Mertsina: The situation on the labor market should improve this year

TALLINN - The slow economic recovery last year did not yet bring significant improvement to the labor market, but the situation is expected to improve this year, noted Swedbank's chief economist Tõnu Mertsina.

The number of employed people decreased by 5,500, or 0.8 percent, last year, but compared to 2021, nearly 43,000 more people were working in Estonia. Mertsina pointed out that Ukrainians arriving in Estonia from 2022 onwards sharply increased the number of employed persons.

"Although the share of employed people in Estonia has slightly decreased in recent years, it remains high compared to other European countries. It is well above the European Union average and also higher than in Latvia, Lithuania, and Finland. Similarly, Estonia's level of investment relative to GDP is above the EU average, and higher than in Latvia, Lithuania, and Finland. High employment and a large share of investment help to increase potential economic growth. However, labor and investment must also increase productivity," said Mertsina.

"Although our average productivity per employee has grown significantly faster than the EU average over the last ten years, we still have a long way to go to reach the average productivity levels of the Union, including Finland, Sweden, and Germany. Unfortunately, increasing productivity is a complex and time-consuming task," Mertsina continued.

"At the same time, considering that our employment rate is already relatively high, the number of inactive people has significantly decreased, and fewer people are entering the labor market than leaving it, the labor market is becoming increasingly tight and requires greater efficiency in the economy," Mertsina said.

In 2022 and 2023, when the Estonian economy went into decline, the labor market did not react quickly enough. Largely due to the influence of Ukrainian war refugees, employment actually increased, which led to a sharp decline in estimated labor productivity. Last year, employment and the value added created in the economy were already better aligned, and for at least the first three quarters of the year, labor productivity increased again in real terms, Mertsina said.

"Productivity growth, however, improves cost-based competitiveness. This is also evident in the manufacturing industry's - the main goods-exporting sector of the economy - assessment of its competitiveness on the foreign market. While by 2023 this assessment had fallen to its lowest level in at least the last 20 years, it has now returned close to its long-term average," Mertsina said.

According to him, companies did not react quickly to the economic downturn by reducing labor costs, but unemployment still increased, reaching 7.6 percent by 2024. Last year, the number of unemployed people decreased only slightly, and the unemployment rate fell to 7.5 percent. However, the labor market typically reacts to improvements in economic activity with a delay. The decline in corporate profitability and public sector cuts are slowing the improvement of the labor market situation.

"Since the share of labor costs in companies' turnover has already risen to a high level, and many production inputs have also become more expensive, companies are increasingly looking for ways to make their operations more efficient. However, high labor costs affect both employment and wage growth," Mertsina said.

"This year's acceleration in economic growth should improve the situation in the labor market. According to our forecast, more jobs will be created - the number of employed people should increase, and unemployment will decrease to 6.7 percent this year," Mertsina added.