The Estonian Economy, No 5, September 27, 2011: High economic activity boosts labour market

1. The Estonian Economy
Monthly newsletter from Swedbank’s Economic Research Department
by Elina Allikalt No. 05 • 27 September 2011
High economic activity boosts labour market
 More broad-based economic growth has brought a strong employment
increase, falling unemployment rate, and a soaring number of vacancies.
Also, the labour activity rate is climbing, especially among youth.
 Despite overall declining unemployment, the rate is still growing among the
long-term unemployed; more active policy responses are needed to avoid
difficult social problems from arising in the future. On the other hand, youth
unemployment has fallen considerably, and in this area the main focus
should shift from unemployment to education issues.
 Gross wage real growth has been negative since late 2008. Although this is
increasing competitiveness in the export-led economic recovery, wage
growth pressures are building up due to structural unemployment. Also, there
are figures indicating a possible increase in unofficial wages.
The strong economic recovery and high economic quarter as well, especially as regards the growing
growth during the first half of this year have had a number of vacancies. Confidence figures are
healthy impact on the crisis-torn labour market. The reporting a consistent fall in unemployment fears,
unemployment rate fell to 13.3% in the second despite deteriorating overall consumer confidence.
quarter, with the number of unemployed down by Our current forecast sees the unemployment rate
28% in annual comparison; unemployment is declining to 13.2% on average this year (from
declining in double digits among all age groups. 16.9% in 2010), which suggests unemployment
The falling unemployment is supported by hefty rates falling to 12% could be seen during the
employment growth; however, the increasing second half of the year.
activity is not allowing the unemployment rate to fall
faster. Unemployment fears and registered unemployment rate
16% 90
Labour market indicators
14%
30% 70% 70
12%
25%
50
65% 10%
20%
15% 8% 30
60%
10% 6%
10
5% 4%
55%
-10
0% 2%
2004 2005 2006 2007 2008 2009 2010 2011
-5% 50% 0% -30
-10% 2005 2006 2007 2008 2009 2010 2011
Registered unemploy ment rate (ls)
-15% 45% Source: DG ECFIN, EUIF Unemploy ment f ears, pts (rs)
employ ment, annual growth (ls)
unemploy ment rate (ls)
activ ity rate (rs)
Source: SE employ ment rate (rs) The most characteristic indicator of the current
labour market situation is the very high activity rate,
Registered unemployment data are showing both in historic terms as well as by country
continuous positive developments during the third comparison. The activity rate reached 67.5% in the
Economic Research Department. Swedbank AB. SE-105 34 Stockholm. Phone +46-8-5859 1000.
E-mail: ek.sekr@swedbank.com www.swedbank.com
Legally responsible publisher: Cecilia Hermansson, +46-8-5859 7720.
Annika Paabut, +372 6 135 440. Elina Allikalt, +372 6 131 989. Madis Aben, +372 6 139 035

2. The Estonian Economy
Monthly newsletter from Swedbank’s Economic Research Department, continued
Nr 05 • 27 September 2011
second quarter, up from 66.3% a year before and We expect employment growth to slow, but to
close to the levels seen at the end of 2008, when remain stable and balanced among sectors. The
the recession deepened; most of this increase was biggest unknown is perhaps connected with the
founded on the youth age group (i.e. <24 year-olds; construction sector, which, although gaining from
which can indicate that part of it is seasonal), as high investment activity (including in the public
well as among 50-69 year-olds (partially connected sector), is already suffering from a lack of skilled
with the age increase in women’s pensions). Labour workers (see last page).
activity in Estonia is among the highest in the EU,
only falling short to mostly Nordic countries. Vacancies at high level with structure
shifting
We expect the activity rate to go down somewhat
Together with high economic activity and
during the second half of the year, supported by a
employment growth, the number of vacancies has
pickup in nonactivity among youth due to their
also been soaring. After a regular seasonal pickup
return to studies; however, there are risks regarding
this assumption. We estimate labour activity to in vacancies during the spring, vacancies have
remain at rather high levels for a longer period, thus continued to grow during the third quarter as well.
not allowing unemployment rates to decline faster. The number of vacancies during the first half of this
year was registered at an amount comparable to
Employment continued to grow at a rapid pace in
those seen during the boom years of 2006-2007
the second quarter, with 7.9% more people
(see chart). However, just as employment growth is
reported employed than a year ago, up from 6.8%
showing a structural shift in the labour market, so
in the first quarter. While employment growth in the
are the vacancies. For example, growing economic
first quarter was still mainly led by the
effectiveness (including technology related) and a
manufacturing sector (60% of total increase), it
bigger contribution from the tradable sector have
became more broad based in the second quarter,
considerably decreased the need for low-skilled and
with construction and the retail-wholesale sector
less educated workers – compared to 2007,
contributing at a similar strength; employment
vacancies have declined the most for elementary
continues to fall in the public services sector.
