The slowdown in economic growth is not yet being reflected in wages

Orsolya Soosaar
Economist at Eesti Pank 

Data from Statistics Estonia show that the average gross monthly wage increased by 8.5% in the second quarter of this year to 976 euros. The sector that saw the most growth in the average monthly gross wage was mining, where the rise was 20%, and the form of company ownership that saw the highest growth was foreign owned companies, where the rise was 10%. Such rapid wage growth is in direct contrast to the very slow economic growth and lower productivity. If economic growth does not accelerate in the coming quarters, a slowing of wage growth is to be expected.

The acceleration in wage growth is broad-based and has several causes. First, the lower end of the wage scale was raised by an increase of 10% in the minimum wage, which affects not only minimum-wage employees but also the next ranks in the wage scale, if companies want to maintain their relative wage structure. Second, the new pay agreements for teachers and medical workers came into force in the spring. Several sectors, notably construction and transport, are affected by the stronger negotiating power of workers who have the possibility go to work abroad. Year-on-year wage growth accelerated in transport and warehousing from 8.6% in the first quarter to 15.4% in the second, and in construction it went from 6% to 12.7%.

The slower economic growth of recent quarters and the fall in productivity have not yet had an impact on wage growth. Unit labour costs grew in the first half of 2013 and the share of labour costs in the value added in the economy rose at the expense of profits. This is partly due to inertia in the labour market as it usually takes one or two quarters for labour costs to adjust to a reduction in economic activity. Wage growth of 7-8% may still be considered too fast when the real output produced by one worker is on average less than it was a year earlier.

A fall in the profit margins of companies increases the risk that capital will move to countries where it is possible to produce at more competitive prices and with higher profitability. As capital flows out, so too will jobs. Companies oriented to the domestic market are able to recover profitability to some extent by raising prices, but the result of this is higher inflation, which will lower the real purchasing power of consumer incomes. The ability of exporting companies to raise prices is limited by foreign competition. If an exporting company raised its prices it would lower its competitiveness and weaken demand for export products from Estonia.

Average wage growth adjusted for inflation, or real purchasing power growth, was 4.9% in the second quarter. Real wages have increased over the last two years, as the average gross wage growth has remained high and the growth rate of consumer prices has declined. This has left the purchasing power of the average wage very close to the peak reached before the crisis.


Annual growth of real GDP and average monthly gross wages


Eesti Pank observes and comments on wage developments as labour costs have a direct impact on the price of goods and services produced in Estonia and wage growth is an important indicator of price stability.

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