Analytics, Banks, Estonia, Industry, Labour-market, Wages

Kaspar Oja. Photo: Bank of Estonia.

"Should there be a relocation of jobs away from Estonia due to it being too expensive to produce here, it will likely take place in the processing industry," the economist said at the introduction of the central bank's fresh labor market review. 

Oja said that Estonian salaries are significantly below that of countries of Northern and Western Europe, but Estonia's salary rate compared with Central and Eastern European countries is relatively high and approaching that of Southern Europe.

On one hand, a higher salary means a greater income and more diverse consumption possibilities for the employee and the economist said that salaries should increase in order to catch up to European countries with a higher standard of living.

On the other hand, workforce appreciation will force production with lower productivity to relocate to countries with a cheaper workforce and this will increase uncertainty regarding the future. "If several companies in a row leave in a short amount of time, employment may suffer," Oja said.

In the Estonian industrial sector, work costs approximately 50% more than in Latvia and Lithuania. Estonia is several times more expensive than Bulgaria and Romania. The salaries of the same area of activity in the Estonian industrial sector are approximately 50% higher than in Poland, Hungary, Latvia and Lithuania and 20-25% higher than in the Czech Republic and Slovakia. "Actually, the price of production in terms of labor expenses in Estonia by now is the highest in Eastern Europe," the central bank economist said.

At the same time, Oja emphasized that even though the workforce is cheaper in most Eastern European countries than in Estonia, relocating production there may not help the company much as workforce in countries with a lower salary rates is to be expected to increase quicker.

"If the same salary growth continues in Latvia as in the last six years, the salary rate of the Latvian industrial sector in six-seven years will reach the same rate it was at in Estonia last year," he said.

According to the economist, this is likely not a sufficient perspective to relocate a large portion of production from Estonia to Latvia as it is not cheap to relocate production either. "Rather, it may be feared that should the economic situation worsen, production units will foremost be closed in countries where the workforce is more expensive," Oja said.