occupations and craft and related sales workers. At
Despite hefty employment developments during the
the same time, vacancies for professionals and
first half of this year, total employment is still
technicians are more than twice as high.
roughly 10% lower than the highest levels seen in
2007-2008, including 20% lower in the recovery-
Number of vacancies by occupation
leading manufacturing sector. However, the boom (thousands)
year levels should not be set as a target because
30 Other
they were unsustainable in the long run and the
labour force is declining; indeed, the size of actual
25 Elementary
emigration as well as future immigration policies occupations
can changes these estimates.
20 Plant & machine
operators
Employment, annual change
(thousands) 15 Craf t and related
trades
45
Other
10 Serv ice and sales
30
Public
serv ices 5 Technicians, assoc.
15
ICT prof essionals
0 0 Prof essionals
Transport
2005 2006 2007 2008 2009 2010 2011 1H 2007 1H 2009 1H 2011
, storage
-15 1H Source: EUIF
Retail,
wholesale
-30
Constru- Labour supply, on the other hand, has responded
-45 ction less flexibly to changes, resulting in structural
Manuf a- unemployment problems. Training and education is
cturing
-60 still the main key for the solution – lots of means
Total
and resources have been channeled to tackle this
-75
Source: SE
issue, including from EU structural funds. However,
there are difficulties in forecasting, especially in the
long run, which occupations are needed and in
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3. The Estonian Economy
Monthly newsletter from Swedbank’s Economic Research Department, continued
Nr 05 • 27 September 2011
which sectors; this is because data are scarce and can be created for the companies to hire long-term
curricula take time to be prepared. Also, in many unemployed. In addition, measures to popularise
fields, the private sectors could be more integrated, part-time job creation (which is currently twice as
e.g., in work practice and coaching activities. In low as the EU average) can also be beneficial.
addition, legislators should consider lifting the
Another major negative outcome for the labour
special benefit tax on work-related education and
markets across the developed economies from the
training.
recent recession has been sharply increasing youth
Long-term unemployment up, youth unemployment. In Estonia, this unemployment rate
unemployment down spiked from less than 10% before the crisis to 40%
in the beginning of 2010. Since then, however,
The biggest trouble area behind the overall positive
youth unemployment has halved, coming down to
developments in the labour market is high long-term
around EU average levels. Also, one of the most
unemployment. The number of short-term
closely followed indicators among youth – NEET
unemployed (i.e., less than 12 months) fell by 46% (the number of those not in employment, education,
during the first half-year, but only by a mere 2% for or training) – has fallen to near pre-crisis levels (see
long-term unemployed, including a 47% increase in chart).
the number of very-long-term unemployed (i.e.,
more than 24 months). The share of long-term Youth unemployment rate, s.a.
unemployed in total unemployment rose above 50% (percent)
during this period (see chart); a similar share was 45
seen, for example, in 2007. However, the total
number in absolute terms has now more than 40
tripled compared with that period. In addition to the 35
long-term unemployment numbers, the number of
discouraged persons was up by 35%, although the 30
number of inactive persons fell by 3% during the 25
same period.
20
Unemployment rate by duration 15
14% 70%
10
12%
60% 5
10% 2006 2007 2008 2009 2010 2011
EU27 Estonia Latv ia
50% Source: Eurostat Lithuania Sweden
8%
6%
40% Most of this sharp decline in youth unemployment
4% can be attributed to strong employment growth,
30% which was up by 25% on average during the first
2%
half of this year, including 28% in the second
0% 20% quarter; seasonal factors definitely play a role in
2004 2005 2006 2007 2008 2009 2010 2011 this, as many temporary and part-time jobs have
share of long-term unemploy ment (rs) been created in different services and sales
Source: SE
long-term activities. However, the number of students has
short-term
remained at a low level for several years now,
indicating an increasing number of youth working
Long-term unemployment poses problems because during their studies or choosing, instead, to work
the longer somebody stays out of work, the less altogether. In the long run, this cannot be
likely it is they will manage to find work, as skills considered sustainable as it imposes the risk of
and work habits erode; this, in turn, will burden the increasing the share of uneducated in the work
social system and affect negatively the declining force.
