Swedbank Analysis - March 2, 2012: To promote growth, Lithuania’s labour market needs more efficiency and flexibility

1. Swedbank Analysis March 2, 2012
To promote growth, Lithuania’s labour market
needs more efficiency and flexibility
 Even though the increase in employment will ease some
pressures, Lithuania has quite a low ratio of employment to
total population, and unfavourable demographic tendencies
will be diminishing Lithuania’s potential growth in the next
few years.
 Overall unemployment has been declining steadily last
year, however, structural problems in the labour market
remain pressing – long-term unemployment increased
further and youth unemployment rate remained above
30%.
 High youth unemployment rate can sometimes be a
misleading indicator due to a low activity rate – 67% of
population aged 15-24 are still studying and are not active
in the job market. An essential problem which needs
immediate fix is that of those who are looking for a job, two
thirds have no qualifications. Furthermore, young people
with higher education are also often locked out of the job
market; this is a problem of poor quality of education and
disregard of market demand.
 Lithuania has demonstrated a quite high flexibility of
wages; however, this flexibility should increase further in
order to accelerate job creation and allow firms to adapt
better as conditions change. All labour market problems
are interrelated and require complex actions. The potential
growth of the economy will be highly dependent upon the
success of the efforts to raise the labour force participation
rate and productivity, to accelerate the process of job
creation, and to solve structural problems.
Higher employment needed for sustainable economic growth
There were almost 1.4 million employed people last year. The number of
employed increased by 27.2 thousands last year compared with 2010,
while the number of unemployed decreased by 42.3 thousands. How-
ever, in 2009 and 2010, the number of employed decreased by 176.3
thousands while the number of unemployed jumped by 196.8 thousands.
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
Nerijus Mačiulis + 370 5 258 2237. Lina Vrubliauskienė +370 5 258 2275
Vaiva Šečkutė +370 5 2 58 2156

2. This left the unemployment rate at 15.4% last year, down from the peak
of 17.8% reached in 2010. Unemployment in 2011, however, still re-
mained at its highest level since 2001.
The ratio of employed in the age group of 15-64-year olds to total popula-
The employment rate in
tion in this age group has been the lowest in Lithuania of the three Baltic
Lithuania has been lower
states. During the first nine months of 2011, this ratio bounced back to
than in the EU, Latvia,
60.4% from 57.8% in 2010. However, it was lower than the EU average
of 64.3%. Compared with Latvia, the employment rate was 1 percentage and Estonia
point lower, and in Estonia it was even 4.5 percentage points higher than
in Lithuania.
Employment rate (15-64-year old)
71
69
67
65
European Union (27 countries)
63 Estonia
Latvia
61
Lithuania
59
57
55
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
9M Source: Eurostat
Lower employment means lower income, spending, tax income, and pro-
duction, on the one hand, and increased costs, on the other, as the ex-
penses for unemployment and other social benefits increase. It also be-
comes harder to finance other government functions. Therefore, lower
employment rates increase the burden for the employed as well, who
may be subject to higher taxes or a deterioration of public services.
The lower ratio of employed may by partly explained by the lower labour Labour force activity
force activity rate1 in Lithuania. Even though it has been catching up with rate is catching up with
Latvia and Estonia, Lithuania's rate is still the lowest among people aged other two Baltic
15-64 years. Lithuania lags the most behind Estonia, where the activity countries
rate increased significantly during 2011 as well.
Activity rate (15-64 years old)
75
74
73
72
71 European Union (27 countries)
Estonia
70
Latvia
69
Lithuania
68
67
66
65
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
9M
Source: Eurostat
1
Ratio of the sum of employed and unemployed, but actively looking for a job,
to the total working-age (15-64) population
2 Swedbank Analysis • March 2, 2012

3. Demographic tendencies will cause dependency ratios to rise
The heavier burden for the employed, which is created by lower activity
and employment rates, is revealed by the dependency ratios. The higher
the ratios, the harder it is for the employed to support such dependants
as the unemployed, children, and pensioners. As a smaller number of
employed is financing the country’s budget, the pressure on the social
security system increases, and it may become harder to perform other
government functions as well.
