04.06.2018.

The beginning of the year saw higher purchasing power of the employed

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Strong wage increases (the average gross wages posted annual growth of 8.6% in the first quarter) combined with moderate inflation and legislative amendments have led to a notable boost in the growth rate of the real net wage, thus resulting in higher purchasing power of the employed.

The health and social care sectors saw the most rapid rise in wages reflecting the fact that part of the additional funds allocated to the health care sector in 2018 where used for raising wages. Nevertheless, the average remuneration in the sector is still below the country's average. Wages also grew more rapidly in the agriculture, forestry and fishing sectors which were more affected both by the raising of the minimum wage (Latvia's minimum wage was increased to 430 euro in 2018) and growing activity in the logging industry.

Businesses continue to complain about labour shortages, while about a half of the population point to difficulties with finding a job. Who is right? The labour market is struggling to balance supply and demand. In the search for equilibrium, wages continue to grow. To comply with the legislative amendments (higher minimum wages) and to attract new employees or to keep the existing ones, businesses are forced to increase wages.

Considering that unemployment continues on a downward trend and the decline, although slowing down, is expected to persist throughout the year, wages are likely to keep rising steadily. Consumer confidence survey data for May also suggest that households expect their financial situation to improve over the year to come. However, wages cannot be raised from thin air as it would increase the spinning risk of the wage-inflation spiral: with wages growing, the households' real purchasing power would not improve since prices would grow accordingly. So far, though, inflation has remained moderate in Latvia largely on account of energy price hikes. Nonetheless, prolonged wage growth, where not backed by a corresponding increase in productivity, may create pressure on prices and business competitiveness. However wonderful it may sound that the "minimum wage should be raised to 1000 euro", each decision has its consequences. Would we be willing to pay 2, 5 or even 10 euro instead of just 1 euro for 1 litre of milk? The wage increase must be reasonable also in the future and must reflect productivity gains.

APA: Opmane, I. (2018, 20. oct.). The beginning of the year saw higher purchasing power of the employed. Taken from https://www.macroeconomics.lv/node/4146
MLA: Opmane, Ieva. "The beginning of the year saw higher purchasing power of the employed" www.macroeconomics.lv. Tīmeklis. 20.10.2018. <https://www.macroeconomics.lv/node/4146>.

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