Flash comment: Latvia - November 29, 2017
Slightly slower but still rapid wage growth in Q3

• Annual gross monthly wage growth at 7.5% in Q3 as labour market tightens

• Wages up in almost all sectors

• Payroll tax cuts and minimum wage hike to give additional boost to wage growth next year

After surging 8.7% in the second quarter, the annual gross monthly wage growth slowed to 7.5% in the third quarter, which is also the average wage growth in the first three quarters of this year.

The wage growth is broad based and is seen in almost all sectors, except real estate as well as electricity, gas and steam production sector. The average wages in the private and public sector are growing at a similar rate.

Net wages are increasing slower than gross wages because of smaller non-taxable income threshold this year (applied to the wages at the pay-out, but can be redeemed after filing the income declaration). Average net wage increased by 6.7% year-on-year in the third quarter. Given 2.9% inflation in the third quarter, the real net wages saw a 3.5% annual increase.

Outlook: Wage growth to remain strong this year and accelerate in 2018

The labour market will continue tightening supporting rapid wage growth. Unemployment will stay on its downward path, averaging at 7.5% in 2018 (8.5% in the Q3 2017). The participation rate is already historically high (close to 70%) and cannot grow much more. The labour shortage is becoming more visible, with the vacancy rate on the rise and companies indicating labour as limiting factor to business more often. Labour market tightening and growing wages will cause headache to businesses – unless accompanied by productivity gains, the growing labour costs will dent competitiveness. At the same time, growing wages will be good news for households, boosting their confidence and consumption.

According to our latest forecast, the average gross wage growth will be about 7.5% this year. Next year, it will accelerate to around 9% after getting an additional boost from the minimum wage hike. Part of the increase (about 2-3 pp) will reflect income legalization. Net wage growth will accelerate from about 6.5% this year to more than 10% in 2018 on payroll tax cuts. The purchasing power of households is expected to increase by about 7% in 2018, almost twice as fast as this year.

For more information please contact Ms. Agnese Buceniece, +371 67445875, agnese.buceniece@swedbank.lv 


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