Sustainable Economic Growth Will Require a Reduction in Excessive Wage Pressure



In the first half of 2012, the Estonian labour market development was more favourable than the average for the euro area. The number of the employed continued to rise, while unemployment fell. The rate of job creation slowed by half over the year as general economic growth slowed down, and our labour market is expected to continue in a similar way in the near future, with employment increasing but at a slower rate. The main risk to the labour market in the short term is a weaker-than-expected recovery in external demand, while the shortage of labour force in some areas could lead to stronger wage pressure.

Estonia's working-age population is shrinking, partly through natural demographic effects and partly because net migration is negative. Preliminary data from the census show that Estonia's working-age population is 3.5% lower compared to the official figures currently used. The population changes caused by emigration in the last decade were unevenly distributed between age groups and regions, the 20-34 age group seeing the largest fall at 8.5%. The effects of the shrinking working-age population are not yet being felt in the labour market because the active participation rate has been rising in recent years. The participation of the over-50 age group has gone up, largely as a consequence of the increased pension age. The effects of the shrinking population on the labour market will also be alleviated somewhat in the future by the raising of the pension age from 2016. However, in the long term it is not possible for heightened activity among the older generations to compensate for the reduction in the younger working population.

The fall in unemployment in Estonia has been the fastest in the European Union in the last year. However, the concern remains that the qualifications and location of the unemployed do not suit the needs of the labour market. It is important that labour market policy measures be effective if they are to reduce unemployment further and lessen the wage pressure caused by the shortage of labour. At the same time, the benefits system should not discourage people from searching for jobs and wanting to return to employment.

The slowdown in economic growth had an impact on the productivity of labour in the first half of the year, while wages continued to rise at only a slightly slower speed. It is normal that wage increases react to economic changes with a lag, but for the sake of future competitiveness it is important that wage rises should remain in line with productivity growth. The key feature this autumn will be the wage growth in the public sector, including in education and health following collective negotiations over pay increases. Rises in the costs of the public sector will indirectly impact Estonia's competitiveness and will put pressure on state finances. It is important that salary increases do not come at the cost of a slower return to balance for the state budget, as a sound budget policy is one of the foundations of long-term economic growth. Re-allocation of the fiscal resources should not lead to a reduction in the financing of other areas that are important for economic growth.

A full presentation of the labour market in the first half of 2012 will be published on the Eesti Pank website.

Further information:
Viljar Rääsk
Public Relations Office
+372 668 0745, +372 527 5055
E-mail: [email protected]