Slower wage growth helps preserve jobs

Orsolya Soosaar
Economist at Eesti Pank

Data from Statistics Estonia show that annual growth in average gross monthly wages slowed in the first quarter of 2015 to 4.5%, and growth in gross hourly wages fell to 5.8%. Seasonally adjusted growth in average monthly wages was markedly slower than in the previous quarter. Consumer prices were 0.9% lower in the first quarter than a year earlier, and so real wages rose by 5.4%.

Wage growth accelerated to 8.5% in the first quarter in local government employment, which includes a lot of jobs in education and in healthcare institutions. Wage rises in government administration have kept pace with those in Estonian private companies, but in the first quarter they slowed from almost 7.5% to 5.4% in the government administration and to 4.8% in private companies. This was still a rapid rate of wage growth given that the economy grew by 1.2%.

As the economy has grown weakly in recent years, the slowing of wage rises is to be expected. If labour costs increase rapidly at a time when corporate profits are falling, employers will sooner or later start to reduce the number of jobs. Fluctuations in unemployment can be damped in times of slow  growth if companies are able to control labour costs during the good times. Wage flexibility is important for Estonia because we have a single monetary policy shared with all the euro area and the economy is very open. The economy can adjust and price competitiveness can be preserved only through 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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