Analytics, Estonia, Financial Services, Markets and Companies, Wages

"The smaller rise in the minimum wage slowed down the growth in gross wages, but the income tax reform more than offset the impact on current net wages," Soosaar said in a press release. "The minimum wage rose by 6.4% this year, which is much slower than the rate of close to 10% seen in recent years. The declared gross monthly wage of people earning minimum wage rose more slowly in the first months of 2018 than it did on average in 2017. Without the income tax rebate system for the low-paid that applied last year, which is not reflected in statistics for current wages, the rise in the tax-free threshold to 500 euros meant that those earning the minimum wage saw a rise of 18% in the pay they received," the economist said.

According to Soosaar, the cut in the taxation of income initially benefited employees more than employers. "As the gross wage is generally fixed in employment contracts, it is to be expected that a fall in the tax rate will lead the net wage to rise. Over the longer term a large cut in the tax rate could reduce wage rises agreed in wage negotiations. The effect of this would slow down the growth in labor costs for employers. Employers will probably benefit less from the reform as the general shortage of labor gives employees a stronger hand in wage negotiations," she said.

The fast rate of wage growth in the general government increases the risk of faster growth in private sector labor costs as well, meaning that the wages will move further out of line with growth in productivity again. Wages in the general government continued to rise fast, although temporary factors from last year should not have had an impact any longer.

"Wage growth in local government, which accelerated to 12% in the first quarter, reflected faster growth in education, but wage growth also remained strong in public administration. This may have been affected by the administrative reform, under which many employment contracts were terminated and signed," the economist said.

The average monthly gross wages and salaries in Estonia totaled 1,242 euros in the first quarter of 2018, marking an increase of 7.7% compared to the same quarter of 2017, Statistics Estonia said on Tuesday. The year-on-year increase in average monthly gross wages and salaries was higher by 0.2 pecentage points than in the previous quarter.

The average monthly gross pay was 1,220 euros in January, 1,213 euros in February and 1,295 euros in March.