Flash comment: Lithuania - May 28, 2019
Major gains in purchasing power due to tax reform

Wage dynamics of the last year continued in first quarter. Gross wage growth adjusted for tax reform eased by 0.3pp to 9.4%. In private sector wage growth cooled off by 1.1pp down to 7.4%. Meanwhile in public sector wage growth accelerated further by nearly two percentage points to 14.3%.

Thanks to the tax reform net wages surged by a whopping 14.6% annually. Real net wages grew by 12.2%, providing healthy boost to household consumption. Admittedly, some of the increase does not translate into purchasing power. Tax reform raised incomes through three channels – reducing social security contributions rate, expanding the base of non-taxable income, and adding the option to transfer part of wage to pension fund for individual himself. What previously was counted as publicly administered social security contributions now is considered savings for citizens that chose to participate in pension saving.

Sectors dominated by public services were leaders in wage growth. Health sector wage jumped 18.6%, education wages were not far behind at 14.8%, public administration and defense wages grew by 10.4%. Overall wage growth was quite rapid across all other sectors and ranged from 5.5% to 9.4%.

Outlook: Public and private sectors diverge

Last year there were worrying signs that public sector will become completely uncompetitive in attracting talent as private sector wages overtook those of public sector. However, it seems that public sector is on track to rebuild its competitiveness – wages in the public sector are 4.8% higher than in the private sector. Political pressure in election year to keep up the wage growth will continue, although its set to ease a bit in the second half of the year due to base effects.

Rapid wage growth raises concerns about overheating labour market. Labour shortages will remain quite acute and produce conditions for continued wage growth. However, we see the effects of headwinds rising in the global economy. Private sector wage growth is slowing down and while Lithuanian economy has proved resilient so far it could slow down if global conditions deteriorate further. But for now, people are enjoying higher purchasing power and it is reflected in retail sales, which grew 7.9% annually in the first 4 months of the year.

For more information about this report, please contact:

Vytenis Šimkus, +370 687 17870, vytenis.simkus@swedbank.lt.

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