At the beginning of 2011, there were 101.2 unemployed, children (0-14 Dependency ratios will
years), and elderly people (over 64 years) for every 100 employed. This be decreasing, but not
ratio had fallen from 107.1 in 2010 and should continue to fall as unem- for long
ployment decreases from its highs. However, the ratio will probably start
increasing after unemployment bottoms out because the size of the work-
ing-age population, contrary to the other groups, will be shrinking. The
average working-age population will be decreasing by 0.9% on average
until 2016, whereas the number of children (0-14 years) will start to rise in
2013, and the number of elderly (over 64 years), in 2014.
Dependency on employed, %
120
100
35.9
Elderly/employed
35.2
39.8
80
34.9
35.5
39.1
37.9
38.4
35.1
37.7
Children/employed
37.1
34.8
36.5
60
36.4
35.1
34.4
Unemplpyed/employed
50.8
37.2
46.9
40
44.0
35.6
Children, unemployed,
42.4
35.7
34.8
34.2
39.7
elderly/employed
33.7
37.4
33.2
34.0
33.4
35.1
20
21.0
16.0
14.2
12.8
15.9
21.7
18.1
15.6
13.0
10.5
9.0
6.0
4.5
6.2
7.8
6.4
0
2001 2003 2005 2007 2009 2011 2013 2015
Source: Statistics Lithuania, Swedbank
Potential output depends on the growth of population, the ratio of labour Demography will have a
force to population, the employment rate, productivity, and hours worked. downward pressure on
Hours worked did not change in 10 years a lot. Average number of hours potential GDP
worked per month per employee was 150.8 in three quarters of 2001 and
150.3 in three quarters of 2011. It did not fluctuate much in the past and
therefore we project that it will not change significantly during the coming
few years.
From 2012 till 2016 the negative growth rates of population and the ratio
of the labour force to population will put a downward pressure on the po-
tential GDP of Lithuania. Meanwhile, the employment rate should have a
positive effect as the economy recovers. Productivity growth should have
a positive impact on potential output growth as well, due to catching-up
effects.
3 Swedbank Analysis • March 2, 2012

4. Average growth of demographic and macroeconomic variables (2012-2016); %
Negative trends in
population and labour
2.77% force growth will be
offset by increases in
1.35% Productivity employment and
Employment
Population
productivity
-0.61%
Labour force
-0.75%
-1.0% -0.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0%
Source: Statistics Lithuania, Swedbank
The pressures on the social security system will decrease somewhat due
to decreasing unemployment. However, as the demographic tendencies
are unfavourable, Lithuania will need to take other labour market meas-
ures if it wants to sustain its potential growth.
Under favourable economic conditions, higher activity rates would be
able to increase Lithuania's potential growth. This means that the impor-
tance of incentives to join and stay longer in the labour market, i.e., to join
and stay in it or to come back to it earlier after maternity leave, will grow.
In addition to that there is some room for the increase in working hours.
According to Lithuanian Labour Code, the maximum working hours with-
out overtime is 40 a week or around 173 a month. Currently Lithuanians
work 150 hours a month on average.
The rising retirement age will have a positive effect on potential output, as
this will expand the size of the labour force. Beginning in 2012, the re- Increasing retirement
tirement age will start to increase by 4 months a year for females and by age will have positive
2 months a year for males. It will be increasing until 2026, when it will effect on labour force,
reach 65 years for men and women. Before 2012, the retirement age for but further measures may
males was 62 years and 6 months, and for females, 60 years. be needed
Structural, long-term youth unemployment becomes more pro-
nounced
From 2008 until 2010, when the unemployment rate increased from 5.8%
to 17.8%, the number of employed in the construction, manufacturing,
and wholesale sectors decreased the most - by more than 10%. About
45% and 40% of all employed were in those three sectors in 2008 and
2010, respectively. The number of people employed in administrative,
support service, professional, scientific, and technical activities increased
during the same period.
Therefore, low-skilled workers and youth have been affected the most.
