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International Internet Magazine. Baltic States news & analytics Monday, 18.12.2017, 22:30

Wage rise continues to stall, yet this has a bright side

Oļegs Krasnopjorovs economist, Latvijas Banka, www.macroeconomics.lv, 30.11.2016.Print version
The rise in wages continues to stall. The average wage for full-time work in the third quarter of 2016 was by only 2.2% higher than a year ago, which is the slowest growth rate in the last six years. Even though there is no doubt about a slower wage rise this year, other statistical data sources (State Revenue Service and national account data) do not have such pronounced slowdown. Thus there is no reason for alarm and the view that the rise in average wage has come to a sudden stop in the past few months. Next year, we are likely to return to a moderate 3-5% year-on-year wage rise – such a rate of growth was the case in 2011-2013.

From the point of view of sustainable growth, a slower rise in wages this year is rather good news. The wage rise has been exceeding productivity for a fourth consecutive year, making economists worry about the competitiveness of the economy and sustainability of growth. If wages continued to grow at the previous pace, even as economic growth slows, it would indicate that we have disturbed the macroeconomic balance (similar as during 2005 – 2007), the economy has over heated and a painful downward correction should be expected in the future.


Yet the current situation when wages are reacting flexibly to the output dynamics, is an additional argument in favour of us still being close to macroeconomic balance: the output gap is close to zero and unemployment is close to its natural level. Thus we have no reason to fear future and focus instead to supply-side economics in order to achieve a faster growth of the potential gross domestic product, i.e. continue to raise wages and living standard in a sustainable way. 






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