Analytics, Banks, Estonia, Labour-market, Markets and Companies

"The biggest shortage of labor is in the sectors with low value added. This is a signal that investments should be moving to where profit is bigger. Sooner or later some companies will have to change their business plan and move on to more productive sectors," Bank of Estonia governor Ardo Hansson said at a press conference on Wednesday.

Hansson said it would be ideal if the changeover happened smoothly.

"It cannot be so that suddenly there is not a single company with low productivity – it is that the share of such companies must decrease. The situation will be problematic if the changeover is abrupt and businesses and employees are unable to adapt to the situation, which could result in high unemployment," he said.

"We have several reasons to presume that a smooth changeover is possible. We can see that many full-time employees are underemployed, which means that growth in productivity can be achieved without hiring new workers. We also have a flexible labor market which favors adaptation," Hansson said.

Hansson added that companies, which have been too optimistic and have kept people on their payroll waiting for demand to improve may be facing problems.

"This is what the situation of Finland in recent years tells us, as wages grew too rapidly there, looking in retrospect, which was followed by a low ebb lasting several years where adaptation under conditions of a single currency is rather painful," Hansson said.

Businesses in Estonia have the capability to achieve higher value added, according to Hansson.

"Businesses are feeling more confident, a moderate improvement is to be expected in the economies of our main trading partners. Businesses have been postponing investments thus far, and although profitability has decreased businesses have relatively big buffers, while the low loan burden and low interest rates at banks should persist," the governor of the central bank said.