Orsolya Soosaar, Katri Urke and Lauri Matsulevitš
Economists at Eesti Pank

The sharp rise in energy and commodities prices and Russia’s war in Ukraine pushed the Estonian economy into recession in the second half of 2022. The downturn had a partial impact on the labour market, but employment and the labour force participation rate remained high, and unemployment stayed low. Jobs were preserved because companies were largely able to pass the rise in their production costs on into product prices and so maintain profitability. This meant they did not have to save on labour costs and so avoided large-scale redundancies.

Employment stopped growing from the first half of the year to the second, and employment fell in branches of the economy that were hit most directly by the crisis, particularly manufacturing. There was no overall fall though in the number of people in employment. It may be understood that companies are expecting the economic climate to improve and want to hold on to employees that have the skills and experience they need because there are long-term labour shortages in the labour market. Positive news for the future development of employment is that the number of vacancies advertised by Töötukassa has held stable since October 2022, and although the expectations of employers for employment became more pessimistic, they are still only a little below their long-term average.

The unemployment rate also held stable in the second half of 2022 in the data from the labour force survey, even though a larger share of people of working age participated in the labour force. There were around 10,000 more people registered as unemployed in the first quarter of 2023 than there were a year earlier, and some two thirds of the increase in registered unemployment came from the addition of refugees from the war in Ukraine to the Töötukassa register, while one third reflected the shock to the economy. Seasonally adjusted registered unemployment stopped rising in March 2023.

The labour supply was greatly affected by the addition of refugees from Ukraine to the labour market. The initial estimate from Statistics Estonia shows that as at 1 January 2023, 31,594 Ukrainian refugees had moved to live in Estonia, and around 40,000 people were under temporary protection as at the end of March. The refugees have been relatively successful at finding work in Estonia, compared to how they have fared in other countries, but the language barrier means they often work in jobs requiring lower qualifications than their education should fit them for.

The deterioration in the economic climate reduced the bargaining power of employees in wage negotiations. The growth over the year in the average wage was fast last year, but it was much slower than the growth in consumer prices. Inflation fell in the fourth quarter though, and purchasing power stopped declining. The rise in the average wage will be driven moving forwards by pressure from workers to recover the purchasing power that was eroded by inflation, and by larger rises in wages in the public sector. Production in Estonia is already notably more expensive than it was, and any future increase in labour costs will depend on how successful companies are at passing their higher costs on into the final prices of their products.

Additional information:
Hanna Jürgenson
Communications Specialist
Eesti Pank
Tel: 5692 0930
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