Comment on wage dynamics in the second quarter of 2009

Latvia's economic recovery largely depends on export development, which is affected by both external and domestic economic environment. Recent data on the euro area and US economies point to bottoming out - good news for Latvian exporters. On the supply side, reduction of costs is a prerequisite for resumption of export growth, with labour costs being the most significant component. Lower labour costs will allow countering the imbalances developed in previous years, namely a significantly stronger rise in labour costs in comparison to labour productivity, with the results manifesting themselves during the current economic downturn.

In the second quarter of 2009 the average gross wages and salaries decreased by 1.0% year-on-year. However, this indicator does not adequately reflect the current situation as average monthly wage is calculated for full-time employment units thus excluding both staff cuts and decrease in average working hours per person employed. A fair view of the economic developments can be obtained by analysing the dynamics of gross wages and salaries. In the second quarter the gross wage and salary pool shrank by 20.8% year-on-year (with the most marked decrease in construction, manufacturing and trade by 46%, 31% and 26% respectively). In the public sector the wage and salary pool decreased mainly on account of reduction of the average wage (the most rapid fall by 16.4% was recorded in public administration), while in the private sector it was mainly due to shorter working hours resulting from both lay-offs and reductions in weekly working hours.

If during an economic downturn shorter working hours are favoured over staff dismissal, it mitigates the growth of unemployment and alleviates social tension, and does not put extra burden on the social budget. At the same time a boost in labour productivity should be considered, since it is the sole alternative to wage and job cuts. Over the last year decent education and work experience have been attached an increasing importance in the labour market. For instance, while in the first quarter the number of jobseekers rose by 6.8 percentage points (to 16.7%) on average, among those with university education the rise was a mere 1.4 percentage points (to 7.0%).