26.08.2024
LABOUR MARKET REVIEW. Improvement in the labour market requires growth in the economy
Postitatud:
29.10.2024
Orsolya Soosaar and Lauri Matsulevits, Economists at Eesti Pank
The second quarter of 2024 saw a halt in the two-year long contraction in the Estonian economy, during which the gross domestic product of the economy contracted by 5.7%. The impact of the recession on the labour market has been more moderate than during earlier crises given the size of the contraction. There are now about 1.2-2.5% fewer employees earning a wage than at the peak, with the exact estimate varying across data sources. Total employment is however very close to its peak at the start of 2023, as the number of self-employed workers has risen as the number of people working for a wage has fallen. The resilience of the labour market may have been supported by the large fall in real wages in 2022, as businesses won for a short time from the increase in inflation while wages took some time to start rising as quickly as prices. Companies may also have been more cautious about making staff redundant because of their experience of the labour shortages they were feeling before the crisis and of the Covid-19 pandemic, which showed how hard it is to hire new employees rapidly when demand starts to recover.
As the recession has come to an end, so positive signs of demand for labour have appeared. The number of vacancies advertised has not fallen this year for example, the expectations of companies for future employment have stabilised, the number registered as unemployed has remained almost unchanged, and employment in manufacturing and construction is no longer falling as fast. Year on year however, there were fewer employees earning a wage in the second quarter than a year earlier, especially in sectors that are exposed to the interest rate cycle like construction and real estate; manufacturing and closely related sectors; administrative and auxiliary activities, which covers temporary work; and transportation and storage. The data do not yet show employment increasing, but this is to be expected, since there is a lag before the labour market reacts to changes in economic activity.
Data from the labour force survey of Statistics Estonia show that an extraordinarily large share of people of working age were participating in the labour market in the first half of 2024. Fewer people than before have stayed out of the labour market because of retirement or caring for family members. The unemployment rate remains between 7.5% and 8%, and is around two percentage points higher than it was two years ago. Finding a job is harder than it was before since there are fewer jobs currently available. Unemployment is probably also being restrained from rising because it is falling among refugees from the war in Ukraine, who have a higher unemployment rate than the average, while the increase in self-employment is offsetting the fall in waged employment.
The growth in wages adjusted for consumer prices, or real wage growth, remained at 4.4% in the first half of 2024 despite the weakness in the economy and growth in wages slowing across the year. Upward pressure on wages from employees was maintained even with low productivity and falling inflation because the purchasing power of the average wage is only now returning to where it was in early 2021 before the recession started. Data from the Tax and Customs Board indicate that wage growth picked up again somewhat in the third quarter of 2024, but competition for available jobs remaining tight and corporate profits having fallen should in future restrain the growth in wages. Companies need the growth in wages to be moderate for the sake of their competitiveness. In recent years, the labour costs for producing goods and services in Estonia have risen fast, hurting the competitiveness of Estonian companies in export markets.
Additional information:
Hanna Jürgenson
Communications Specialist
Eesti Pank
Tel: 5692 0930
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