Rapidly rising wages are putting pressure on prices

Natalja Viilmann
Economist at Eesti Pank

Data from Statistics Estonia put the yearly growth in the average gross wage at 8.9% in the final quarter of last year. This was mainly because of special bonuses, which were one third larger than a year earlier. Wage growth continues to be spurred by labour shortages as demand for workers has been high for several years. The faster rise in labour costs than in productivity has largely been passed on into prices.

Wage growth picked up in many business in the private sector in the fourth quarter, and it accelerated to 9% in manufacturing and 10.8% in construction. Increased labour productivity made it easier for companies to raise wages, though higher labour costs have partly been passed on into product prices. Wage growth is still quite uneven across sectors and regions.

The sector where wages rose fastest in 2018 as a whole was the public sector, where they were up almost 10%. The minimum rate for teachers was raised in 2018 to 1150 euros, and following wage analysis by the Ministry of Education the actual average wage of teachers was raised to 1475 euros by the end of 2018, a rise of 15% over the year. The wage growth in public administration slowed in the final quarter of last year, but this was because the reference base was high as the Estonian presidency of the European Council ended and the reform of administration led to changes.

Strengthening wage pressure always brings the dangers of higher inflation and declining competitiveness. Labour costs are about half of gross domestic product measured at current prices and the strong growth in the economy in fourth quarter of 2018 allowed the payroll to increase substantially to be 11% bigger than in the fourth quarter of 2017. Some relief is given by the relatively strong growth of 7.5% in corporate profit over the year in the same quarter. Overall profit still declined slightly as a share of value added.

Real wages, which are adjusted to take account of changes in consumer prices, were 5% higher in the fourth quarter than a year earlier, while productivity per employee was up 3.3%. The average employee was working fewer hours than a year earlier though, as flexible working patterns that permit part-time work have allowed more people to be employed while reducing the average contribution of each individual. In consequence, productivity per hour worked rose by a more substantial 6.3%. Overall there is still an imbalance between the growth in wages and that in productivity, but there has been some improvement.


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