The Estonian labor market recovered strongly from the COVID crisis in the second half of 2021 and in early 2022, with growth in employment accelerating over summer 2021 and pandemic-related restrictions imposed on the fall not delivering any major setbacks to employment, the Bank of Estonia said in a press release on Wednesday.

Companies' expectations for developments in employment and their perceptions of labor shortages had returned to pre-pandemic levels, and thus both the Estonian economy and its labor market were hit by the consequences of the war in Ukraine during a high point in the business cycle.

Unemployment fell in the second half of 2021 as employment recovered and the labor force participation rate fell. The number of registered unemployed was higher than prior to the pandemic despite the recovery in the labor market, while survey data indicated a simultaneous increase in labor shortages. This indicated that vacant jobs required different qualifications than those available labor could offer. The mismatch can be explained in part by the number of jobs in accommodation and food service, which was the sector hit hardest by the COVID crisis, being one fifth lower than prior to the pandemic.

The number of Estonian residents working abroad fell as opportunities to find paid work in Estonia improved. Businesses also hired additional workers from outside Estonia as well. In early 2022, there were as many foreigners working in short-term employment in Estonia as there were prior to the pandemic; the number of such employees working in manufacturing even exceeded pre-pandemic levels.

Wage pressures up

Wage pressures increased in the second half of 2021 as a large share of companies sought to hire additional workers and there was a shortage of suitable candidates for the new jobs, Estonia's central bank said. Wages rose fastest in the private sector, especially in sectors where they had risen more slowly during the pandemic.

Even though wages rose fast, productivity increased even faster. The growth in productivity over the past 16 years has been supported by changes in the structure of the Estonian economy, as employment has increased in sectors with higher productivity, such as information and communications, and has declined in sectors with lower productivity, such as agriculture and textile and clothing production.

High inflation in the fourth quarter of 2021, however, meant that the purchasing power of the average wage declined, as prices rose faster than wages. The danger exists of a wage-price spiral occurring, however this risk is reduced by the weak economic environment as well as the increasing amount of labor available.

Refugee wave to substantially impact labor market

To date, Estonia has received some 30,000 war refugees from Ukraine, some two thirds of whom are adults, and according to the Bank of Estonia, some 10,000 are expected to join the local labor market. In the short term, this will increase the number of people seeking work, while in the longer term it may be assumed that the labor market will adapt and companies in Estonia will create additional jobs.

The Estonian government had also decided prior to the war to extend the right of Ukrainian citizens to work in Estonia, although some of these citizens have since returned to Ukraine to defend their country.

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