Wage growth has slowed but remains faster than productivity growth
Economist at Eesti Pank
- The average gross wage rose more slowly in the last quarter of 2015, but still did so faster than productivity
- The average net wage increased about 1.5 percentage points faster than the gross wage did because of the cuts in the income tax and unemployment insurance rates
- The average wage rose fastest in 2015 in local government employment, which partly reflects the wage rises in healthcare and education
- An increased share of households think it probable that unemployment will rise, which probably means that expectations for wage rises have been lowered
Data from Statistics Estonia show that the average gross monthly wage was up 6.4% on a year earlier in the fourth quarter of 2015. Wage rises slowed slightly over the year and seasonally adjusted over the quarter.
The average net wage increased about 1.5 percentage points faster than the gross wage because of the cuts in the income tax and unemployment insurance rates. This difference will be smaller in 2016 because the income tax rate did not change other than a rise in the tax-free threshold from 154 euros a month to 170.
Wages rose fastest in local government employment, where they were up by 8.4%. This is in part a reflection of the wage agreements in healthcare and the government’s decision to raise the average wage in education. Wages in private companies in Estonian ownership, where the majority of waged employees work, rose by 6% over the year as a whole, which is markedly slower than the 7.9% seen in 2014. This has clearly been helped in part by the cuts in labour taxes and the fall in consumer prices, which have together increased the purchasing power of employees. Slower wage growth is in any case to be expected as productivity growth is very low.
Wage growth might be lifted in 2016 by a rise in the minimum wage from 390 euros to 430. The higher the minimum wage climbs in relation to the median wage1, the greater the effect it has in raising average wages, because it affects more employees. In the public sector, wages for employees in healthcare will continue to rise because the agreement signed in 2014 covers two years. The Ministry of Education and Research expects that the average wage for teachers will rise by 4.8% in 2016. Wage rises may be restrained by the expectation of households that unemployment may start to rise, as this may affect the expectations of employees for wage rises. The decline in the profits of the corporate sector over recent years indicates that the pressure to hold back wage rises is high.
The flash estimate from Statistics Estonia put GDP growth in the last quarter of 2015 at 0.7% over the year. Increasing employment and low inflation mean that wage growth at the end of 2015 was faster than productivity growth. As the three-year average growth in unit labour costs in Estonia was higher than the threshold for the Alert Mechanism Report, the European Commission recently carried out a thorough investigation to find the causes of this and the dangers from it. The European Commission identified the causes of rapid wage growth as including labour shortages, wage competition with Finland and rapid rises in the minimum wage. As the Estonian labour market is flexible and the reforms to social insurance will increase the labour supply in the future, the Commission found that wage pressures will ease. This is in line with Eesti Pank’s forecast.
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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