SEB Bank: Labor market impacted most by salary pressure, demographics

SEB headquarters building in Tornimäe, Tallinn.
SEB headquarters building in Tornimäe, Tallinn. Source: Siim Lõvi/ERR

Estonia's labor market has peaked, and is subject to wage pressure and demographics, analyst at SEB Bank Mihkel Nestor said Thursday.

"The Estonian labor market is driven by two strong trends: the adaptation of companies to wage pressures and demographics," Nestor said in a press release, as reported by BNS.

"The first of these is characterized by recent announcements by a few larger companies about ending production in Estonia. The salary rate here has become too high. The average gross salary is set to reach close to €1,400 this year, and employers now also admit that finding an employee for any kind of job is impossible with a net salary of less than €1,000," Nestor continued.

While low wages are most widespread in the service industry, the analyst said, the sector servicing domestic customers is able to translate labor expenses to prices more easily, as its competitors are in the same position. At the same time, a rapid rise in wages also leads to less negative attention to price increases, BNS reports.

According to Nestor, the industrial sector, wher a large part of production is sold abroad and which predominantly operates in traditional, low-productivity branches, is in a much more difficult situation.

"That a lot of 'empty' work is done in Estonian industry is highlighted by the fact that, while some 19 percent of all employed persons found employment in the processing industry last year, the branch produced only 15 percent of added value created across the entire economy," he said.

He added that another substantial trend is a sharp decline in the number of younger working-age people.

"At the same time, the decrease in workforce is moving constantly forward along this trajectory and will soon concern all sectors of the economy. As in mathematics, two negative trends may nevertheless lead to a positive result - hand in hand, low wage jobs and those doing them disappear," Nestor said.

Rising population

Even though the mortality rate continues to exceed the number of births, the population of Estonia has been growing for four consecutive years, aided by immigration. Compared with 2015, the population has grown by some 11,500 people, or 0.9 percent. Most immigration comprises Estonian returnees, it is reported, though the labor market has also been affected by the extensive involvement of temporary, foreign workers.

According to Nestor, the impact has been most positive in the construction sector: "Even though last year's construction volumes exceeded even the height of the 2007 boom, this has not made teachers, doctors and bus drivers take up a shovel; temporary high demand has been covered with temporary foreign workforce."

"Unfortunately, all this does not change the fact that in the long run, the decline in the working-age population is one of the biggest challenges facing the Estonian economy," Nestor said.

Nestor added that in the bigger picture, it seems that the labor market has as of now reached its peak

"Although companies are still interested in recruiting new people, their optimism has declined significantly compared with last year, especially in industry and construction. Similarly, the number of companies reporting labor shortages as a hindrance to their business has decreased. People's fear of job loss has also increased," he added.

At the same time, Nestor emphasized that, in a historical perspective, the situation on the labor market is still excellent.

The rate of unemployment in Estonia was 4.7 percent in the first quarter of 2019, 2.1 percentage points lower than in the same period last year, Statistics Estonia said on Wednesday.

The labor force participation rate was 70.8 percent, and the employment rate 67.5 percent. The labor force participation rate and the employment rate remained at a similar level compared with the first quarter of the previous year.

Editor: Andrew Whyte

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