Slower growth in labour costs than in GDP is the first step to a recovery of competitiveness



  • In a sign of improvement in the economy, labour costs grew slightly more slowly than GDP rather than faster than it for the first time in three years
  • For competitiveness to improve, wage rises will have to be more restrained than economic growth at current prices
  • Wage pressures will be increased in future by increased infrastructure investment and the presidency of the European Union

The average gross wage was 6.9% higher in the final quarter of 2016 than a year earlier, which is a smaller rise than in the first three quarters of the year. Statistics for the national accounts show payroll growth slowing and not increasing as a share of GDP for the first time in a long while. Wage growth slowing while economic growth speeds up is a move in the direction of sustainable development that has been referred to as a soft landing in economic forecasts.

Wage growth did not slow equally in all sectors and it was restrained particularly by slower growth in trade and agriculture, while wages rose more quickly in industry and the general government sector. Despite the faster growth in wages, GDP data show that the match between productivity and wages in manufacturing improved, strengthening the competitiveness of companies in foreign markets. Improved competitiveness among exporters is also indicated by a survey for the European Commission and the Estonian Institute of Economic Research.

Labour costs are still around 50% of GDP in Estonia, which is higher than the European Union average and similar to the level seen during  the crisis. The wages of Estonian workers have approached the level of the European Union faster than company profits have. This could be seen to mean that employers have had to raise wages for employees more than they have managed to raise the efficiency of production in their companies. Weak profitability may also deal a blow to workers, as it will make it less certain that jobs will be preserved. A soft landing needs wage rises to continue to be more restrained than economic growth at current prices

Several factors may boost wage growth again in future. Increased investment in infrastructure will probably mean more labour is needed in the construction sector, general government wages will come under pressure because of the upcoming presidency of the European Union and the coalition agreement to raise wages for employees working in education, and in January the minimum wage rose by a further 9.3%. Equally, wage pressure will be eased a little by the work ability reform, which will bring people into the labour market, and by the notably slower decline than previously in the number of people of working age in Estonia.

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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Leanyka Libeon
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