Due to massive layoffs in the construction and manufacturing sectors, the
Low-skilled workers and
unemployment rate of men, who tend to be employed in these sectors
more than women, increased from 6.0% in 2008 to 21.2% in 2010.
youth have been most
Meanwhile, the unemployment rate of woman, which traditionally is less affected in the labour
elastic, increased from 5.6% in 2008 to 14.4% in 2010. market
The most vulnerable have been low-skilled workers. The unemployment
rate among people with only a secondary education or lower than that
amounted 30-42% in 2010. This was much more than the unemployment
rate among university graduates, which increased from 3.0% in 2008 to
7.0% in 2010.
4 Swedbank Analysis • March 2, 2012

5. Number of employed; 2010 compared with 2008 change in %
Administrative and support service 29.4%
activities 11.3%
Professional, scientific and technical 7.5%
activities 3.4%
-1.7%
Agriculture, forestry and fishing 1.3%
Public administration and defence; 1.3%
compulsory social security -1.1%
-2.3%
Health and social work -2.2%
-3.7%
Education -3.0%
Transportation and storage
5.3% 2011 9m compared with 2008 9m
-4.3%
-2.7%
2010 compared with 2008
Information and communication
-7.7%
Wholesale and retail trade; repair of motor -8.0%
vehicles and motorcycle -10.0%
-9.9%
Accommodation and food service activities -13.6%
-20.2%
Manufacturing
-20.0%
-45.3%
Construction -44.0%
-60% -40% -20% 0% 20% 40% Source: Statistics Lithuania
In the first nine months of 2011, some recovery was seen in employment
in transportation and storage. Employment in the first nine months of last
year increased by 5.3% over the same period of 2008, compared with a
4.3% decrease in 2010 over the same period of 2008. Employment also
recovered somewhat in information and communication, where the de-
crease in employment fell from 7.7% (2010 compared with 2008) to 2.7%
(first nine months in 2011, compared with the same period in 2008); over
the same periods, similar decreases were seen in accommodation and
food service activities (-9.9% and -13.6%, respectively) and wholesale
and retail trade (-10% and -8.0%, respectively). Over the same periods,
the growth of employment accelerated similarly in administrative and
support service activities (29.4% and 11.3%, respectively) and profes-
sional, scientific and technical activities (7.5% and 3.4%, respectively).
Interestingly, employment in the manufacturing sector did not increase
despite a very rapid recovery of this sector, for which output is close to its
pre-crisis highs. This can probably be explained by the greater efficiency
and productivity of Lithuanian manufacturing – companies adjusted their
processes and structure to be able to create the same value with fewer Employment in
employees. Such gains in productivity are commendable; however, tan- manufacturing did not
gible future progress should be achieved through higher investments, not increase, despite rapid
through further cuts in employment. sector’s recovery
In Lithuania, in two years (from 2008 until 2010), the unemployment rate,
as well as the youth (15-24-year olds) unemployment rate, increased the
most among the Baltic countries and much more than in the EU on aver-
age. Even though the total unemployment rate in 2010 in Lithuania was
lower than in Latvia, Lithuania's youth unemployment rate continued its
rapid increase, reaching 35.1% - 14.2 percentage points more than the
EU average and slightly above Latvia’s (34.5%).
5 Swedbank Analysis • March 2, 2012

6. Unemployment rate
40
35.10
35
32.90
30
25 Males
Females
21.2
20 Total
17.8 17.8
15–24
15 15.4
14.4 Long-term
13
10
7.4 8
5
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: Statistics Lithuania
The youth unemployment rate is highly correlated with the total unem-
ployment rate, but is more volatile. During an economic downturn, em-
ployers may choose from a wider variety of more experienced workers
seeking jobs. While, on the contrary, by employing a younger person, the
employer most often has to invest in that person and take a risk that, after
acquiring the skills and experience, the worker might quit and take a job
in a competing firm. Therefore, during hard times, employers are less
eager to take such risks. The young people employed during recessions
become more vulnerable as well, as employers choose to fire those with
less experience and knowledge, and probably those whose severance
pay is lower – in both cases, this will most likely be a younger person.
Youth unemployment should be decreasing as total employment in-
creases. Nevertheless, it remains a significant problem for a country with
high emigration rates. A high youth unemployment rate can harm the
future labour force as some may decide to leave the country, and others,
without appropriate experience, will be less productive than otherwise.
