Labour productivity increased in the first half of the year
- Labour productivity increased faster than labour costs in the first half of 2017 for the first time for several years
- As demand for labour remains strong so upwards pressure on wages continues
- The number in employment increased in most sectors, as did the number of hours worked per employee
- The match between jobs and available labour has not improved since the second half of last year
Labour productivity increased faster than labour costs in the first half of 2017 for the first time for several years. At the same time profits started to increase in the business sector having fallen for some years. Had profits fallen any further, production in Estonia may have become less attractive and the risk of a sharp cut in jobs in the event of a shock to the economy could have increased. Companies that had been holding onto jobs and employees in previous years despite the weakness of demand were able to increase their output and productivity as external demand increased without having to take on additional employees. Without further investment in production technology though, the rise in productivity may prove only temporary.
The growth in labour costs picked up again in the second quarter but to a lesser extent than the growth in productivity. Wages grew faster in industries in the oil shale sector and in construction as production volumes increased sharply. The increase in wage growth is also notable in public administration, probably in connection with Estonia’s presidency of the Council of the European Union. The probability of further acceleration in wage growth is raised by increased corporate expectations for employment and a rise in the share of companies who consider labour to be the main factor restricting output. Wage pressures may be eased by the change to the income tax law in 2018, which will raise the net wage of employees earning below the median wage particularly sharply.
Growth in the economy accelerated to 5.2% in the first half of the year. Although labour productivity was up substantially, so was demand for labour. The number in employment increased in most sectors in both the industrial sector and the service sector, as did the number of hours worked per employee. Statistics from Töötukassa and the labour mobility and vacancy surveys from Statistics Estonia show a rise in the number of vacancies. The labour mobility survey also shows employment relations being terminated more frequently at the initiative of the employee, which indicates that the cause is more often a change of job. Increased mobility among employees is natural during the upswing of the economic cycle, as companies offer attractive conditions in their search for employees and employees have the confidence to change their job.
Overall the current data show an increase in demand for labour as the demand for the output of companies has increased. The stresses of labour shortages in the labour market have been eased by a rise in the labour force participation rate and indirectly probably by external labour. As demand for labour will increase faster than the supply of labour in the near future, upwards pressure on wages will increase. There is a danger in this that labour costs will again rise faster than profits in future, and the recovery in profitability that was seen in the first half of the year will prove only temporary.
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