Swedbank Analysis                                                               March 2, 2012To promote growth, Lithuania’...
This left the unemployment rate at 15.4% last year, down from the peakof 17.8% reached in 2010. Unemployment in 2011, howe...
Demographic tendencies will cause dependency ratios to riseThe heavier burden for the employed, which is created by lower ...
Average growth of demographic and macroeconomic variables (2012-2016); %                                                  ...
Number of employed; 2010 compared with 2008 change in %              Administrative and support service     29.4%         ...
Unemployment rate    40                                                                                      35.10    35  ...
Currently, 67% of those in the 15-24 age group are still studying inschools, colleges, universities, or other educational ...
3However, the problem of structural unemployment , which was partlyillustrated by the high long-term unemployment, has dee...
Cost competitiveness regained and unemployment trap reducedReal wage growth has been negative for the last three years. Th...
The unemployment trap peaked in 2009, when unemployment started                    The gap between socialrising rapidly. A...
opment of the business in some situations. In addition, such regulationsforce employers to be more cautious about employin...
potential growth, decrease the pressure to raise taxes, and ensure thestability of the social security system, as well as ...
Economic Research DepartmentSwedenCecilia Hermansson             +46 8 5859 7720   cecilia.hermansson@swedbank.seGroup Chi...
DisclaimerThis research report has been prepared by economists of Swedbank’s Economic Research Depart-ment. The Economic R...
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Swedbank Analysis - March 2, 2012: To promote growth, Lithuania’s labour market needs more efficiency and flexibility

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Swedbank Analysis - March 2, 2012

  1. 1. Swedbank Analysis March 2, 2012To promote growth, Lithuania’s labour marketneeds 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 growthThere were almost 1.4 million employed people last year. The number ofemployed 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 176.3thousands 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. 2. This left the unemployment rate at 15.4% last year, down from the peakof 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 intion in this age group has been the lowest in Lithuania of the three Baltic Lithuania has been lowerstates. 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 averageof 64.3%. Compared with Latvia, the employment rate was 1 percentage and Estoniapoint lower, and in Estonia it was even 4.5 percentage points higher thanin Lithuania. Employment rate (15-64-year old)71696765 European Union (27 countries)63 Estonia Latvia61 Lithuania595755 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 9M Source: EurostatLower 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, loweremployment rates increase the burden for the employed as well, whomay 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 activityforce activity rate1 in Lithuania. Even though it has been catching up with rate is catching up withLatvia and Estonia, Lithuanias rate is still the lowest among people aged other two Baltic15-64 years. Lithuania lags the most behind Estonia, where the activity countriesrate 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: Eurostat1 Ratio of the sum of employed and unemployed, but actively looking for a job,to the total working-age (15-64) population2 Swedbank Analysis • March 2, 2012
  3. 3. Demographic tendencies will cause dependency ratios to riseThe heavier burden for the employed, which is created by lower activityand employment rates, is revealed by the dependency ratios. The higherthe ratios, the harder it is for the employed to support such dependantsas the unemployed, children, and pensioners. As a smaller number ofemployed is financing the country’s budget, the pressure on the socialsecurity system increases, and it may become harder to perform othergovernment functions as well.At the beginning of 2011, there were 101.2 unemployed, children (0-14 Dependency ratios willyears), and elderly people (over 64 years) for every 100 employed. This be decreasing, but notratio had fallen from 107.1 in 2010 and should continue to fall as unem- for longployment decreases from its highs. However, the ratio will probably startincreasing after unemployment bottoms out because the size of the work-ing-age population, contrary to the other groups, will be shrinking. Theaverage working-age population will be decreasing by 0.9% on averageuntil 2016, whereas the number of children (0-14 years) will start to rise in2013, and the number of elderly (over 64 years), in 2014. Dependency on employed, %120100 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, SwedbankPotential output depends on the growth of population, the ratio of labour Demography will have aforce to population, the employment rate, productivity, and hours worked. downward pressure onHours worked did not change in 10 years a lot. Average number of hours potential GDPworked per month per employee was 150.8 in three quarters of 2001 and150.3 in three quarters of 2011. It did not fluctuate much in the past andtherefore we project that it will not change significantly during the comingfew years.From 2012 till 2016 the negative growth rates of population and the ratioof the labour force to population will put a downward pressure on the po-tential GDP of Lithuania. Meanwhile, the employment rate should have apositive effect as the economy recovers. Productivity growth should havea positive impact on potential output growth as well, due to catching-upeffects.3 Swedbank Analysis • March 2, 2012
  4. 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, SwedbankThe pressures on the social security system will decrease somewhat dueto decreasing unemployment. However, as the demographic tendenciesare 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 beable to increase Lithuanias potential growth. This means that the impor-tance of incentives to join and stay longer in the labour market, i.e., to joinand 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 Lithuanianswork 150 hours a month on average.The rising retirement age will have a positive effect on potential output, asthis will expand the size of the labour force. Beginning in 2012, the re- Increasing retirementtirement age will start to increase by 4 months a year for females and by age will have positive2 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 maymales was 62 years and 6 months, and for females, 60 years. be neededStructural, long-term youth unemployment becomes more pro-nouncedFrom 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%. About45% and 40% of all employed were in those three sectors in 2008 and2010, respectively. The number of people employed in administrative,support service, professional, scientific, and technical activities increasedduring 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 andunemployment rate of men, who tend to be employed in these sectorsmore than women, increased from 6.0% in 2008 to 21.2% in 2010. youth have been mostMeanwhile, the unemployment rate of woman, which traditionally is less affected in the labourelastic, increased from 5.6% in 2008 to 14.4% in 2010. marketThe most vulnerable have been low-skilled workers. The unemploymentrate among people with only a secondary education or lower than thatamounted 30-42% in 2010. This was much more than the unemploymentrate among university graduates, which increased from 3.0% in 2008 to7.0% in 2010.4 Swedbank Analysis • March 2, 2012
  5. 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 LithuaniaIn the first nine months of 2011, some recovery was seen in employmentin transportation and storage. Employment in the first nine months of lastyear increased by 5.3% over the same period of 2008, compared with a4.3% decrease in 2010 over the same period of 2008. Employment alsorecovered 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); overthe same periods, similar decreases were seen in accommodation andfood service activities (-9.9% and -13.6%, respectively) and wholesaleand retail trade (-10% and -8.0%, respectively). Over the same periods,the growth of employment accelerated similarly in administrative andsupport 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 increasedespite a very rapid recovery of this sector, for which output is close to itspre-crisis highs. This can probably be explained by the greater efficiencyand productivity of Lithuanian manufacturing – companies adjusted theirprocesses and structure to be able to create the same value with fewer Employment inemployees. Such gains in productivity are commendable; however, tan- manufacturing did notgible future progress should be achieved through higher investments, not increase, despite rapidthrough further cuts in employment. sector’s recoveryIn Lithuania, in two years (from 2008 until 2010), the unemployment rate,as well as the youth (15-24-year olds) unemployment rate, increased themost among the Baltic countries and much more than in the EU on aver-age. Even though the total unemployment rate in 2010 in Lithuania waslower than in Latvia, Lithuanias youth unemployment rate continued itsrapid increase, reaching 35.1% - 14.2 percentage points more than theEU average and slightly above Latvia’s (34.5%).5 Swedbank Analysis • March 2, 2012
  6. 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 LithuaniaThe 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 workersseeking jobs. While, on the contrary, by employing a younger person, theemployer most often has to invest in that person and take a risk that, afteracquiring the skills and experience, the worker might quit and take a jobin a competing firm. Therefore, during hard times, employers are lesseager to take such risks. The young people employed during recessionsbecome more vulnerable as well, as employers choose to fire those withless experience and knowledge, and probably those whose severancepay 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 withhigh emigration rates. A high youth unemployment rate can harm thefuture 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 unemploymentbe somewhat exaggerated because the number of unemployed is not as indicator may behigh if the activity rate in taken into account. The labour force activity rate misleadingamong 15-64-year olds has been more than 70% recently, whereas theactivity rate of youth barely reaches 30% – majority of them are stillstudying and for that reason are not active participants of the job market.Therefore, if the ratio of unemployed to population of the respective agegroup is considered, then the youth unemployment is rather small – 9.7%and 7.6% in 2010 and 2011, respectively, which is considerably lowerthan the registered unemployment rate of the working-age (15-64-yearolds) 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 Exchange6 Swedbank Analysis • March 2, 2012
  7. 7. Currently, 67% of those in the 15-24 age group are still studying inschools, 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 areeager 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, whereasamong all the unemployed the unqualified comprised only 41.9%. Manyof 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 unemployedwhen this sector collapsed.This means that currently the biggest problem is related to insufficientqualifications of young people. Their unemployment would ebb if con-struction sector were to recover rapidly and a lot of low-skilled jobs werecreated. However, unless there is a fundamental shift in how renovationof soviet-era buildings is organizes, this is not likely to happen any timesoon. Another option is to rethink the way Labour Exchange organizestrainings 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 unemploymentAnother 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 haverecently 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 programmeswhich provide little knowledge, skills and competences needed outsidethe 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-termunemployment to a more acceptable level in the future. In addition to unemployment mayincreasing the total unemployment rate, people who have stayed out of become an obstacle towork for a year or longer may drop out of the active labour force as theylose hope of finding jobs. decreased unemploymentThe long-term unemployed lose their skills, or those skills become out-dated and irrelevant. This makes it harder to find a job. As statisticsshow, this problem in Lithuania is becoming more severe. The rate ofincrease 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 jobfor a longer period of time failed to employ them selves. Probably it washard to find work even for those who lost their jobs about a year ago, andnew 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 labourmarket needs and supply.2 Long-term unemployed are those, who do not find a job for longer than oneyear7 Swedbank Analysis • March 2, 2012
  8. 8. 3However, the problem of structural unemployment , which was partlyillustrated 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 inber of students per 1,000 people, there appears to be a mismatch be- labour market istween supply and demand in the labour market. Employers have trouble mismatchedfinding suitable employees even when the number of people looking forjobs rises. Most of the unemployed do not have the necessary educationor experience. According to the Lithuanian Labour Market Exchange,22% of registered unemployed at the beginning of this year did not haveany experience, and 41.9% did not even have any professional educa-tion. Therefore, in some cases, the demand for labour was higher thenthe supply.Since the start of economic recovery the job vacancy has been increas-ing faster than employment. It would seem, that the situation improvedsomewhat 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 inthe vacancy rate must have been influenced by the more cautious behav-iour of employers due the bankruptcy of the Snoras bank and the ongoingdebt crisis in euro zone. Therefore, the shift in the Beveridge curve in thelast quarter hardly signals any improvement in the efficiency of theLithuanian 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, SwedbankDuring 2011, the largest demand for the labour force was recorded in thetransport sector. Demand for truck drivers, assemblers of metal ships,and welders was higher than supply as not enough of the unemployedpersons had appropriate qualifications.This mismatch was partly addressed by employing workers from thirdcountries. During the last year, the Lithuanian Labour Market Exchangeissued 3.3 thousands permits to employ foreigners—almost double theamount in 2010. The foreigners were mostly employed by the servicesand industry sectors, answering the demand for truck drivers, assemblersof 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. 9. Cost competitiveness regained and unemployment trap reducedReal wage growth has been negative for the last three years. This hasdecreased the purchasing power of consumers; however, it has also in-creased the country’s competitiveness. Lithuania was losing its costcompetitiveness as from 2005 to 2009 productivity was increasing muchslower than real wages. These developments were raising unit labourcosts. However, in 2010 and 2011 competitiveness was regained as pro- High flexibility of wageductivity was growing and real wages were decreasing. In response, real determinationunit labour costs in 2010 dropped by more than 9%. Since then, Lithuaniahas been one of the countries that has succeeded in lowering its reallabour costs the most.The country has managed to regain its competitiveness through internal Productivity keepsdevaluation. This reflects the quite-high flexibility of wage determination increasing faster thanin Lithuania’s labour market. In addition to restoring competitiveness, wageswage 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, EurostatReal wages will be rising this year, though the growth will be limited bylower expectations and the still-high unemployment. At the same time,productivity growth should increase by a similar amount as real wages, oreven a bit more, this year and the next. Therefore, unit labour costsshould remain stable.A large unemployment trap, which measures the percentage of potentialgross 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, therelationship should exist because the unemployed would not sacrificetheir free time without proper compensation. Such unemployed people,who are not likely to earn much more than their benefits, tend to becomelong-term unemployed. In such cases, even if the unemployment trap isreduced and their motivation to find work returns, it may be hard for themto find jobs. The longer people remain unemployed, the harder it be-comes to find a job, as they lose their skills or their competence becomesoutdated and irrelevant. Another possible negative consequence of alarge unemployment trap is a decision to work unofficially and keep un-employment benefits. This tendency was very pronounced in 2009 and2010.9 Swedbank Analysis • March 2, 2012
  10. 10. The unemployment trap peaked in 2009, when unemployment started The gap between socialrising rapidly. At that time, the forgone benefits plus additional taxes benefits and wages isamounted to 86% of potential wages for an unemployed person finding a lower, but not lowjob. However, in 2010, the unemployment trap shrank to 70% and be- enoughcame 5.4 percentage points lower than the EU average. Nevertheless, itwas still 7 percentage points higher than in Estonia, which has higherwages and lower labour taxes.The likely increase in the minimum wage this year should decrease the Minimum wageunemployment trap by widening the gap between social benefits and theminimum 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 swordmore motivated to look for jobs more actively. On the other hand, thewage 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 theunemployment trap. When the benefits are not much lower than thewages the unemployed could get, they may choose to stay unemployedand work for a few hours unofficially to increase their income somewhat.However, as the unemployment trap decreases, the motivation to workofficially should increase because the benefits they would have to sacri-fice become smaller.Decreasing unemployment trap must have increased the motivation tolook 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 socialbenefits is not the right approach, but weeding out system abuses couldhelp. Furthermore, long term strategies involving proper education andfavourable environment for investments could boost labour productivity,and, consequently wages.Somewhat weaker regulation has increased labour market flexibility,but more changes are neededEven though Lithuania has demonstrated considerable flexibility in wage Government respondeddetermination, its labour market regulations have been outdated and un- to rapidly decreasingfavourable for development and job creation. Responding to the rapidly employment; however,deteriorating employment figures, the government introduced somewhat more flexibility in labourmore flexibility to the labour market by modifying some parts of the market neededLithuanian 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 regulationof overtime work has been introduced as well. Now, overtime work isallowed 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. Tradeunions resisted changes that would have mandated the same time periodof notice for all workers. Now, some groups (older people, employeesunder the age of 18, and parents with children under the age of 14) mustbe given four months notice, while the period for others is twice as short.Also, some groups of persons (older people, single parents with childrenunder 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 theemployer’s choice and therefore may not be optimal for the further devel-10 Swedbank Analysis • March 2, 2012
  11. 11. opment of the business in some situations. In addition, such regulationsforce employers to be more cautious about employing persons from theabove-mentioned groups.In July 2010, as an attempt to increase employment among the youth, theemployment of workers under age 29 without any work experience wassubsidised. Their employers have been entitled to a subsidy up to 50% oftheir 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 neverworked before. Such exemptions encouraged employers to employyounger people and might have reduced unofficial unemployment in theyounger labour force. According to the Ministry of Social Security andLabour, last year the subsidy was provided for some 62 thousand people.This social security tax exemption is temporary and should expire in July2012. However, this could be too short a period of time to lower the youthunemployment rate from its highs in 2010 (35.1%), or to possibly in-crease the youth participation rate. The Ministry of Social Security andLabour plans to extend this subsidy by using EU structural funds to fi-nance it partly. In addition, some other concessions for increasing theemployment of younger people are under consideration. In April, Lithua-nia plans to unveil a national youth employment plan, which will aim todecrease youth unemployment. According to the media, it may also in-volve, for example, rent subsidies for those moving to bigger cities. TheMinister of Social Security and Labour believes that among the most im-portant measures are incentives for employers to employ young peoplewith little experience and incentives to promote entrepreneurship.In addition, there are plans to review the Lithuanian Labour Code furtherby introducing more flexibility to the labour market. The aim of thesechanges is to ensure more rapid job creation. Ensuring flexibility in thelabour market would not only accelerate job creation but would also allowfirms to adapt and survive as circumstances change.RecommendationsAttempts to further review the Lithuanian Labour Code by introducingmore flexibility in the labour market would be the right move to decrease More labour marketunemployment and control long-term unemployment growth. These steps flexibility, closer co-could accelerate job creation in the longer term and allow companies to operation betweenbecome more flexible. Incentives to employ younger people are of par- business and educationticular importance as well: they would help to ensure a better-qualified systemand bigger labour force in the future.However, it is important to understand that all labour market problems areinterrelated and require complex actions. A higher number of vacancieswould only escalate the structural unemployment issue if the mismatchproblems in the labour market are not addressed. And a higher activityrate would only increase the number of unemployed if there is no growthor new jobs.Lithuania demonstrated wage flexibility when changes in circumstancesforced it to restore competitiveness through internal devaluation. Lithua-nia successfully lowered wages, which had tended to grow faster thanproductivity before the crisis, and restored its cost competitiveness. Nev-ertheless, the demographic tendencies should encourage the authoritiesto review labour market policies in order to increase labour force partici-pation rates, and reduce the mismatch between labour market needs andemployers’ skills. Higher employment rates would increase Lithuania’s11 Swedbank Analysis • March 2, 2012