However, sometimes the scope of youth unemployment in Lithuania can Youth unemployment
be somewhat exaggerated because the number of unemployed is not as indicator may be
high if the activity rate in taken into account. The labour force activity rate misleading
among 15-64-year olds has been more than 70% recently, whereas the
activity rate of youth barely reaches 30% – majority of them are still
studying and for that reason are not active participants of the job market.
Therefore, if the ratio of unemployed to population of the respective age
group is considered, then the youth unemployment is rather small – 9.7%
and 7.6% in 2010 and 2011, respectively, which is considerably lower
than the registered unemployment rate of the working-age (15-64-year
olds) population (11.7%).
Unemployed to population (registered unemployment), %
16 80
14.5
14 70
11.7
12 60
9.7
10 50
Total (ls)
7.6 Up to 25 years old (ls)
8 40
Activity rate (15–24)
6 30 Activity rate (15-64)
4 20
2 10
0 0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: Lithuanian Labour Exchange
6 Swedbank Analysis • March 2, 2012

7. Currently, 67% of those in the 15-24 age group are still studying in
schools, colleges, universities, or other educational institutions. There-
fore, most of the active population in this age group have either few quali-
fications, or are looking only for a part-time job. Not many employers are
eager to employ unqualified workers, who may not be able to fully en-
gage in work due to other responsibilities regarding education.
According to Lithuanian Labour Market Exchange, 59.3% of youth regis-
tered as unemployed did not have any professional education, whereas
among all the unemployed the unqualified comprised only 41.9%. Many
of the unemployed under 25 years old used to work in construction sector
(a choice made during booming years, when a wage of unqualified con-
struction worker was above country average), but became unemployed
when this sector collapsed.
This means that currently the biggest problem is related to insufficient
qualifications of young people. Their unemployment would ebb if con-
struction sector were to recover rapidly and a lot of low-skilled jobs were
created. However, unless there is a fundamental shift in how renovation
of soviet-era buildings is organizes, this is not likely to happen any time
soon. Another option is to rethink the way Labour Exchange organizes
trainings of unskilled unemployed. A system where companies are subsi-
dized for training their potential future employees could significantly lower Two kinds (and sources)
mismatch between skills supplied and demanded in the market. of youth unemployment
Another problem is less related to a business cycle and is more danger-
ous in a long term. The fact that one third of registered unemployed have
recently obtained qualifications but are unable to find a job indicates sig-
nificant flaws in higher education system. Lithuania has too many univer-
sities and colleges which offer education in way too many programmes
which provide little knowledge, skills and competences needed outside
the doors of educational institution. Obligatory internships, unfortunately,
are usually sham and do not prepare young people for the job market.
Long-term unemployment2 may become one of the obstacles to reducing Persistent long-term
unemployment to a more acceptable level in the future. In addition to
unemployment may
increasing the total unemployment rate, people who have stayed out of
become an obstacle to
work for a year or longer may drop out of the active labour force as they
lose hope of finding jobs.
decreased unemployment
The long-term unemployed lose their skills, or those skills become out-
dated and irrelevant. This makes it harder to find a job. As statistics
show, this problem in Lithuania is becoming more severe. The rate of
increase in the long-term unemployed did not subside even in 2011, al-
though the total unemployment rate eased to 15.4%. The number of long-
term unemployed continued increasing as people who stayed out of job
for a longer period of time failed to employ them selves. Probably it was
hard to find work even for those who lost their jobs about a year ago, and
new people therefore became long-term unemployed as well.
The persistent increase in long-term unemployment underscores the ur-
gent need for better conditions for job creation, better retraining pro-
grams, and other measures to help improve the matching between labour
market needs and supply.
2
Long-term unemployed are those, who do not find a job for longer than one
year
7 Swedbank Analysis • March 2, 2012

8. 3
However, the problem of structural unemployment , which was partly
illustrated by the high long-term unemployment, has deepened recently.
Moreover, the decreasing size of the working-age population may exac-
erbate structural unemployment problems in the future because the la-
bour force will shrink.
Even though Lithuania is one of the leading countries based on the num- Supply and demand in
ber of students per 1,000 people, there appears to be a mismatch be- labour market is
tween supply and demand in the labour market. Employers have trouble mismatched
finding suitable employees even when the number of people looking for
jobs rises. Most of the unemployed do not have the necessary education
or experience. According to the Lithuanian Labour Market Exchange,
22% of registered unemployed at the beginning of this year did not have
any experience, and 41.9% did not even have any professional educa-
tion. Therefore, in some cases, the demand for labour was higher then
the supply.
