The labour market has remained strong despite the decline in economic activity
Orsolya Soosaar, Katri Urke, Lauri Matsulevitš, Mari Pärnamäe
Economists at Eesti Pank
The position of the labour market was very good in the first half of 2022. This was despite the shock to the economy caused by Russia’s invasion of Ukraine and the consequent jump in energy prices. There were more people employed in the first half of the year than there were before the Covid-19 pandemic, but the expectations for employment of businesses in manufacturing, trade and construction became more pessimistic during the first half of the year and the strong growth in employment slowed.
Although employment was high, there were more people unemployed in Estonia in the first half of 2022 than there were before the pandemic. This was because the labour force participation rate of residents of Estonia increased extraordinarily quickly. It is probable that several obstacles to participation in the labour force that were imposed by the pandemic were removed. A first sign of the impact of the more recent crisis can be seen in the unemployment data, as the data for registered unemployment in the third quarter show some rise in unemployment among local residents on top of the addition to the statistics of refugees from the war. Within that is some increase in the newly unemployed who have lost their job because of redundancy.
Wages rose fast in the first half of the year despite economic activity being weaker. This was aided by a rise of 12% in the minimum wage after it had been frozen for two years, the recovery of wage rises in the public sector that were postponed during the pandemic, and clearly also the extraordinarily high inflation in consumer prices. Wages in Estonia are generally not automatically indexed, but inflation is still often taken into account in wage negotiations. How rapidly rising labour costs affect the competitiveness of businesses in Estonia will depend largely on how the production costs of competitors are affected. The capital income of companies increased in the first half of the year at the same rate as labour costs, which means that companies still did not have to use their profits to cover the higher labour costs. It is probable that this will change if economic activity cools further and wages continue to rise quickly.
The most extraordinary development in the Estonian labour market has been the increase in the labour supply because of the refugees from Ukraine who have entered the labour market. As at the end of October, Estonia had given temporary protection to 26,425 refugees of working age, meaning they are aged 15-75. Data from Statistics Estonia show that around 9000 of them have started an employment relationship, while some 6000 are looking for work with the help of Töötukassa. Refugees have found work in manufacturing and in the service sector. It is important that they look for work in a range of sectors, as the labour market is then able to absorb them without competition for jobs becoming too tight in particular sectors.
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