Economic growth was faster than expected in Estonia in the second half of 2018, and as a result, demand for labour increased, according to Bank of Estonia economist Orsolya Soosaar. The labour market remained hot: wage growth picked up in pace, people switched jobs often, and corporate data indicated a growth in employment.

The labour market is expected to cool down somewhat over the course of 2019, however, alongside a slowdown in economic growth.

"Economic growth in Europe and the entire world is decelerating, which will start to affect the Estonian economy and labour market more and more in the future," Ms Soosaar explained. "Demand for labour is not growing as fast as it used to, as seen by the fact that the number of vacancies stopped increasing in the second half of 2018 and companies' expectations for employment growth are lower."

The share of companies to see labour shortages as the main obstacle to expanding their business has also decreased, which means that wage pressure is also smaller, she noted.

The rate of employment among permanent residents is very high in Estonia compared to other EU member states and the long-term average, which will increasingly limit future employment growth. Compared to the Estonian labour force survey, which is used to assess residents' behavior on the labour market, reports by businesses indicated a larger growth in employment. The difference can be attributed to the fact that foreign labour contributed to employment growth more than it previously has.

As labour demand was high and labour supply was limited, wage growth exceeded productivity growth in the second half of 2018.

Wage growth was fastest in the public sector, including in education and healthcare, but in the fourth quarter of 2018 it was also fast in construction and the industrial sector as well. Wages would likely have risen even faster in 2018 without the effects of the income tax reform, which significantly increased the net wages of employees earning below the national average wage.

Wage growth in the private sector was also dampened by the use of foreign labour, as it meant that shortages of local labour were less of a problem for companies seeking to hire, Ms Soosaar added.