Since the start of economic recovery the job vacancy has been increas-
ing faster than employment. It would seem, that the situation improved
somewhat in the last quarter of 2011, when the job vacancy rate de-
creased from 1.1% in the third quarter to 0.6%. However, this decrease in
the vacancy rate must have been influenced by the more cautious behav-
iour of employers due the bankruptcy of the Snoras bank and the ongoing
debt crisis in euro zone. Therefore, the shift in the Beveridge curve in the
last quarter hardly signals any improvement in the efficiency of the
Lithuanian labour market. It is likely that job vacancy rate will trend to-
wards 1.5-2%, whereas unemployment will stay above 10% until 2014.
Thus, the Beveridge curve will stay significantly shifted rightwards, com-
pared with pre-crisis period of full employment.
Beveridge curve
2.5
2007 IV
2007 III 2007 I
2008 III
2 2008 I
2007 II
2006 III
Job vacancy rate
2008 II 2006 IV
1.5 Economic recovery
Job vacancy rate is likely
2006 II
2011 III Economic recession
to increase faster than
2006 I 2008 IV Pre-crisis expantion
1 2011 I
2011 II
2011 IV
2010 III
2010 II
employment
0.5 2009 I 2010 IV 2010 I
2009 III
2009 II
2009
0
0.0 5.0 10.0 15.0 20.0
Unemployment rate
Source: Statistics Lithuania, Swedbank
During 2011, the largest demand for the labour force was recorded in the
transport sector. Demand for truck drivers, assemblers of metal ships,
and welders was higher than supply as not enough of the unemployed
persons had appropriate qualifications.
This mismatch was partly addressed by employing workers from third
countries. During the last year, the Lithuanian Labour Market Exchange
issued 3.3 thousands permits to employ foreigners—almost double the
amount in 2010. The foreigners were mostly employed by the services
and industry sectors, answering the demand for truck drivers, assemblers
of metal ships, and welders.
3
Structural unemployment results from a mismatch between demand in the la-
bour market and the skills of unemployed.
8 Swedbank Analysis • March 2, 2012

9. Cost competitiveness regained and unemployment trap reduced
Real wage growth has been negative for the last three years. This has
decreased the purchasing power of consumers; however, it has also in-
creased the country’s competitiveness. Lithuania was losing its cost
competitiveness as from 2005 to 2009 productivity was increasing much
slower than real wages. These developments were raising unit labour
costs. However, in 2010 and 2011 competitiveness was regained as pro- High flexibility of wage
ductivity was growing and real wages were decreasing. In response, real determination
unit labour costs in 2010 dropped by more than 9%. Since then, Lithuania
has been one of the countries that has succeeded in lowering its real
labour costs the most.
The country has managed to regain its competitiveness through internal Productivity keeps
devaluation. This reflects the quite-high flexibility of wage determination increasing faster than
in Lithuania’s labour market. In addition to restoring competitiveness, wages
wage flexibility is important in preventing the persistence of high unem-
ployment rates.
Productivity, wage and unit labour cost growth, yoy %
20
15
10
Real wage growth
5
Real unit labour costs*
0
Real labour productivity
-5 per hour worked*
-10
-15
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
* - 3 quarters' average Source: Statistics Lithuania, Eurostat
Real wages will be rising this year, though the growth will be limited by
lower expectations and the still-high unemployment. At the same time,
productivity growth should increase by a similar amount as real wages, or
even a bit more, this year and the next. Therefore, unit labour costs
should remain stable.
A large unemployment trap, which measures the percentage of potential
gross wages accounted for by taxes and forgone unemployment bene-
fits, erodes any motivation to find a job. Even though the correlation be-
tween the activity rate and the unemployment trap is not significant, the
relationship should exist because the unemployed would not sacrifice
their free time without proper compensation. Such unemployed people,
who are not likely to earn much more than their benefits, tend to become
long-term unemployed. In such cases, even if the unemployment trap is
reduced and their motivation to find work returns, it may be hard for them
to find jobs. The longer people remain unemployed, the harder it be-
comes to find a job, as they lose their skills or their competence becomes
outdated and irrelevant. Another possible negative consequence of a
large unemployment trap is a decision to work unofficially and keep un-
employment benefits. This tendency was very pronounced in 2009 and
2010.
