The Estonian EconomyMonthly newsletter from Swedbank’s Economic Research Departmentby Elina Allikalt No. 1 • 10 March 2011 Labour market improving amidst growing imbalances The unemployment rate fell to 13.6% in the fourth quarter as employment growth reached 2.1%. Further improvement, however, will be limited by structural and regional imbalances in the labour market. Real wage growth remained negative in the fourth quarter, but end-year bonus payments increased notably. Wage growth will return to the positive side this year, with stronger growth in the exporting and growing sectors. Despite falling incomes and growing unemployment, the relative poverty rate declined significantly in 2009.Unemployment falling and employment Unemployment and nonactivity, 1Q 2004 - 4Q 2010 (thousands)growing 140The latest labour market data released for thefourth quarter of 2010 by Statistics Estonia showed 120a continuously falling unemployment rate, hand in 100hand with rising employment. The unemploymentrate, which peaked in the first quarter of last year at 8019.8%, has been decreasing since, dropping to13.6% in the fourth quarter. This trend has been 60supported by growing employment, which has been 40rising for three quarters in a row in quarterly terms,and turned positive in annual terms as well (+2.1%). 20The participation rate, which shot up in 2008 0(66.7%), has come down a bit (66.3% in the fourth 2004 2005 2006 2007 2008 2009 2010quarter) but still remains above pre-crisis levels unemploy ed long-term unemploy ed(64.7% during 2005-2007). Also, the number of short-term unemploy ed discouraged Source: SE studentslong-term unemployed and discouraged people fellin the fourth quarter for the second quarter in a row(in quarterly terms). Also, the gap between unemployment of men and women, which soared about a year ago when ratesOne of the biggest problems in the labour market – for men were almost twice as high as for women,youth unemployment – peaked at the beginning of has now nearly balanced (14.2% and 13%). Thelast year at 41% but fell to 23% in the fourth strongest growth in men’s employment was seenquarter, raising employment by 7% (the highest amongst 25-49-year olds (11%), while womengrowth among all age profiles); at the same time, gained the most from youth employment (13%).the number of students fell by 3%. On the other After two-and-a-half years of rising unemploymentside, the unemployment of 50+ -year olds was the for non-Estonians, this statistic tarted to diminish inonly one to continue to increase (by 26% annually), the fourth quarter, boosting employment for thiswith employment down by 3%, and the number of group by 3.3%; nevertheless, the northeast regionpensioners by 6%. The lowest level of of Estonia, with the highest population density ofunemployment, at 12.2%, was registered in the non-Estonians, was the only region wherebiggest age group, of 25-49-year olds, where unemployment continued to climb (by 22%).employment grew by 4%. Although long-term unemployment is falling in quarterly terms, it is still increasing in annual terms, especially for those who have been out of work for Economic Research Department. Swedbank AB. SE-105 34 Stockholm. Phone +46-8-5859 1000. E-mail: email@example.com www.swedbank.com Legally responsible publisher: Cecilia Hermansson, +46-8-5859 7720. Maris Lauri, +372 6 131 202. Elina Allikalt, +372 6 131 989. Annika Paabut, +372 6 135 440.
The Estonian Economy Monthly newsletter from Swedbank’s Economic Research Department, continued Nr 1 • 10 March 2011longer than two years. Because overall transport and storage by 8%, construction by 2%,unemployment is falling much faster, the share of and domestic trade by 5% in annual terms.long-term unemployment has shot up again, putting However, surveys showed at the end of last year amany social problems in the spotlight, such as growing tendency to hire new people (see chart).poverty and alcoholism; this rise is also constrainingthe state budget as social costs and the shadow Employment expectations in coming months, Jan 2007 –economy grow. Feb 2011 (balance of increase/decrease answers)Unemployment rate by duration, 1Q 2004 - 4Q 2010 60 20% 60% 40 18% 16% 50% 20 14% 12% 40% 0 10% 2007 2008 2009 2010 2011 8% 30% -20 6% 4% 20% -40 2% 0% 10% -60 2004 2005 2006 2007 2008 2009 2010 industry construction retail serv ices < 6 months -80 6-11 months Source: EKI 12-23 months > 24 months Source: SE share of long-term unemploy ment (rs) The developments in the labour market during theEmployment in selected economic sectors, 1Q 2004 – second half of last year were more positive than we4Q 2010 had expected. However, further rapid improvement(thousands) will be limited by several factors. The biggest 180 700 obstacle will be the scale of structural unemployment – in addition to qualifications 160 mismatches, the factor of labour immobility seems 140 650 to be growing in importance.1 Regional differences 120 in unemployment rates were visible already before the recession, and this picture did not change much 100 600 during the crisis – unemployment went up evenly in 80 all regions, with the same imbalances remaining in place. The northeast region of Estonia has always 60 550 experienced higher-than-average unemployment 40 rates, and now, when employment is growing in 20 500 other regions, high unemployment is still lingering in 2004 2005 2006 2007 2008 2009 2010 the northeast. Tallinn and the surrounding region, total (rs) manuf acturing though, has shown more flexibility than other Source: SE construction public serv ices trade regions, as its unemployment rate fell to one of the lowest at the end of last year from the peak reached during the crisis.Looking at the economic sectors, we see that thegrowth in employment is mostly founded on the Registered unemployment figures, provided by themanufacturing sector, which is also the main driver Unemployment Insurance Fund (EUIF), are pointingof economic growth. In the fourth quarter of 2010, to increasing unemployment in January (to 10.3%employment in manufacturing was up by 11% in from 10% in December). While part of this increasequarterly and by 13% in annual terms, adding a is seasonal, the figures show that the number oftotal of 15,000 jobs in annual comparison. Stronggrowth was also seen in tourism-related services –accommodation and catering – with 19% annually,and financial intermediation, with 3%. On the other 1hand, sectors that mostly rely on domestic demand See also Bank of Estonia Working Paper 1/2011:continued to downsize their labour force-e.g. „Labour market mobility during a recession: the case of Estonia.“ 2 (5)
The Estonian Economy Monthly newsletter from Swedbank’s Economic Research Department, continued Nr 1 • 10 March 2011unemployed leaving the EUIF by getting jobs is Gross wage, 1Q 2004 - 4Q 2010falling also (see chart). On the other hand, we (annual growth)believe that many of those counted as outflow of 25%unemployed by their own choice may be engagedin the shadow economy or working under short- 20%term contracts. 15%At the same time, the creation of new vacancies isat record-high levels; the number of total vacancies 10%is around the 2005 level, pointing to labour demandstabilisation. The shift in the structure of vacancies 5%(e.g., towards less low-skilled, more technicians)indicates the continuing need to focus on retraining 0%and re-educating the unemployed, especially those 2004 2005 2006 2007 2008 2009 2010who have been out of the labour market for a longer -5%period of time, in order to lessen the risk of theirbecoming discouraged. In this area, employment -10% Monthly wage Hourly wage Monthly wage, real growth Hourly wage, real growthgrowth is supported by active labour marketprogrammes (e.g., wage subsidies, work practice). Wage growth varied between sectors substantially,Registered unemployment and vacancies, Jan. 2007 –Jan 2011 pointing not only to ongoing restructuring processes(thousands) in companies (e.g., the difference in wage levels 12 between those downsized during the recession and the newly employed) but also to the nature of the 10 strongly export led economic growth. Real wage growth was positive throughout 2010 in 8 manufacturing – it rose by 0.6% in the fourth quarter – thanks mainly to rapidly recovering output 6 and employment, but also due to significantly improved productivity. The IT and research sector 4 and mining also contributed to this growth, 2 reflecting strong labour demand in these sectors. Wage growth turned positive at the end of the year 0 also in construction and administrative and support 2007 2008 2009 2010 2011 services, as well as in the entertainment and new unemploy ed total v acancies recreation sectors. new v acancies Source: EUIF outf low of becoming employ ed Looking forward, wage growth will remain rather uneven between sectors, with stronger growth in export-oriented and growing sectors and profitableWage growth accelerates but remains companies. However, as domestic demand willnegative in real terms gradually start to recover, overall real wage growthAverage monthly gross wage growth, which had should turn positive by the middle of this year. Inbeen flat for most of 2010, accelerated to 3.9% in addition, continuously falling unemployment ratesthe last quarter. This can be attributed to increased as well as high inflation will eventually put extrabonus payments at the end of the year – because pressure on wage growth. As labour emigration hasthe economic situation had improved significantly not slowed appreciably and more and morefrom the year before, profitable companies were companies are pointing to a lack of qualified labour,much more willing to reward their employees a demand-led wage growth is becoming a growing(estimates suggest that bonus payments increased risk in some sectors (e.g., ITC, construction). At theby one-third on average from the previous year’s same time, however, low-skilled jobs will see veryvery low level). As a result, average hourly gross slow, if any, wage growth this year.wage growth accelerated much less, by 1.9% in thefourth quarter. However, despite the accelerated At-risk poverty rate dropped sharply inwage growth, inflation picked up at the end of the 2009year as well, leading real-term wages to fall for the Perhaps the most unexpected yet positive outcomeninth consecutive quarter—by 1.3% for monthly and amidst the rising unemployment and falling incomesby 3.2% for hourly wages, in annual terms. has been the significant fall in the relative poverty 3 (5)
The Estonian Economy Monthly newsletter from Swedbank’s Economic Research Department, continued Nr 1 • 10 March 2011 2rate . The latest data, available for 2009, point to an several social groups that are more dependent onat-risk poverty rate of 15.8%, down from 19.7% in state social contributions did not see their poverty2008 and the average since 2000 of 18.7%. This rates go down even when remaining employedoutcome was possible for two main reasons: (e.g., single parents and households with 2+ children). Falling incomes pushed the at-risk-of poverty threshold down by 8% from 2008. In a way, the worsening situation of youth and This means that, although many people improving conditions of elderly people can be managed to “escape” poverty via this treated as an expected trend during a severe measurement, their social conditions and economic crisis – for example, the crisis in Sweden incomes actually did not improve. and Finland in the early 1990s impacted youth the most with wide discussions about a “lost The biggest at-risk group – pensioners – generation”, while the pensioners were much better was the only one to see their incomes off thanks to stable state contributions. increase. Despite heavy budget cuts by the government during this period, pensions As incomes on average in 2010 fell further and were raised on average by 5% in mid-2009. unemployment continued to rise, while pensions As a result, the poverty rate for those 65 remained unchanged, we can expect the trends and older more than halved, falling from seen in 2009 in at-risk poverty rates to continue. 34% in 2008 to 15% in 2009. However, tighter social spending by the state could significantly affect the conditions of several at-riskRelative poverty rate, 2001-2009 social groups.(percent) Together with falling poverty rates, income 40 inequality declined during the crisis as well. The 35 Gini coefficient3, which was on average 0.34 during 2005-2007, fell to 0.31 in 2008-2009; this is now 30 very close to the euro area average. Inside euro area, only Ireland and the Slovak Republic 25 registered bigger drops in this category than Estonia. 20 Income inequality in EU countries (excl. Luxembourg), 2009 15 GDP per capita (PPP, EUR th) 35 10 NL AT IE 2001 2002 2003 2004 2005 2006 2007 2008 2009 30 DK euro area SE DE total men women 16-24 BE Source: SE 25-49 50-64 65+ FI UK 25 FR ES IT CYOverall, relative poverty rates are strongly SI CZ EL 20correlated with unemployment; accordingly, the MTsocial groups that are at the highest risk of being SK EE PTunemployed (or, rather, have the biggest difficulties 15in becoming employed) are the same groups that HU PL LT LVhave experienced the smallest decreases in poverty BG RO 10rates, or even increases—e.g., 16-24-year olds, 0.2 0.25 0.3 0.35 0.4people without higher education, non-Estonians, Gini coefficient Source: Eurostatand people living in the northeast area (due to highpopulation density of non-Estonians). In addition, Elina Allikalt2 At-risk-of-poverty rate is the share of persons with anequalised yearly disposable income lower than the at- 3risk-of-poverty threshold (i.e. 60% of the median Gini coefficient measures the inequality of incomeequalised yearly disposable income of household distribution, a value of 0 expressing perfect equality and amembers). value of 1 absolute inequality. 4 (5)
The Estonian Economy Monthly newsletter from Swedbank’s Economic Research Department, continued Nr 1 • 10 March 2011SwedbankEconomic Research Department Swedbank’s monthly newsletter The Estonian Economy is published as a service to ourSE-105 34 Stockholm customers. We believe that we have used reliable sources and methods in the preparationPhone +46-8-5859 1028 of the analyses reported in this publication. However, we cannot guarantee the accuracy firstname.lastname@example.org completeness of the report and cannot be held responsible for any error or omission in thewww.swedbank.com underlying material or its use. Readers are encouraged to base any (investment) decisions on other material as well. Neither Swedbank nor its employees may be held responsible forLegally responsible publisher losses or damages, direct or indirect, owing to any errors or omissions in Swedbank’sCecilia Hermansson, +46-8-5859 7720 monthly newsletter The Estonian Economy.Maris Lauri +372 6 131 202Elina Allikalt +372 6 131 989Annika Paabut +372 6 135 440 5 (5)