Flash comment: Latvia - March 1, 2019
Wage growth in 2018 fastest in decade

Last year the average gross wage recorded the fastest growth in ten years. It increased by 8.4%, reaching 1004 euros. It was boosted by minimum wage hike (from 380 euros to 430 euros) and tightening labour market. The unemployment rate is at a ten year low and continues shrinking, and the labour shortage remains pronounced, intensifying the competition for labour and lifting wages. The reported wage growth was most likely also supported by the measures aimed at reducing the grey economy, in particular the share of undeclared income.

The average wage growth was positive in all sectors. People employed in the health care sector saw the fastest wage growth (+15.9%) on average, while the wages in the finance and insurance services sector saw the slowest increase (+3.6%). The wage growth in other sectors was between 6% and 12%. Public and private sectors saw a very similar pay rise, i.e. 8.5% and 8.4%, respectively.

Lower payroll taxes and higher non-taxable income threshold for the largest part of society, especially those earning smaller wages, gave additional boost to net wages. The average net wage growth was 1.5 percentage points above the gross wage growth. The former increased by 9.9% in 2018 and was 742 euros. Adjusting for 2.5% inflation, the purchasing power improved by 7.1%.

Outlook: Gross wage growth will remain strong but moderate to about 7% in 2019

The tightening labour market and acute labour shortages will continue contributing to rapid wage growth. However, as the effect of last year minimum wage hike fades, the wage growth will moderate to about 7% in 2019.

Income growth will improve the financial situation of households and underpin the household consumption growth, which will be the main driver of overall economic growth this year. Current labour market situation poses challenges for companies, which will have to increasingly think about how to attract and retain employees, as well as how to invest in increasing productivity in order to cope with the increasing labour costs. Situation where wage growth is exceeding productivity growth is not sustainable and can hurt profitability and competitiveness of companies.

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

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