Central bank and finance ministry: Wage rises putting pressure on economy

Bank of Estonia
Bank of Estonia Source: Photo: Postimees/Scanpix

Rapidly rising wages are putting pressure on prices, but at the same time those wage rises are being driven by domestic consumption, as well as a shortage of labour, according to both the Bank of Estonia, the country's central bank, and the Ministry of Finance. The wage rises also seem to be acting as something of a weathervane for the economy, from what both central bank and finance ministry have announced, backed-up by Statistics Estonia figures.

Strengthening wage pressure always brings the dangers of higher inflation and declining competitiveness, according to the central bank.

With labour costs making up about half of Gross domestic product (GDP), measured at current prices, according to the bank, any economic growth (and Estonia has been seeing GDP growth rates of 3-4% in recent years, higher than many other European nations) is at the same time going to cause the proportion that payroll makes up in the economy, to rise. This happened in Q4 2018, where strong growth meant payroll as a segment of GDP rose 11% year-on-year (y-o-y) to said quarter.

"Some relief is being given by the relatively strong growth, at 7.5%, in corporate profit over the year in the same quarter. Overall profit still declined slightly, as a share of value added," Bank of Estonia economist Natalja Viilmann said in a press release.

On the other hand, the finance ministry noted that in some sectors, the labour ''shortage'' is itself being caused by lower wages, and thus pushes back as wage inflation. Thus the divide between cause and effect is not always very clear.

For instance, so far as the trade sector goes, salary growth has been driven by domestic consumption, though trade enterprises have also been forced to raise salaries at a greater rate than in other sectors in order to attract employees, since labour shortages had been caused by unattractive rates of pay, the finance ministry said.

Labour productivity improvements have also been a factor.

Some Statistics

Another factor in wage increases, averages notwithstanding, is the end-of-year bonuses which tend to get awarded. Q4 of 2018 saw the greatest wage increases of that year, mostly as a result of special bonuses, which were one third larger than the previous year, Ms Viilmann added.

However, despite the bonus component being the stated cause of wage rises in late 2018, Mis Viilmann went on to add that the overall factor in wage growth was labour shortages, as noted above.

The public sector, however, saw the most rapid growth in wage prices overall, up almost 10% across the sector. The minimum salary for teachers was raised to €1,150 in 2018, and following wage analysis by the Ministry of Education and Research, the actual average wage of teachers saw an increase of 15% to €1,475 by the end of 2018, according to Statistics Estonia (SE) data, as quoted by the finance ministry.

Wage growth in public administration slowed in Q4 2018, on the other hand, but this was because the reference base was set at a high level, it is argued: Estonia's presidency of the European Council ended at the close of 2017, and administrative reforms kicked-in, according to the finance ministry, which both contributed to this high reference base.

Real wages, adjusted to take account of changes in consumer prices, rose 5% y-o-y to Q4 2018, while productivity per employee was up 3.3% over the same period, the central bank said.

Salaries increased in all fields of activity, with trade and construction companies and the education sector providing the most towards the acceleration of salary growth, from amongst the larger sectors, the finance ministry said, though in this case salaries were starting from a relatively low base.

"The situation was very good in construction last year, and due to increased work volumes, working hours, as well as the number of employed persons, increased, in addition to the average wage,'' said Erki Lõhmuste,  deputy head of the fiscal policy department at the Ministry of Finance, in a press release.

''At the same time, by historical comparison, salaries in construction are still low, remaining below the economy's average," Mr Lõhmuste said.

Statistics Estonia figures back up the overall claim of salary rises in 2018. The average gross monthly wage in Estonia stood at €1,310 in 2018, after a y-o-y growth of 7.3%, according to SE. The figure for Q4 in isolation was thus slightly higher, at €1,384, the agency said.

Causes of wage increases

As noted already, there is something of a catch-22 in that wages are having to be risen to attract workers, yet this is being described as a labour shortage, and that this shortage is causing the salary inflation.

"Wage growth continues to be spurred by labour shortages, as demand for workers has been high for several years. The rise in labour costs outstripping productivity has largely been passed on to prices," said Natalja Viilmann.

Areas which are particularly labour-dependent seemed to have experienced the most significant growth, giving credence to the above claim. In manufacturing, wage costs rose by 9%, and in construction the rise was 10.8%, according to the bank (see finance ministry comment above).

The Ministry of Finance concurred with the Bank of Estonia that labour shortages had been contributing to rising wages. This wage growth would, however, slow down as the economy cools down, the ministry said, presumably meaning the salary rises would induce enough of the ''spare'' labour to start work for a relative equilibrium to be met, though not entirely.

"Salary growth remained rapid throughout the whole of last year, increasing in all fields of activity,'' said Erki Lõhmuste.

''Salary growth accelerated at the end of the year. along with economic growth and labour shortages maintain strong pressure for salary increase also in the near future," Mr Lõhmuste added.

"Behind the salary growth for employees in the education sector, is the government's decision to raise the salaries of teachers at a heightened pace. The increase in the average salary within the processing industry has been slightly smaller than is average for the economy, but growth accelerated significantly in the last quarter of the previous year,'' Mr Lõhmuste continued.

''Behind this seems to be the decline in employees' work burden, while increases in salary expenses in the processing industry has remained around 6% for the whole of last year, and there do not seem to be any significant signs of acceleration," he added.

Labour productivity

Increased labour productivity made it easier for companies to raise wages as well, though higher labour costs have partly been passed on into product prices as noted. Wage growth is still quite uneven across sectors and regions, according to the central bank.

The average employee was working fewer hours than a year earlier however, as flexible working patterns, which permit part-time work, have allowed more people to be employed, while reducing the average contribution of each individual, the economist said.

In consequence, productivity per hour worked rose by a more substantial 6.3%.

"Overall there is still an imbalance between the growth in wages and that in productivity, but there has been some improvement," Ms Viilmann, from the Bank of Estonia, added.

Editor: Andrew Whyte

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