Wages, inflation are indicators to watch

  • 2008-04-03
  • By TBT staff
RIGA - As Latvia's economy continues to cool 's leaving open speculation as to whether it will undergo a hard- or soft-landing 's the combination of wage and inflation data will become increasingly important to monitor.
GDP, bank lending, real estate prices and retail consumption are all falling or have hit a plateau since the government put the brakes on the Baltic state's red-hot economy last summer.
Quarterly growth declined to 8 percent in the October to December period last year, its first sizable fall in several years, while retail sales fell 0.7 percent in January.

Consumer confidence has also taken a beating as Latvians begin to realize that wage and salary gains will no longer keep pace with the consumer price index, which in February grew at an annual rate of 16.7 percent.
But the government is under pressure 's from many of its own ministers 's to increase wages for public sector workers. However, Prime Minister Ivars Godmanis is dead-set against this idea given that the wage-inflation spiral is one of the primary reasons why Latvia's economy has been teetering on a precipice.
The prime minister told a meeting of the National Tripartite Council that pay raises should compensate for inflation and that the minimum wage should not be increased more than 15 percent.
Annual inflation, he predicted, would likely be 13 's 15 percent in 2008, which, to be sure, is higher than both public and private sector estimates at the beginning of the year. GDP growth, he added, would amount to 6 percent.

But Godmanis was insistent that wages could not continue growing like they did last year when average monthly income increased 32 percent, according to official statistics. He said further wage increases had to be linked to productivity, which hasn't been the case in the past.
The government will have to debate wage hikes soon. Trade unions want the minimum monthly wage to be increased to 220 lats (313 euros) next year, while employers believe the minimum wage should be raised to 200 lats.

The Finance Ministry, meanwhile, has sided with Godmanis and said that the increase should not surpass the growth in productivity, which means that the minimum wage could be raised to 180 lats, or by 15 percent.
By contrast, the Welfare Ministry has proposed to boost the minimum monthly wage from the present 160 to 220 lats in 2009. Bureaucrats there fear that, due to runaway inflation a larger part of the population will have to be reclassified as living below the poverty line.
In the private sector, Latvian Builders Association President Viktors Purins said construction workers' salaries would not increase much this year.

"The net salary received by the builders will most probably not change, while the employees, due to strict control, will try to legalize the salaries and pay all the related taxes," he told the Baltic News Service.
According to Central Statistics Office, construction workers' salaries increased 45.5 percent in 2007. The dearth of workers was acute throughout the first half of the year, forcing many projects to be delayed.