Flash comment: Latvia - March 2, 2018
Tightening labour market lifted wages by 7.9% in 2017

• Average gross wage growth at 7.9% in 2017

• Unemployment rate down to 8.7% in 2017

• Employment growth inched up in 2H 2017, compensating the fall in 1H 2017

• Labour shortage poses an increasing challenge to employers

Labour market tightening continued throughout 2017 propelled by growth-driven demand and negative demographic trends. The unemployment rate fell to 8.1% at the end of last year and was 8.7% for the year as a whole (down from 9.6% in 2016). The employment growth was close to zero but positive (+0.2%) as participation rate shot up to a new historical high of 68.9% just compensating the decline in working age population (-1.9%).

Labour shortage is becoming an increasing challenge for employers. The job vacancy rate is on the rise, and the measure of unemployed persons per job opening is approaching historical lows. Mismatch between the regional distribution of the unemployed and the job openings aggravates the situation.

Continuing labour market tightening together with rising productivity induced a rapid wage growth last year. The average gross wage was at 926 euros, 7.9% higher than a year earlier. The pace of growth was the fastest in nine years. However, not all of the increase was true as some of it was due to legalization – the share of envelope wages in Latvia is gradually falling as authorities are working on reducing the share of grey economy. The average net wage picked up 7%. The purchasing power growth slightly slowed last year (to 4% from 4.5% in 2016) as inflation returned (2.9%).

The wage growth was not only fast but also broad-based as the average wage increased in all the sectors. Professional, scientific and technical service providers as well as people employed in the education sector saw the most rapid increase.

Outlook

This year, the unemployment rate will decline further averaging at around 8%. The participation rate will continue inching up, but it will barely compensate the effect of falling population on employment growth, which will remain around zero. In addition to further tightening in labour market, a minimum wage hike of 13% will lift the average gross wage growth by close to 10%. The net wages will be growing even a tad faster on the back of reduced labour taxes (lower rates and higher non-taxable income thresholds especially for low wage earners).

In 2017, the growth in wages was matched with a rise in productivity, but productivity is unlikely to keep up the pace, and risks to competitiveness will build up. So far, the export market shares have been resilient, but in order to avoid possible future losses companies have to constantly invest in boosting their productivity.


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

________________________________________

This email is sent through the web-based distribution system of Swedbank Macro Research. As a subscriber you can change your settings regarding what publications you will receive by clicking “Change your settings”. You can also unsubscribe by clicking "Unsubscribe".    

Subscribe!
This letter is distributed by Swedbank in cooperation with Brightly. The letter is personal.