labour force. Also, many of the long-term
unemployed used to work in areas where demand In order for activity among youth to decline and the
for labour has now fallen sharply; this situation number of students to increase, more social and
pointing to struggles with structural unemployment. financial safety nets need to be put in place for
In addition to effective education and training youth to allow them to fully concentrate on their
measures, more incentives, including tax benefits, studies. Currently, many students feel as if they are
forced to work during their studies because of
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4. The Estonian Economy
Monthly newsletter from Swedbank’s Economic Research Department, continued
Nr 05 • 27 September 2011
financial problems; this, in turn, affects their on average since the start of last year. However,
academic record and increases the risk to this pattern cannot survive in the long run, even
eventually drop out. While more flexibility is needed, more so because production has been climbing on
including better part-time work possibilities, the the value-added ladder and will continue to do so.
currently planned policy changes in the parliament, The tightening of the labour supply will also put
unfortunately, seem to be doing the opposite – pressures on wage growth in manufacturing, as the
making the rules for higher-education students biggest employment sector in the economy.
stricter and thus education more elitist.
Average monthly gross wage real growth
Youth labour market indicators (annual growth)
(thousands) 25% Total
Manuf acturing
140 Construction
20% Retail
Storage, transport
120 Public serv ices
15%
100
10%
80
5%
60
0%
40
2007 2008 2009 2010 2011
-5%
20
0 -10%
2004 2005 2006 2007 2008 2009 2010 2011
-15%
Employ ed Unemploy ed
Source: SE Source: SE
Students NEET*
* not in employ ment, education or training
Lack of qualified workers as the main reason for restraining
Real wage growth still negative business activity
(share of all respondents)
What surprised us negatively about the second
80
quarter labour market data was the slower-than-
expected growth of average gross wages and, in 70
turn--due to the high inflation--also the continuously
60
negative real wage growth of – +4.2% and -1%,
respectively. Growth fluctuated strongly across 50
sectors, from -7% in education to +6% in real estate
40
activities (in real annual terms). Looking at current
developments, especially accelerating inflation, the 30
outcome in the second half of this year will probably
20
be weaker than we previously expected as well,
although overall wage pressures in the economy 10
are strengthening. There are growing risks that
0
structural unemployment will push up wages in the 2005 2006 2007 2008 2009 2010 2011
most supply-squeezed sectors; this, in turn, can
industry serv ices construction
spill over to other sectors in the economy. The Source: EKI
current public sector wage policy, which is entirely
concentrated on effectiveness gains, will not be A bit confusing are the wage growth numbers in the
sustainable in the long run either. construction sector. On the one hand, this sector
reported the strongest growth in employment (26%)
Real wage growth in the manufacturing sector has in the second quarter; also, the lack of qualified
been hovering around zero for a year now, labour is considered to be the biggest problem, in
reporting just +0.2% in the second quarter. This the face of increasing investment and construction
cost advantage edge points to growing activity, as many of those who lost their work during
competitiveness in the global markets as most of the recession went to Finland, where construction
the production in manufacturing is exported. As a sector started recovering sooner and wage levels
result, productivity growth in manufacturing has are much more attractive. On the other hand,
been many times higher than in the whole economy wages in the construction sector were up by just
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5. The Estonian Economy
Monthly newsletter from Swedbank’s Economic Research Department, continued
Nr 05 • 27 September 2011
3.1% in nominal terms and declined by 2% in real also, the need to attract workers probably adds to
terms. At the same time, construction price growth their incentives to increase unofficial payments.
is accelerating, based on the price of labour – e.g., This notion is supported by confidence figures,
construction prices were up by 3.2% in the second according to which the share of respondents in the
quarter, including by 7% of labour. Even more, data construction sector claiming the lack of qualified
show that during the first half of this year wages in labour to be the main reason for restraining their
the construction sector in Finland outpaced those in business activity has shot up to levels last seen in
Estonia (8.2% vs. 3%, respectively). late 2007 (see chart).
This conflict in figures can no longer be explained
by just structural shifts, and thus the share of
unofficial pay is most likely increasing as well. Elina Allikalt
Despite the increase in construction activity, many
construction companies are still financially troubled;
Swedbank
Economic Research Department
Swedbank’s monthly newsletter The Estonian Economy is published as a service to our
SE-105 34 Stockholm
customers. We believe that we have used reliable sources and methods in the preparation
Phone +46-8-5859 1028
of the analyses reported in this publication. However, we cannot guarantee the accuracy or
ek.sekr@swedbank.com
www.swedbank.com completeness of the report and cannot be held responsible for any error or omission in the
underlying material or its use. Readers are encouraged to base any (investment) decisions
Legally responsible publisher on other material as well. Neither Swedbank nor its employees may be held responsible for
Cecilia Hermansson, +46-8-5859 7720 losses or damages, direct or indirect, owing to any errors or omissions in Swedbank’s
Annika Paabut +372 6 135 440 monthly newsletter The Estonian Economy.
Elina Allikalt +372 6 131 989
Madis Aben +372 6 139 035
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