The European Commission said in its annual analysis published on Wednesday that while Estonia has one of the best performing labor markets in the EU, certain factors might reduce the country's competitive ability.
According to the Commission, Estonia's fiscal position remains strong, with a budget in surplus and negligible government debt. Some weakening of Estonia's fiscal position is expected in 2018, however, as the government which took office last fall intends to implement a more expansionary budgetary policy.
Estonia has one of the best performing labor markets in the EU, the analysis found, but its declining working-age population is a challenge. The Estonian labor market is characterized by its flexibility, high participation and employment rates as well as low unemployment. At the same time, aging combined with prolonged low fertility rates are set to shrink the working-age population over the next decade, which will contribute to the ongoing tightening of the labor market, creating a continued upward pressure on wage growth. This poses a risk for businesses' profitability, competitiveness and overall long-term economic growth, the Commission said.
However, ongoing labor market reforms are expected to boost labor supply and prevent excessive wage growth. The entry into force of Estonia's work ability reform is bringing work-incapacity pensioners back to the labor market. This increased labor supply is expected to slow wage growth. Labor supply will benefit from further ongoing reforms, creating further incentives to work, reducing the gender pay gap and providing more accessible childcare. Also, the ongoing local government reform is projected to make labor market activation policies more effective, as local social services are made more efficient. Finally, labor and skills shortages are expected to decrease, as measures are being taken to address them. Notably, constraints on economic immigration have recently been relaxed.
The Estonian economy is well integrated with its Nordic neighbors and the euro area, but its foreign direct investment remains below the long-term average.
The Commission also said that Estonia's industry remains dominated by traditional sectors with low research and development intensity.
Some progress, challenges remain
Overall, Estonia made some progress in addressing the 2016 country-specific recommendations. On the labor market and social policy issues, some progress was made in providing high-quality local social services, including by adopting and implementing local government reform. Limited progress was made on adopting and implementing measures to reduce the gender pay gap, however. Some progress was made in promoting private investment in research, development and innovation, including by strengthening cooperation between academia and businesses.
Inequality, relative poverty and social exclusion continued increasing gradually, and health outcomes remain significant challenges. Inequality has increased in recent years and is now well above EU averages, the Commission said.
Estonia has further improved its business environment, but challenges remain in a few areas. Estonia is running several projects to reduce the regulatory burden, bureaucracy and overlapping functions of different public bodies, but a continuing lack of national rules for transferring companies' registered offices into and out of Estonia weakens the business environment. Furthermore, lengthy insolvency procedures and inadequately protected minority shareholders' rights in corporate governance remain institutional barriers to investment.
Editor: Aili Vahtla