RIGA - A new World Bank report published last week cites labor shortages as a long-term problem for the Baltic economies, the fastest growing in Europe, as more and more Balts move to West European countries in search of higher income.
"Unemployment continues to decline in most countries in the region, but labor market bottlenecks'sexacerbated by sizable outflows of workers since EU accession'sare emerging," cautioned Thomas Laursen, World Bank economist and author of the report.
Since the opening of EU labor markets, the Baltic states in particular experienced an exodus of their working age populations. The highest numbers are in Latvia and Lithuania, with 2.4 percent of working-aged Latvians and 3.3 percent of Lithuanians leaving for greener pastures. In Estonia the number is 1 percent.
The report, Labor Migration from the New EU Member States, focused on labor mobility in the new member countries as a result of the opening of selected labor markets to nationals from new EU member states. Evidence showed that fears in Western Europe of massive inflows of workers and their negative impact on the receiving labor markets were unfounded. Foreign workers from poorer member states generally supplemented rather than replaced domestic workers and helped sustain solid economic growth while at the same time keeping local wages stable.
However, labor outflow has led to shortages in several sectors in the Baltic states and has contributed to increased wage pressures at home. Some companies' expansion plans have had to be placed on hold. Countries sending workers are benefiting from the money sent home, and may eventually gain from additional knowledge gained when workers return home, but the report recommends that more be done to keep workers from leaving in the first place.
The World Bank economist also called on Baltic governments to manage labor migration more pro actively. For instance, the report recommends that efforts - including reducing high labor taxes and in some cases social benefits - be undertaken to entice workers to stay at home. The report even suggested considering more liberal laws pertaining to importing labor from even farther east, recommending that this be done in tandem with a careful labor screening system.
In fiscal policy, the report recommends that additional spending on wages is necessary in the sectors where workers are in particularly short supply. The health care sector was specifically mentioned, and here the World Bank suggested user fees to supplement health care financing. The construction sector was especially mentioned as a sector where wage spending needs to be increased.
The report also warned about mounting inflation. Wage growth is accelerating rapidly in the Baltic countries, as is credit, and the full impact of rising commodity and producer prices have not yet surfaced. Inflation was specifically mentioned as the main factor standing in the way of acceptance into the eurozone in the Baltic states. This evidenced by Lithuania just missing joining the eurozone due to inflation earlier this year, and Latvia and Estonia predicting 2010 and beyond for joining the single currency.
How the Baltic governments handle stalled public financial and structural reforms was seen as critical in the successful implementation of the large amount of EU structural funds that are becoming available. Targeted infrastructure investments are critical to further economic development, and perhaps eventually luring their workers back home.
In spite of increased oil prices and higher global interest rates, the economies of the Baltic states continued to show strong growth during 2006. Strong growth for the new EU members was predicted for 2007, with some cooling foreseen for the Baltic states.