The Estonian labour market was in a strong position at the start of this year



The Estonian labour market recovered strongly from the Covid-19 crisis in the second half of 2021 and in early 2022. Growth in employment accelerated in the summer, and the restrictions imposed in the autumn to stop the spread of the virus did not deliver any major setback to employment. Expectations of companies for developments in employment and their perceptions of labour shortages were back to where they were before the pandemic. Both the Estonian economy and the labour market have thus been hit by the consequences of the Russian invasion of Ukraine while the business cycle was at a high point.

Unemployment fell in the second half of 2021 as employment recovered and as the labour force participation rate fell. The number of people unemployed was higher than before the pandemic despite the recovery in the labour market, while survey data show labour shortages increasing at the same time. This indicates that the vacant jobs required different qualifications to those that the available labour could offer. This mismatch can be partly explained by the number of jobs in accommodation and food service, which was the sector hit hardest by the coronavirus, being a fifth lower than before the pandemic.

The number of Estonian residents working abroad fell as opportunities to find paid work in Estonia improved. Businesses also hired additional workers from outside Estonia on top of this. There were as many foreigners working short term in Estonia in early 2022 as there were before the pandemic, with the number working in manufacturing even higher than it was then.

The reception of refugees from the war will substantially impact the number of people working in Estonia. The government decided before the war to extend the right of Ukrainian citizens to work in Estonia, though some of those citizens have returned home to defend their country. Estonia has by now taken in some 30,000 refugees, some two thirds of whom are adults, with around 10,000 expected to join the labour market. In the short term this will increase the number of people looking for work, while in the longer term it may be assumed that the labour market will adapt and companies will create additional jobs.

Wage pressures increased in the second half of 2021 as a large share of companies were looking to hire additional workers, and there was a shortage of suitable candidates for the new jobs. Wages rose fastest in the private sector, especially in sectors where they had risen more slowly during the pandemic. Even though wages rose fast, productivity increased even faster. The growth in productivity over the past 16 years has been supported by changes in the structure of the economy, as employment has increased in sectors with higher productivity, like information and communications, and has declined in sectors with lower productivity like agriculture and production of textiles and clothing. High inflation in the fourth quarter meant though that the purchasing power of the average wage declined, as prices rose faster than wages. There is the danger of a wage-price spiral occurring, but this risk is reduced by the weak economic environment and the increasing amount of labour available.

Additional information:
Ingrid Schmuul
Communications Specialist
Eesti Pank
Tel: 668 0965, 5697 9146
Press enquiries: [email protected]