Bank of Estonia economist: Slow economic recovery a danger to jobs

Workers doing maintenance work on tramways in Tallinn. Photo is illustrative.
Workers doing maintenance work on tramways in Tallinn. Photo is illustrative. Source: Priit Mürk/ERR

A year and a half into recession, the Estonian economy is now forecast to start to recover soon, but not quickly, and should labor costs go on rising rapidly as well, jobs may become harder to find, Bank of Estonia economist Orsolya Soosaar said in the central bank's latest labor market review.

The Estonian economy has been in recession for a year and a half now, however the labor market has thus far performed better than forecast, and better than experiences from previous economic crises would suggest, according to a press release published Wednesday.

The number of jobs in manufacturing as well as in construction has been falling for some time now, but the service sector has helped hold overall employment high. Estonia's economy is forecast to start to recover soon, but is not expected to do so rapidly, and should labor costs continue to rise quickly, then it's likely that jobs will become harder to find.

"Register data shows that employment peaked in the second half of 2022, and that it started to fall on year from this summer," Soosaar highlighted. "Given the extent of the recession, though, with GDP down 4.1 percent from its peak, the decline in employment has thus far been quite limited. Further indications that some further cooling is to come in the labor market are given by employer employment expectations becoming increasingly pessimistic throughout the year, so that they are now below their historical average, and also by the number of job vacancies advertised through the Estonian Unemployment Insurance Fund (Töötukassa, EUIF)."

The unemployment rate remained low for a very long time, however data from Statistics Estonia's labor force survey indicates that it rose sharply in the second quarter of this year. The number of unemployed rose chiefly due to the share of the population wanting to work increasing, however.

The unemployment rate continued to rise during the summer months, reaching 7.6 percent in August according to data published by Eurostat. Registered unemployment has also been on the rise since May.

"An increase in the number of people looking for work and a fall in the number of jobs available means there is increased competition for jobs, and so there is less upward pressure on wages," Soosaar explained. "Survey data shows that employers also feel that labor shortages have eased."

The growth in Estonia's average gross monthly wage accelerated in the first half of 2023, however this was driven by a sharp increase in teachers' minimum wages, raises in internal security as well as a new collective agreement in the healthcare sector. Private sector wage growth slowed somewhat in the second quarter, but was still fast given the ongoing recession, and this increased labor costs as a share of Estonia's GDP.

"Rapid growth in labor costs may threaten the competitiveness of exporting companies, as labor costs are a major part of production costs," the Bank of Estonia economist warned.

"The increase in labor costs in manufacturing in Estonia has not, however, been noticeably greater than in Latvia and Lithuania since before the [COVID-19] pandemic, and it has been smaller than the increase in Poland and some other countries in Central and Eastern Europe," she continued. "In a very general sense at least, the data does not indicate that wage costs have made manufacturing companies less competitive than companies in those countries."


Follow ERR News on Facebook and Twitter and never miss an update!

Editor: Aili Vahtla

Hea lugeja, näeme et kasutate vanemat brauseri versiooni või vähelevinud brauserit.

Parema ja terviklikuma kasutajakogemuse tagamiseks soovitame alla laadida uusim versioon mõnest meie toetatud brauserist: