Real wage growth to accelerate in Estonia as inflation eases - analyst

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The rate of nominal growth of wages and salaries in Estonia this year will be in the same range as in 2012, yet real wages are seen to move up faster due to the deceleration of inflation, Swedbank Eesti chief economist Tõnu Mertsina said.

As a result of the effect from faster increase in real wages and slower growth rate of the consumer price index (CPI), growth in real wages in Estonia continued for the sixth quarter in succession in the final quarter of last year, Mertsina told BNS.

He pointed out that the speed of wage increases varied a lot by area of activity, with gross wages moving up the most year on year in the construction sector and in arts, recreation and entertainment, whereas in transportation and storage the smallest increase, of less than one percent, took place. For workers in transportation and storage, financial sector and education the real wage contracted, that is, nominal growth in their gross wage was smaller than CPI growth. The analyst added that in construction wage pressures may ease as a result of the ending of projects financed with money from the sale of carbon credits.

Along with increases in wages and employment also the households' potential consumption capability has grown. Because of the low interest rates people prefer keeping their savings in the current account rather than a fixed-term account, which in turn has an upward effect on consumption.

Since labor costs per employees grew faster in Estonia last year than productivity, a labor unit in general economy became more expensive. That is, the cost of the creation of a unit of value-added rose.

Mertsina also observed that in sectors more dependent on external demand, such as manufacturing, accommodation and catering, and transport, the unit cost of labor increased according to preliminary estimates, putting the companies in a weaker position in price competition.

Even though the consumer confidence indicator in an outlook for the next 12 months improved in December and January, it has stayed in negative territory for a longer time, he said.

For the current year Mertsina predicts a slowdown in employment growth. "Should economic activity accelerate in the second half of the year, this could cause wage pressures under conditions of reduced offer of labor, especially skilled labor. At the same time it can be presumed that businesses will not increase their labor costs substantially beyond the increase in productivity, which could undermine their competitiveness," he added.

The average monthly gross wage in Estonia was 916 euros in the final quarter of 2012, 5.9 percent higher than in the same period in 2011, Statistics Estonia said on Friday. The average hourly gross wage was 6.6 percent higher measuring 5.53 euros.

Real wage, calculated taking into account the influence of the change in the consumer price index, increased 2.1 percent year on year in the fourth quarter of 2012. An increase compared to the same quarter of the previous year was recorded in real wages for the sixth quarter in succession.