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SEB analyst: Estonia's labor market has passed its peak

SEB economist Mihkel Nestor.
SEB economist Mihkel Nestor. Source: ERR

Estonia's labor market indicators hit their all-time high last year and no new records will apparently be set this year, SEB economic analyst Mihkel Nestor said.

Data published by Statistics Estonia a week ago shows that the situation on the Estonian labor market last year was better than ever before. Never before since Estonia regained its independence has so great a number of people been going to work in this country, the analyst said.

In total over 670,000 people were in employment in 2019. That figure equaled 68.4 percent of all people of ages 15-74, which is a higher rate than in any other EU member state. While the previous high in employment from 2007, the peak of the economic boom of the 2000s, has been surpassed already for years, the lowest unemployment rate registered for that period was finally beaten last year when unemployment fell to 4.4 percent, compared with 4.6 percent in 2007.

Significant changes have taken place over the past 12 years also in labor market participation, especially in the economic activity of older people. Where in 2007 fewer than 40 percent of 60 to 64-year-olds were in employment in Estonia, last year that ratio was as high as 65 percent. Employment in that age group alone is higher than average employment across all age groups in several EU member states. Among people of ages 70-74, employment has more than doubled in Estonia.

If in 2007 only 9 percent of people of ages 70-74 were in employment, last year that ratio had climbed to one-fifth. The high participation of older people in the labor market has been facilitated by several factors, the most important of which definitely is better health, as the remaining healthy lifetime has become longer by two years for that age group in the past decade. Also changes in the nature of work, with more office jobs being on offer and many blue-collar jobs having become less physically demanding, has contributed to employment among older people for sure, Nestor said.

In great probability the labor market indicators of last year will remain unbeaten for some time to come. Namely, a trend has been observed for some time where alongside very strong data from the labor market survey of Statistics Estonia, statistics from the Unemployment Insurance Fund is sending somewhat different messages. The previously stable downtrend in registered unemployment was reversed already in the early summer of last year, when it began to move higher with rather big leaps. 

According to latest figures from January this year, registered unemployed in Estonia numbered 36,721, which is the highest such figure since 2013. 

The economic climate deteriorated tangibly in the energy sector last year, while several industrial companies with low-paid jobs found also themselves in trouble. The most resounding examples of this are the decisions of two garment manufacturers with a long history to discontinue manufacturing operations in Estonia. This trend has continued, and the past few weeks have brought us news of pending closures of several foreign owned industrial companies here.  

That some industries are leaving should not take anyone by surprise, Nestor said. The average wage in Estonia has grown by almost 25 percent in the past three years alone and has effectively doubled during the past decade. The average gross monthly wage should hit approximately €1,500 this year, which is higher by about one-third than in the other Baltic countries.

Nestor said that while it is difficult to say where the red line runs for each individual company, upwards of which it makes sense for them to relocate manufacturing, uncertain global environment has given a reason to act. 

The timing of the implementation of such change is favorable from the viewpoint of Estonia, as due to the labor shortage that has continued for years there are still companies here that are ready to hire. Movement of labor into more competitive businesses meanwhile improves the health of the entire economy, the analyst said.

Although rearrangements in the industrial sector are leading the rate of unemployment to a rise, this doesn't mean that rapid pay rises would slow down significantly this year at least. 

While there's tight competition on the labor market for professionals in more specific fields, additional workforce in the lower paid service jobs is in as high demand. In addition to labor shortage, wage growth will be accelerated by the agreement between unions and employers to raise the minimum wage by more than 8 percent. Since economic growth this year is seen to be almost half the figure for last year, the trend whereby wage costs grow at the expense of corporate profits that has continued for many years will continue also in 2020, Nestor added. 


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Editor: Marcus Turovski

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