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Bank of Estonia: Cooling of economy to reach labor market too

Construction work in Estonia (picture is illustrative).
Construction work in Estonia (picture is illustrative). Source: Priit Mürk/ERR

The rate of employment in Estonia was among the highest in the EU in the first half of 2019, however the cooling of the economy is expected to reach the labor market as well soon, the Bank of Estonia said on Monday.

Although slowed down economic growth, the declining competitiveness of the oil shale sector and a large number of short-term employees arriving from abroad have had a significant impact on the Estonian labor market this year, there is rather a shortage of labor than a shortage of work on the Estonian labor market, it appears from the central bank's labor market overview.

Of all 15- to 74-year-olds, 68 percent were employed in the first half of 2019, which is among the highest such indicators in the EU. The unemployment rate was 5 percent, which is very low.

In the industrial sector, however, the impact of poorer export outlooks can be felt. Growth in the sector's employment has slowed down, and the overwhelming majority of employers in the manufacturing industry are predicting a reduction in employee numbers. The number of vacant jobs has also declined, and an even smaller share of employers see a shortage of labor as the primary obstacle to expanding production.

Meanwhile, the soil shale sector is being affected by a decline in the competitiveness of electric energy produced in Estonia, which is being caused by a leap in the price of carbon dioxide emission credits. Estonian state-owned energy group Eesti Energia is slated to cut 800 jobs as a result of reduced production volumes. Although the impact from this shock has yet to reach labor market indicators, judging by experience from previous crises, this will significantly affect employment and the unemployment rate in the Ida-Viru County region, the central bank said.

Unlike with the 2016 crisis, which was caused by a decline in global oil prices and after which a large number of the people laid off by the Estonian shale oil industry returned to their jobs as a result of a stabilization of prices and government support for the sector, the same cannot be expected to happen this time, Bank of Estonia economist Orsolya Soosaar told BNS.

Indications began cropping up in the first half of 2019 that the cooling of the economy is reaching the labor market as well. While workforce demand remained robust in the service sector, poorer export outlooks are affecting the industrial sector. Among manufacturing industry employees, a majority are now seeing a decline in the number of employees ahead, and the increase in employment in that field has slowed.

Employers' more lukewarm interest in hiring was also reflected in the small number of job vacancies.

According to Soosaar, a drop in the price of carbon dioxide quotas to prior levels is unlikely, which means that many workers will have to move on to other fields. However, the current labor market situation is favorable for such movement due to low unemployment and the service sector's growing demand for labor.

Number of foreign workforce up

The central bank described the migration turnaround to occur a few years ago as one of the most important events for the Estonian labor market. In addition to over 7,000 more people taking up residence in Estonia than leaving leaving the country last year, foreigners in even bigger numbers have been arriving in Estonia as temporary workforce in recent years. The number of valid registrations of short-term employment reached approximately 20,000 in the third quarter of 2019.

Considering the low level of unemployment and natural aging of the working-age population, Estonia has rather benefited from such labor migration, but this also entails risks, according to the central bank. For instance, should the economy suffer a setback and competition for jobs intensify, the presence of short-term employees may aggravate the situation for local workers seeking jobs.


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Editor: Aili Vahtla

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