Estonia's labor market in good shape but reacting to economic situation

Construction work.
Construction work. Source: Siim Lõvi /ERR

Estonia's labor market has remained in good shape, however there are signs of a reaction to the general economic situation. Bank of Estonia (Eesti Bank) expects there to be a small increase in unemployment, both this year and next.

According to Bank of Estonia's (Eesti Bank) latest forecast, unemployment in Estonia is expected to rise to seven percent this year and eight percent next year. Last year it was 5.6 percent.

According to Bank of Estonia Vice-President Ülo Kaasik, consumption has fallen. "If there were more confidence and household incomes were rising, then there would be space for more consumption," said Kaasik.

However, Kaasik added that the labor market situation remains very good. "The difficulties we are seeing elsewhere have not translated into a significant drop in employment. On the contrary, in the first half of this year we have seen virtually record levels of employment. Admittedly, the figures from Statistics Estonia have to be viewed in the light of the fact that last year's did not yet take into account all the Ukrainian refugees, who were also already entering the labor market."

Kaasik pointed out that while the overall employment situation is good, it does not mean that is the case for all sectors. "In fact, we can see from the statistics that there are at least some sectors where the picture is no longer quite so rosy. Whether that be in manufacturing or construction, where employment rates have clearly started to decline, while in the public sector, as a result of the various crises, more people have been employed in order to provide services," Kaasik said.

At the same time, however, labor productivity has declined, which, according to Kaasik, is unsustainable. Part of the reason is that companies expect the fall in demand to be temporary and so are reluctant to lay off workers immediately. This tends to mean many of those retained are under-utilized or in low-productivity jobs.

"In the longer term, of course, should demand fail to recover, there is a risk that there will probably also be a reaction in relation to employment," Kaasik said.

According to Kaasik, companies are able to retain employees because price growth has outpaced wage growth and so they still have enough of a buffer as well as the financial strength to keep workers on the job. However, this means that the reaction to the recession may simply be delayed when it comes the labor market. Real labor costs per capita are lower now than they were in 2021.

In recent years, wage growth has been in double digits it, however it is now forecast to slow even further than the Estonian central bank had previously predicted. Bank of Estonia now expects average wage growth of 11.5 percent this year and 6.1 percent in both 2024 and 2025. Changes to the income tax system will have an impact on the latter.

In the past, price growth was significantly faster than wage growth and the purchasing power of wages is now recovering. "Nonetheless, the purchasing power of wages is still lower than it was before the onset of rapid price increases," Kaasik said. Bank of Estonia forecasts that wage purchasing power could return to pre-recession levels in 2025.


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Editor: Michael Cole

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