recession.
Like in many other countries, the government in Estonia reacted to the coronavirus crisis with a package of support measures, and the measure with the most direct impact on labour market developments was wage compensation. Without that, it is very probable that many more jobs would have been lost, but such a subsidy for wage costs is not a reasonable long-term solution, nor one that is affordable for the state.
In the longer term the economy will have to function freely and the role of the state will be to help the economy adapt to the new circumstances. Some people who have lost their job will probably not be able to find a new job immediately in the same sector, and it is very important that they receive support from the state for training and other labour market measures.