9 Swedbank Analysis • March 2, 2012

10. The unemployment trap peaked in 2009, when unemployment started The gap between social
rising rapidly. At that time, the forgone benefits plus additional taxes benefits and wages is
amounted to 86% of potential wages for an unemployed person finding a lower, but not low
job. However, in 2010, the unemployment trap shrank to 70% and be- enough
came 5.4 percentage points lower than the EU average. Nevertheless, it
was still 7 percentage points higher than in Estonia, which has higher
wages and lower labour taxes.
The likely increase in the minimum wage this year should decrease the
Minimum wage
unemployment trap by widening the gap between social benefits and the
minimum wage. This should increase the motivation to look for a job and regulation is a double-
raise activity rates. The long-term unemployed and others should become edged sword
more motivated to look for jobs more actively. On the other hand, the
wage increase might have a negative effect on the creation of new jobs,
especially for those with low skills and no experience.
People should also be less inclined to work unofficially, the smaller is the
unemployment trap. When the benefits are not much lower than the
wages the unemployed could get, they may choose to stay unemployed
and work for a few hours unofficially to increase their income somewhat.
However, as the unemployment trap decreases, the motivation to work
officially should increase because the benefits they would have to sacri-
fice become smaller.
Decreasing unemployment trap must have increased the motivation to
look for a job and work officially rather than stray in the shadow economy.
Therefore, it is very important to keep unemployment trap as low as pos-
sible and prevent it from coming back to the level of 2009. Cutting social
benefits is not the right approach, but weeding out system abuses could
help. Furthermore, long term strategies involving proper education and
favourable environment for investments could boost labour productivity,
and, consequently wages.
Somewhat weaker regulation has increased labour market flexibility,
but more changes are needed
Even though Lithuania has demonstrated considerable flexibility in wage Government responded
determination, its labour market regulations have been outdated and un- to rapidly decreasing
favourable for development and job creation. Responding to the rapidly employment; however,
deteriorating employment figures, the government introduced somewhat more flexibility in labour
more flexibility to the labour market by modifying some parts of the market needed
Lithuanian Labour Code.
The new June 2010 Labour Code allows firms to make fixed-term con-
tracts with employees filling newly created positions. This change is,
however, temporary, expiring in August 2012. A more flexible regulation
of overtime work has been introduced as well. Now, overtime work is
allowed not only in extraordinary cases, which are described in the La-
bour Code, but also if mutually agreeable to employer and employee.
However, some of the proposed changes were not introduced. Trade
unions resisted changes that would have mandated the same time period
of notice for all workers. Now, some groups (older people, employees
under the age of 18, and parents with children under the age of 14) must
be given four months' notice, while the period for others is twice as short.
Also, some groups of persons (older people, single parents with children
under the age of 16, and others) cannot be fired first if the number of em-
ployees in the company is being reduced. Such regulations restrict the
employer’s choice and therefore may not be optimal for the further devel-
10 Swedbank Analysis • March 2, 2012

11. opment of the business in some situations. In addition, such regulations
force employers to be more cautious about employing persons from the
above-mentioned groups.
In July 2010, as an attempt to increase employment among the youth, the
employment of workers under age 29 without any work experience was
subsidised. Their employers have been entitled to a subsidy up to 50% of
their salaries. In addition, in August 2010 the social security tax was low-
ered from 31% to 7.7-8.4% for employers hiring a person who had never
worked before. Such exemptions encouraged employers to employ
younger people and might have reduced unofficial unemployment in the
younger labour force. According to the Ministry of Social Security and
Labour, last year the subsidy was provided for some 62 thousand people.
