Central bank: Labor market strong despite challenges in first half of 2022

Checkout employees at a Lidl supermarket in Tallinn. March 2022.
Checkout employees at a Lidl supermarket in Tallinn. March 2022. Source: Ken Mürk/ERR

Estonia's labor market was in a very good position in the first half of 2022, despite the shock to the economy caused by Russia's full-scale invasion of Ukraine and the consequent jump in energy prices, Bank of Estonia economists Orsolya Soosaar, Katri Urke, Lauri Matsulevitš and Mari Pärnamäe said Wednesday.

In the first half of the year, there were more people employed than there were prior to the COVID-19 pandemic, however the expectations for employment of businesses in manufacturing, trade and construction became more pessimistic as well, and the strong growth seen in employment slowed, according to a Bank of Estonia press release.

Although employment was high, there were more people unemployed in Estonia in the first half of 2022 than there were prior to the pandemic. This was due to the fact that Estonian residents' labor force participation rate increased extraordinarily quickly, the central bank noted, adding that it's likely that several obstacles to participation in the labor force imposed by the pandemic were eliminated.

One of the first signs of the impacts of the more recent crisis can be seen in unemployment data, where, on top of the addition to the statistics of war refugees from Ukraine, registered unemployment data for the third quarter of 2022 reflects some increase in unemployment among local residents as well. Included in this rise is a slight increase in the newly unemployed, who lost their jobs in layoffs.

Despite weaker economic activity, wages rose fast in the first half of the year. This was aided by a 12 percent increase to Estonia's national minimum wage following a two-year pause, the recovery of wage increases in the public sector that had been postponed during the pandemic and clearly also the extraordinarily high inflation in consumer prices. Wages in Estonia are generally not automatically indexed, but inflation is still often taken into account in wage negotiations.

How rapidly rising labor costs affect the competitiveness of businesses in Estonia will depend largely on how competitors' production costs are affected. Companies' capital income increased at the same rate as labor costs in the first half of the year, which means that companies still didn't have to use their profits to cover higher labor costs. This is likely to change if economic activity cools further and wages continue to rise quickly.

Thousands of Ukraine refugees join labor market

The most extraordinary development on the Estonian labor market has been the increase in labor supply due to the war refugees from Ukraine who have entered the labor market, the Bank of Estonia highlighted.

As of the end of October, Estonia had granted temporary protection to 26,425 refugees of working age, i.e. aged 15-75. According to Statistics Estonia figures, approximately 9,000 of these refugees have started an employment relationship, while another some 6,000 are looking for work with the help of the Estonian Unemployment Insurance Fund (EUIF).

Refugees in Estonia have found work in manufacturing as well as the service sector. The central bank emphasized that it is important they look for work in a range of sectors, as the labor market will then be able to absorb them without competition for jobs becoming too fierce in specific sectors.


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Editor: Aili Vahtla

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