Growth in net wages leapt sharply
- Growth in the gross wages of people earning minimum wage was slowed down by lower negotiated wages, but net wages increased considerably owing to the income tax reform
- The cut in income tax initially benefited employees more than employers
- Pay rises in the general government exceeded those of the private sector. If this gives a signal to the private sector, labour costs may start to accelerate, and wages would move out of line again with productivity growth
The smaller rise in the minimum wage slowed down the growth in gross wages, but the income tax reform more than offset the impact on current net wages. The minimum wage rose by 6.4% this year, which is much slower than the rate of close to 10% seen in recent years. The declared gross monthly wage of people earning minimum wage rose more slowly in the first months of 2018 than it did on average in 2017. Without the income tax rebate system for the low-paid that applied last year, which is not reflected in statistics for current wages, the rise in the tax-free threshold to 500 euros meant that those earning the minimum wage saw a rise of 18% in the pay they received.
The cut in income tax initially benefited employees more than employers. As the gross wage is generally fixed in employment contracts, it is to be expected that a fall in the tax rate will lead the net wage to rise. Over the longer term a large cut in the tax rate could reduce wage rises agreed in wage negotiations. The effect of this would slow down the growth in labour costs for employers. Employers will probably benefit less from the reform as the general shortage of labour gives employees a stronger hand in wage negotiations.
The fast rate of wage growth in the general government increases the risk of faster growth in private sector labour costs as well, meaning that the wages will move further out of line with growth in productivity again. Wages in the general government continued to rise fast, although temporary factors from last year should not have had an impact any longer. Wage growth in local government, which accelerated to 12% in the first quarter, reflected faster growth in education, but wage growth also remained strong in public administration. This may have been affected by the reform of administration, under which many employment contracts were terminated and signed.
Eesti Pank observes and comments on wage developments as labour costs have a direct impact on the price of goods and services produced in Estonia and wage growth is an important indicator of price stability.