Estonia: Competition with Foreign Employers Accelerated Wage Growth
OREANDA-NEWS. December 02, 2013. Data from Statistics Estonia show that the average gross wage reached 930 euros in the third quarter and annual growth had accelerated to 8.8%. Average hourly wages didn't rise as fast, which shows that the acceleration in wage growth came from the variable components of wages. Unit labour cost growth continued at a quick pace.
Wage growth was broad-based across industries, but construction and transport and warehousing stood out where competition with foreign employers is particularly strong. Wages in companies owned by foreigners grew by 10.2%, those in Estonian-owned companies by 7.3%. Real wages adjusted for seasonal factors are close to the peak reached in the first quarter of 2008, before the crisis.
Although the acceleration in wage growth was boosted this year by both the rise in the minimum wage and collective wage agreements in the public sector, the speed of wage growth has been maintained by the shortage of available labour, particularly skilled labour. The unemployment rate is still higher than it was before the crisis, but this is largely a consequence of the level of active involvement in the labour market. If labour market participation were today at the level seen before the crisis, the unemployment rate would be 4.6%, not 8%. There has been a sharp fall in the number of unemployed for each vacancy.
The indicators of balance in the economy are now stronger than before the crisis, with a smaller current account deficit, slower lending growth and lower debt levels. However, rapid growth in labour costs could threaten the continued sustainability of economic development. For companies rapid growth in input costs may lead to a reduction in profit margins, and if this continues, profit expectations will fall and companies will become more careful in their investment decisions.