Rapid wage growth to continue in Estonia

According to Statistics Estonia, the average gross monthly wage in Estonia in the first quarter of 2023 was 1,741 euros, 13.3 percent higher than in the same period last year. Photo: Dmitri Kotjuh

Prevailing labor shortages, rapid inflation and businesses' strong financial results for 2022 have brought with them a large increase in the average wage in Estonia, which is likely to continue for some time, Mihkel Nestor, analyst at SEB Estonia, says.

According to Statistics Estonia, the average gross monthly wage in Estonia in the first quarter of 2023 was 1,741 euros, 13.3 percent higher than in the same period last year.

«Compared to the average wage growth over the last decade, this surge is about twice the normal rate. Wage growth in Estonia last reached similar levels just before the major economic crisis in early 2008,» Nestor said in a press release.

The median pay, meaning the pay level that 50 percent of wage earners clear and the remaining 50 percent are beneath, was more than 300 euros lower than the average salary in the first quarter, totaling 1,424 euros. At close to 15 percent, the growth of the median salary was slightly faster than that of the average gross salary.

«Virtually all the preconditions for rapid wage growth have been met. The most important of these is the fact that, despite two quarters of recession, labor market conditions are extremely tight. Despite fears that employers will soon start laying people off, employment, on the contrary, has continued to grow,» said Nestor.

He pointed out that in the first quarter, 696,600 people were in employment in Estonia.

«This is a very large number, so many people have never been to work in Estonia, at least according to modern statistics. As a percentage of the population, almost 70 percent of all people aged 15-74 are in employment now, which is very much more than in most other countries of the European Union,» he said.

The second strong argument for wage rises is rapid inflation, Nestor said.

«While average wages and salaries grew by 13.3 percent year on year in the first quarter, the consumer price index increased by 17.1 percent. This means that, at least on the basis of statistical averages, people's purchasing power declined during this period. Because none of us likes a situation where we can consume and save less than we are used to, employees have become more active in asking for higher increases,» he said.

If in the past wage growth has not been able to compensate for the increase in the cost of living, then soon this will change, according to Nestor.

«Due to last year's high reference base, inflation will clearly slow down in the coming months, but given the tight conditions in the labor market, employees will be able to use price growth as an argument in wage negotiations for some time to come,» he added.

People who receive their pay from the state budget received the biggest raise in the first quarter. For example, the pay hike for educators hit almost 20 percent in year-to-year comparison, as a result of which the average pay in the field of education came quite close to the national gross average wage.

«In the longer term, the wage growth of education workers had previously been well below that of other fields, which is why the current sharp increase can be considered an ex-post adjustment,» Nestor said.

However, the same cannot be said about employees in the field of public administration.

«Last year, the salary growth there was quite close to the market average, but despite this, the average gross salary for them increased by 17 percent in the first quarter of 2023 compared to a year ago,» the analyst said.

In the private sector, however, it was the low-wage sectors, where the COVID crisis had previously hampered income growth, that stood out with rapid increases.

«The average pay in accommodation and catering increased by more than 17 percent over the year, and in entertainment and leisure by more than 15 percent. In general, wage growth was fast almost everywhere, and the increase in average wages was less than 10 percent in only three areas of activity,» Nestor said.

In addition to tight labor market conditions and rapid inflation, wage growth is also being aided by the fact that companies simply can afford higher labor costs. Of course, in a slowing economy such a party will not last forever, but a weaker business cycle will translate first into lower profits and only after a while into lower wage growth, Nestor said.

According to the analyst, rapid wage growth in Estonia is likely to continue for some time. Employment is at a record high and a sharp weakening seems unlikely.

«On the contrary, surveys among businesses currently tend to suggest that employers continue to be ready to hire. According to the latest labor demand index, the only sector where a clear decline in labor demand is foreseen is manufacturing. So there is still reason for employees to look to the future with quite a bit of optimism,» he concluded.