This social security tax exemption is temporary and should expire in July
2012. However, this could be too short a period of time to lower the youth
unemployment rate from its highs in 2010 (35.1%), or to possibly in-
crease the youth participation rate. The Ministry of Social Security and
Labour plans to extend this subsidy by using EU structural funds to fi-
nance it partly. In addition, some other concessions for increasing the
employment of younger people are under consideration. In April, Lithua-
nia plans to unveil a national youth employment plan, which will aim to
decrease youth unemployment. According to the media, it may also in-
volve, for example, rent subsidies for those moving to bigger cities. The
Minister of Social Security and Labour believes that among the most im-
portant measures are incentives for employers to employ young people
with little experience and incentives to promote entrepreneurship.
In addition, there are plans to review the Lithuanian Labour Code further
by introducing more flexibility to the labour market. The aim of these
changes is to ensure more rapid job creation. Ensuring flexibility in the
labour market would not only accelerate job creation but would also allow
firms to adapt and survive as circumstances change.
Recommendations
Attempts to further review the Lithuanian Labour Code by introducing
more flexibility in the labour market would be the right move to decrease More labour market
unemployment and control long-term unemployment growth. These steps flexibility, closer co-
could accelerate job creation in the longer term and allow companies to operation between
become more flexible. Incentives to employ younger people are of par- business and education
ticular importance as well: they would help to ensure a better-qualified system
and bigger labour force in the future.
However, it is important to understand that all labour market problems are
interrelated and require complex actions. A higher number of vacancies
would only escalate the structural unemployment issue if the mismatch
problems in the labour market are not addressed. And a higher activity
rate would only increase the number of unemployed if there is no growth
or new jobs.
Lithuania demonstrated wage flexibility when changes in circumstances
forced it to restore competitiveness through internal devaluation. Lithua-
nia successfully lowered wages, which had tended to grow faster than
productivity before the crisis, and restored its cost competitiveness. Nev-
ertheless, the demographic tendencies should encourage the authorities
to review labour market policies in order to increase labour force partici-
pation rates, and reduce the mismatch between labour market needs and
employers’ skills. Higher employment rates would increase Lithuania’s
11 Swedbank Analysis • March 2, 2012

12. potential growth, decrease the pressure to raise taxes, and ensure the
stability of the social security system, as well as the quality of other state
functions.
The structural unemployment issue should be addressed through closer
cooperation between business and the education system, e.g., more ef-
fective retraining programs. These programs, which are currently organ-
ized by Lithuanian Labour Market Exchange, could be improved by
higher private sector involvement. This would make them more effective
as business usually knows better what kind of workers are and will be
demanded in the future. Changing attitude
towards internships,
The economy would benefit if universities would prepare fewer but better- more vocational schools,
qualified students, who would be ready to successfully join the labour shorter university studies
market and satisfy its needs. The attitude towards student internships in
Lithuania should change as today it is more like a formality. Instead in-
ternships could be introduced already in earlier years than the last one
and extended in that way. Relevant internships should make students
better prepared to enter the job market after graduation.
In Lithuania, a disproportionally large number of school-leavers decide to
study at universities, especially in social sciences, humanities and liberal
arts. Low number of students in physics and other technological sciences
worsens a prospect of home-grown innovation. University studies should
also be shorter. Lithuania is lagging in the Bologna process – whereas, in
most European countries, a student can get a master's degree in five
years, it still takes six years in Lithuania. Along with a decrease in the
number of tertiary students, the role of vocational schools should in-
crease. Better conditions for hiring foreigners with appropriate skills
would contribute to growth as well. All these measures should help align
skills with market demand and at the same time expand the labour force.
It is also important to ensure that the unemployment trap does not ex- Social benefits should
pand as, under favourable conditions, a small unemployment trap in- not create permanent
creases participation rates and employment. However, intentions to index unemployment trap.
the minimum monthly wage should be abandoned, as this could cause an
inflation-wage spiral and subsequent loss of competitiveness and jobs. A
better approach is to shorten the period for which a person is eligible for
social benefits. Whereas unemployment benefits are usually phased out
in a year, loopholes exist under which a person can receive social bene-
fits indefinitely while working unofficially and having undeclared income.
Social benefits for those in need are essential, but common practice of
system abuse should be stopped.
The unfavourable demographic tendencies also require higher productiv-
ity growth, which has to be achieved through a more responsive and dy-
namic education system and an increase in investment in fixed tangible
and intangible assets.
