Unemployment was low at the end of the year despite the recession
Economist at Eesti Pank
Unemployment was 5.4% in Estonia in the fourth quarter of last year in the data from Statistics Estonia. The recession affected unemployment less than had been forecast, as increased employment in several parts of the service sector offset the redundancies that occurred mainly in the industrial sector. Over the longer term there is a shortage of labour in Estonia, and so it makes sense for employers to hold on to staff when they are faced with temporary economic headwinds.
Labour demand usually falls with some lag after the economic climate has cooled, which leads to lower employment and higher unemployment. The Estonian labour market has stood up well though to the decline in the value added in the past three quarters. Data from the Tax and Customs Board show employment falling in the second half of the year in manufacturing, especially in branches like wood processing and furniture making that were hit hardest by the crisis. Employment increased however in several parts of the service sector such as financial services, education and, accommodation and food service, which was still recovering from the pandemic.
A survey by the Estonian Institute of Economic Research shows that the share of companies in the service sector that were still feeling labour shortages in the last months of last year was larger than its long-term average, though it shrank in January. This could indicate that the higher cost of living is starting to bite harder on services companies, as it is increasing the pressure on them to raise wages, which are generally a larger share of expenses in the sector than they are in industry. Equally, the declining purchasing power of households is starting to restrain demand for services. The economy is forecast to recover this year and the impact on the labour market of the recession will be more modest than it has been in previous crises, because in the longer term there is a shortage of qualified labour in the economy.