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Sunday, 06.07.2025, 23:06
Better alignment of growth in wages and productivity is threatened by labour shortages in Estonia

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The economy perked up
in the second half of 2016 and growth recovered in labour productivity.
Employment declined at the same time, and so did wage growth a little, with the
consequence that growth in labour costs slowed. This equally meant that the
squeezing of corporate profit margins lessened. Whether companies can improve
their profitability and overcome problems with inflated labour costs will
depend on whether labour productivity grows further. Where companies have so
far managed to preserve jobs and hold on to staff despite weak demand, improved
demand will allow them to increase production and productivity without taking
on additional labour costs. Productivity clearly depends on investment too,
which has been reduced in recent years.
The rate of growth of
the average wage slowed in the second half of 2016, though only a little.
Wage growth was very different in different sectors of the economy, like it was
in the first half of the year. Wages in oil shale and construction rose by less
than the average wage, but those in the labour-intensive services sector rose
faster than the average, though not as fast as in the first half of the year.
The high expectations for employment in construction and in manufacturing
companies revealed in sentiment surveys by the Estonian Institute of Economic
Research suggest that wage growth may be pushed up in future as there is a
shortage of suitable labour.
Labour shortages are
illustrated by the notable increase in 2016 in the number of vacancies. The
rise in the vacancy rate can partly be explained by increased movement between
jobs as the number of separations initiated by the employee was 13% higher than
a year earlier. Under normal circumstances a rise in the vacancy rate is
accompanied by a fall in unemployment, but in the second half of 2016 the
unemployment rate actually rose. There were more unemployed in Ida-Virumaa
because employment was lower and in Harjumaa because of both lower employment
and increased participation in the labour force. Simultaneous increases in the
number of vacancies and in output indicate however that the match between
labour and jobs may have deteriorated. The number of unemployed was shown by
the labour force survey to have increased sharply in Ida-Virumaa, but a lot of
the new jobs were created in Harjumaa.
Over the long term
the labour supply is dictated by the number of people of working age and their
degree of active participation in the labour market. Increased participation in
the labour market will be supported in future by reforms to social insurance.
The labour participation rate in Estonia is already one of the highest in
Europe though, especially for the over-50s, and this will limit the effect of
the reforms. The decline in the number of people of working age has slowed much
more in recent years than had been forecast. Because immigration into Estonia
will probably exceed emigration from Estonia in future, the amount of labour in
the economy will shrink more slowly in future than was earlier forecast.