Arrak: A Matter of Productivity
I gave a lecture to a few dozen Tartu County instructors yesterday. Although I tried to lead the way to higher, more philosophical issues, the discussion kept coming back to money. "Tell us again why there is more of it beyond Estonia's borders?" they insisted.
Luxembourg is out of the question - the minimum wage for teachers is precisely 10 times higher (6,000 euros) than in Estonia. Of course, Luxembourg is also one of the world's richest countries. But in Finland, just a hundred kilometers north of us, the minimum pay for teachers is 2,800 euros or 4.5 times greater.
I tried to explain that it all comes down to productivity.
Not that which is in the classroom or the hospital ward (the latter is fairly difficult to measure), but the productivity of a producing, processing and hopefully exporting industry. The average hour worked in Norway creates 69 euros of value (oil), in Luxembourg 62 euros (finance), in Ireland 52 euros (more than in Germany, by the way) and in Finland 40 euros. In Estonia it is 11 euros. It's as easy as that. Tax receipts yield four times higher salaries on the northern coast of the Gulf of Finland because productivity is four times higher.
It's simple math, although that isn't very comforting.
Of course, in addition to the presence of money, distribution and values are also important aspects. In Sweden, for example, productivity (44.5 euros) is greater than in Finland, but the minimum wage for teachers is a third lower, a "mere" 1,900 euros. Perhaps they have other benefits and not everything can be measured in money. A sovereign country has sovereign priorities and principles of distributing wealth.
What's the case with priorities in Estonia? Is the quality of life of a teacher better or worse in relative terms than before the economic boom and during the boom? It turns out teachers didn't gain from the boom in relative terms. In Q4 of 2004, the educator's average gross salary was 470 euros per month (95 percent of the general average). In 2008, the percentage was the same, but the salary had risen to 800 euros. I remember that, unlike with most other employees on the public payroll, there were no cuts in teacher pay during the crisis.
But education employees have not benefited from the from the post-crisis economic revitalization. In the last quarter of 2012, pay had decreased to 85 percent of the average - a full 10 percentage points lower.
On one hand, there seems to be reason for anger; on the other, it is completely normal for the rise of incomes to be associated with structural and productivity changes in producing and exporting economic branches. To be fair, it should be added that the average pay in public administration and national defense has declined from 136 percent of the general average during the boom to 120 percent.
But still the question emerges: will low-wage earners in Estonia be able to enjoy a life worth of human dignity before Estonia runs empty?
We have, after all, joined the club of the rich and beautiful. Prices are already more "European,“ but most salaries are not. In Monday's Postimees, Kaire Uusen called for prompt elimination of injustice and "throwing the 300 to 500-euro paychecks in the trash can for once and for all.“ Today's income disparity is more akin to that of South America, as is our thought and behavior.
It is true; by looking at the parking lots at shopping centers or even watching the activity on the Tallinn-Tartu highway, one would think that the purchasing power is more than healthy in Estonia. One gets the same feeling from all the sold-out tourist packages - per aspera ad astra, in other words, farther, more frequently and for longer. This is where the suspicion arises that perhaps the minority indeed has an injust and cynical attitude toward the majority: perhaps they pay their workers the minimum wage, but are themselves able to buy a new and bigger car every two years. Company executives hold meetings in warm, faraway lands, but employees can't remember the last time they received a Christmas bonus.
In that sense I am not in agreement with Kaire Uusen. If there truly are greedy and stingy executives, there can't be very many of them in Estonia for the simple reason that most of Estonia's companies are microfirms, consisting primarily of family members. They are more like families; the distribution of wealth is out in the open.
Hence, the main reason for low incomes is, nevertheless, productivity. From 1999 to 2007, productivity of labor grew on average by 6.3 percent annually in Estonia, which at the same time was nearly a percentage point behind the growth of real wages. By the end of the boom, the growth of incomes had surpassed the growth in productivity by multiple times. It was an economically deadly situation and it had to come to an end. From 2008 to 2011, both indicators grew at an equal pace - 2 percent annually. How quickly we will catch up to the welfare states is a whole other issue.
But let's also look at the numbers on the distribution of pay and profits in Estonia. It is a widely known fact that the most important price in an economy is not the price of electricity or gasoline, but pay. Salaries constitute roughly half of the revenue and costs paid in society. At the beginning of the boom (beginning in 2004), compensation for employees (including social tax) made up 41 to 45 percent of GDP in various quarters.
In the first quarter of 2009, as the boom intensified and the job market tightened (unemployment was nearly nonexistent), salaries climaxed at 55 percent.
It is interesting to see what happened to profits at the same time. From the pre-boom level of 31 to 32 percent, soaring salaries squeezed profits to 17 percent of GDP in the first quarter of 2009. All this attests to the fact that something was rotten in the economy and good times often become very bad times, especially in the context of international competition.
In any case, Estonia's economy is today one of the most quickly developing economies in Europe - at one point it was the quickest. So who is benefiting from the current growth?
One thing we know for sure - it's not the teachers. But in the context of wage earners and payers? Again, let's look at the stats. Salaries as a percentage of GDP have declined from 55 to 46 percent. Meanwhile, profits have grown from 17 to 28 percent. What does that tell us?
It depends which side we approach it from. Businessmen can say that the historical injustice has been repaired. Excessively low unemployment is certainly worse than excessively high unemployment, since the first quickly leads to the second. Estonia's job market and incomes have been flexible. The Estonian business sector has been clever and flexible, increasing productivity and international competitiveness.
From the wage earners' perspective, the greedy employer has been the primary beneficiary of the economic growth. The state is clearly distributing revenues for the benefit of the latter.
Will this pendulum shift again, and when? What is the optimal relationship between profits and salaries? And will this, in the end, help improve our wealth? We'll have to wait and see. But one thing is clear - money comes from productivity. To sum up, numbers and economic laws can be harsh. Whether it comforts the teacher is another matter.
Andres Arrak is an economist, professor and columnist. The article has been translated by ERR News. It first appeared on ERR radio.