SEB analyst: Estonian labor market defying economic downturn's gravity

TALLINN - SEB economic analyst Mihkel Nestor observes that, despite the economic downturn, the labor market in Estonia has remained favorable from the perspective of employees, and as economic growth recovers, Estonia is likely to face labor shortages once again.

Nestor said in a press release that although the economic downturn has ended, Estonia's GDP is still nearly 6 percent below its 2022 peak.

"Looking at Estonia’s past, such a sharp GDP decline could have led to a drop in employment by a few percentage points. Yet, this has not happened. At the start of 2022, Estonia's employment rate was 69 percent, and in the third quarter of this year, 69.1 percent of people aged 15 to 74 were employed. What makes this particularly striking is that during the same period, over 50,000 war refugees from Ukraine arrived in Estonia, and the struggling economy seemed to absorb them without any difficulty," the analyst said.

"It is difficult to fully explain this paradox, but some factors are worth highlighting. Firstly, the economic downturn of the past two years has been somewhat illusory. While real GDP has declined, nominal GDP has grown due to high inflation. With more money circulating in the economy, businesses have managed to continue paying salaries even though there is less work than before," Nestor said.

Another key reason he identified is Estonia's persistent labor shortages before the crises, which hampered business operations and economic growth during good times.

"Although media often focuses on skilled labor shortages, the lack of workers for low-wage jobs has been even more severe. Previous difficulties in filling such positions may explain why it was relatively easy for Ukrainians arriving in Estonia to find jobs. In a situation where most companies have not faced acute financial struggles, whereas memories of challenges with recruitment remain fresh, many employers have likely chosen to retain existing staff in hopes of providing them with more work soon," Nestor said.

The analyst also pointed out that the labor market situation appears to have improved in recent months. While the employment rate was slightly higher in the second quarter than in the third due to seasonal factors, unemployment has decreased. Registered unemployment fell from 8 percent at the start of the year to 6.8 percent in October.

"The fact that employment has remained so resilient despite economic difficulties suggests that as economic growth accelerates, we will soon face the familiar issue of a lack of workers. This makes the recent steps by the Ministry of Economic Affairs to ease restrictions on hiring foreign labor quite welcome. Until now, the government has primarily favored the recruitment of highly paid specialists, exempting workers earning 1.5 times the average salary from the immigration quota. Now, it aims to lower this threshold to the average salary," he said.

These changes, he noted, could particularly benefit industrial companies outside Tallinn, where wages are lower, and the average gross salary in Estonia could represent a solid income for roles like machine operators or welders.

"While this move is welcome from an employer's perspective, it is essential to ensure the bar is not set too low. Ultimately, labor shortages and wage pressure are significant drivers that push the economy toward higher productivity," he said.