  12. 12. potential growth, decrease the pressure to raise taxes, and ensure thestability of the social security system, as well as the quality of other statefunctions.The structural unemployment issue should be addressed through closercooperation 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 byhigher private sector involvement. This would make them more effectiveas business usually knows better what kind of workers are and will bedemanded 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 studiesmarket and satisfy its needs. The attitude towards student internships inLithuania should change as today it is more like a formality. Instead in-ternships could be introduced already in earlier years than the last oneand extended in that way. Relevant internships should make studentsbetter prepared to enter the job market after graduation.In Lithuania, a disproportionally large number of school-leavers decide tostudy at universities, especially in social sciences, humanities and liberalarts. Low number of students in physics and other technological sciencesworsens a prospect of home-grown innovation. University studies shouldalso be shorter. Lithuania is lagging in the Bologna process – whereas, inmost European countries, a student can get a masters degree in fiveyears, it still takes six years in Lithuania. Along with a decrease in thenumber of tertiary students, the role of vocational schools should in-crease. Better conditions for hiring foreigners with appropriate skillswould contribute to growth as well. All these measures should help alignskills 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 shouldpand as, under favourable conditions, a small unemployment trap in- not create permanentcreases participation rates and employment. However, intentions to index unemployment trap.the minimum monthly wage should be abandoned, as this could cause aninflation-wage spiral and subsequent loss of competitiveness and jobs. Abetter approach is to shorten the period for which a person is eligible forsocial benefits. Whereas unemployment benefits are usually phased outin 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 ofsystem 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 tangibleand intangible assets.All in all, during the next few years Lithuania will be facing the challenge Potential growth dependsof offsetting negative demographic tendencies by increasing its productiv- on ability to offsetity and employment. Therefore, the potential growth of the economy will negative demographicbe highly dependent upon the success of the efforts to increase the la- tendencies by higherbour force participation rate and productivity, to accelerate the process of employment andjob creation, and to solve structural problems. productivity. Vaiva Šečkutė Nerijus Mačiulis12 Swedbank Analysis • March 2, 2012
  13. 13. Economic Research DepartmentSwedenCecilia Hermansson +46 8 5859 7720 cecilia.hermansson@swedbank.seGroup Chief EconomistChief Economist, SwedenMagnus Alvesson +46 8 5859 3341 magnus.alvesson@swedbank.seSenior EconomistJörgen Kennemar +46 8 5859 7730 jorgen.kennemar@swedbank.seSenior EconomistAnna Ibegbulem +46 8 5859 7740 marie-anne.larsson@swedbank.seAssistantEstoniaAnnika Paabut +372 888 5440 annika.paabut@swedbank.eeActing Chief EconomistElina Allikalt +372 888 1989 elina.allikalt@swedbank.eeSenior EconomistLatviaMārtiņš Kazāks +371 67 445 859 martins.kazaks@swedbank.lvDeputy Group Chief EconomistChief Economist, LatviaDainis Stikuts +371 67 445 844 dainis.stikuts@swedbank.lvSenior EconomistLija Strašuna +371 67 445 875 lija.strasuna@swedbank.lvSenior EconomistLithuaniaNerijus Mačiulis +370 5 258 2237 nerijus.maciulis@swedbank.ltChief Economist, LithuaniaLina Vrubliauskienė +370 5 258 2275 lina.vrubliauskiene@swedbank.ltSenior EconomistVaiva Šečkutė +370 5 258 2156 vaiva.seckute@swedbank.ltEconomist13 Swedbank Analysis • March 2, 2012
  14. 14. DisclaimerThis 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 thisresearch department differ from the activities of other departments of Swedbank, and therefore theopinions expressed in the reports are independent from interests and opinions that might be expressedby 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 tochange of circumstances such understanding might change accordingly.This report has been prepared pursuant to the best skills of the economists and with respect to theirbest knowledge this report is correct and accurate, however neither Swedbank nor any enterprisebelonging to Swedbank or Swedbank directors, officers, or other employees or affiliates shall beliable 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 reportand provide financial services (issue loans, among others) to them. Aforementioned circumstancesmight 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 interpretedas a promise or confirmation of Swedbank or any of its directors, officers, or employees that theevents described in the report shall take place or that the forecasts turn out to be accurate. This reportis 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 forany 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 innature, 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 SOLELYON YOUR OWN RISK AND ARE OBLIGED TO VERIFY AND ESTIMATE THE ECONOMICREASONABILITY AND THE RISKS OF SUCH ACTION INDEPENDENTLY.14 Swedbank Analysis • March 2, 2012