Fast Pace of Pay Raises Damaging Competitiveness, Says Banker (1)
Swedbank Estonia's chief economist Tõnu Mertsina says the fast pace of pay raises may damage the country's competitiveness on external markets.
Mertsina said salaries have outpaced productivity since the beginning of 2011. Moreover, wages continued to rise in the second quarter even as productivity fell, reported uudised.err.ee.
While salaries are picking up in Latvia and Lithuania as well, they have been doing just the opposite in Finland and Sweden during the last four quarters, as export growth slows in those countries due to - besides lower demand - high production costs.
Mertsina said the rate of growth of salaries exceeded that of consumer prices in Estonia in 2011, and it continues to rise as inflation dissipates.
On a positive note, the increase in real wages boosts private consumption, with both of those growing 5 percent in the first half of 2013. This means economic growth will become more dependent on consumption, Mertsina said.
"Indeed, private consumption will contribute the most to economic growth this year, whereas that contribution should increase during the next few years as well," Mertsina said.
"At the same time, the growth of consumption capacity in Estonia will not make up for the imbalance between rising salaries and the growth of productivity, which threatens business profits, inflates prices, especially in the service sector, and may lower the competitiveness of our cost-oriented exports," Mertsina said.
With the passing of the 2014 state budget last month, public sector workers are also set to rise, with the general salary fund increasing in all areas of governance by 5.1 percent.
The government received some criticism for the decision, to which Finance Minister Jürgen Ligi responded: "We opted to keep the state employees' pay rises somewhat at the same pace with the private sector, but not too high [...] It's interesting to hear an expert say that the pay raise exceeds economic growth figures. We are dealing with nominal economic growth here, and, first of all, [pay raises] will fall short of nominal growth. Secondly, they will fall short of private sector raises. In some areas they are matching the private sector pace - the social sphere, culture and education. Teachers' minimum wages will rise 12 percent, for example."