Purchasing power of salaries keeps growing at a pace, yet poses no inflation risks

Along with rises in salaries and employment, population’s income level also keeps rising, which promotes an improvement both in retail trade volumes and consumers’ expectations. In the fourth quarter of 2012, the average salary in the economy was 4.0% above the level a year ago. With the inflation remaining low, the purchasing power of salaries keeps rising at an ever faster rate (2.5% year-on-year). The rise in salaries, however, goes hand in hand with a rise in productivity and thus presents no risks to price stability and competitiveness.

Real salary and productivity index (I Q2005  = 100)

Source: CSB data, calculations by Bank of Latvia economists;

* productivity in IV Q 2012: operational data

The percentage of entrepreneurs who consider labour shortage the main obstacle to entrepreneurship has stabilized below 10% (European Commission data). That is less than in the pre-bubble years (2002 - 2004) and thus reflects a normal (“balanced”) situation (promoting growing investments and thus rising productivity) instead of implying that, as a result of labour shortages, salaries could rise faster than productivity.

In 2012, the average gross salary grew 3.7%, because the high unemployment allowed for increasing production volumes at the expense of new employees, paying them salaries below the enterprise average (and that pushed the average salary statistics downward). As unemployment gradually approximates the natural unemployment level, it implies that it will be more difficult for entrepreneurs to increase employment rapidly and more funds will have to be directed toward productivity-promoting investment. That would be grounds also for a faster rise in salaries, about 4-5% in 2013, still not creating a significant inflationary pressure in the economy.