All in all, during the next few years Lithuania will be facing the challenge Potential growth depends
of offsetting negative demographic tendencies by increasing its productiv- on ability to offset
ity and employment. Therefore, the potential growth of the economy will negative demographic
be highly dependent upon the success of the efforts to increase the la- tendencies by higher
bour force participation rate and productivity, to accelerate the process of employment and
job creation, and to solve structural problems. productivity.
Vaiva Šečkutė
Nerijus Mačiulis
12 Swedbank Analysis • March 2, 2012

13. Economic Research Department
Sweden
Cecilia Hermansson +46 8 5859 7720 cecilia.hermansson@swedbank.se
Group Chief Economist
Chief Economist, Sweden
Magnus Alvesson +46 8 5859 3341 magnus.alvesson@swedbank.se
Senior Economist
Jörgen Kennemar +46 8 5859 7730 jorgen.kennemar@swedbank.se
Senior Economist
Anna Ibegbulem +46 8 5859 7740 marie-anne.larsson@swedbank.se
Assistant
Estonia
Annika Paabut +372 888 5440 annika.paabut@swedbank.ee
Acting Chief Economist
Elina Allikalt +372 888 1989 elina.allikalt@swedbank.ee
Senior Economist
Latvia
Mārtiņš Kazāks +371 67 445 859 martins.kazaks@swedbank.lv
Deputy Group Chief Economist
Chief Economist, Latvia
Dainis Stikuts +371 67 445 844 dainis.stikuts@swedbank.lv
Senior Economist
Lija Strašuna +371 67 445 875 lija.strasuna@swedbank.lv
Senior Economist
Lithuania
Nerijus Mačiulis +370 5 258 2237 nerijus.maciulis@swedbank.lt
Chief Economist, Lithuania
Lina Vrubliauskienė +370 5 258 2275 lina.vrubliauskiene@swedbank.lt
Senior Economist
Vaiva Šečkutė +370 5 258 2156 vaiva.seckute@swedbank.lt
Economist
13 Swedbank Analysis • March 2, 2012

14. Disclaimer
This research report has been prepared by economists of Swedbank’s Economic Research Depart-
ment. The Economic Research Department consists of research units in Estonia, Latvia, Lithuania,
and Sweden, is independent of other departments of Swedbank AB (publ) (“Swedbank”) and respon-
sible for preparing reports on global and home market economic developments. The activities of this
research department differ from the activities of other departments of Swedbank, and therefore the
opinions expressed in the reports are independent from interests and opinions that might be expressed
by other employees of Swedbank.
This report is based on information available to the public, which is deemed to be reliable, and re-
flects the economists’ personal and professional opinions of such information. It reflects the econo-
mists’ best understanding of the information at the moment the research was prepared and due to
change of circumstances such understanding might change accordingly.
This report has been prepared pursuant to the best skills of the economists and with respect to their
best knowledge this report is correct and accurate, however neither Swedbank nor any enterprise
belonging to Swedbank or Swedbank directors, officers, or other employees or affiliates shall be
liable for any loss or damage, direct or indirect, based on any flaws or faults within this report.
Enterprises belonging to Swedbank might have holdings in the enterprises mentioned in this report
and provide financial services (issue loans, among others) to them. Aforementioned circumstances
might influence the economic activities of such companies and the prices of securities issued by them.
The research presented to you is of an informative nature. This report should in no way be interpreted
as a promise or confirmation of Swedbank or any of its directors, officers, or employees that the
events described in the report shall take place or that the forecasts turn out to be accurate. This report
is not a recommendation to invest into securities or in any other way enter into any financial transac-
tions based on the report. Swedbank and its directors, officers, or employees shall not be liable for
any loss that you may suffer as a result of relying on this report.
We stress that forecasting the developments of the economic environment is somewhat speculative in
nature, and the real situation might turn out different from what this report presumes.
IF YOU DECIDE TO OPERATE ON THE BASIS OF THIS REPORT, THEN YOU ACT SOLELY
ON YOUR OWN RISK AND ARE OBLIGED TO VERIFY AND ESTIMATE THE ECONOMIC
REASONABILITY AND THE RISKS OF SUCH ACTION INDEPENDENTLY.
14 Swedbank Analysis • March 2, 2012