Despite rising wages the pay gap remains significant
Wages continue to grow in Latvia, and the average monthly gross wage of employees reached 1083 euro in the second quarter of 2019. The pace of remuneration growth is decelerating, reflecting the general trend observed in economic development. Despite the decreasing share of low-wage earners, the considerable differences in wages between industries and regions, however, remain.
The average remuneration rose by 7.8% in the second quarter of 2019 year-on-year, which equals the annual rate of increase in the first quarter, but is lower than last year. Taking account of the slowdown in economic growth, this trend is not something unexpected, and does not yield any surprises. With the tax reform effect weakening, this year witnesses also deceleration in the annual rate of increase in net wages, i.e. an increase in the average wage received "in hand" was 7.5% in the second quarter versus 10% in 2018.
A particularly positive trend has emerged – the share of low-wage earners is steadily decreasing. This suggests that the use of the so-called envelope wages for remuneration purposes is also declining. However, the pay gap remains substantial in geographical, sectoral and industrial terms. For instance, the average wage in Latgale even does not reach two thirds of the average remuneration in Riga.
While Riga and Riga planning region stand out vis-à-vis other regions in the public sector, the private sector results are slightly different and prove that the situation in regions is not always that bad. In Kurzeme and Zemgale, for example, the average wage of staff employed by private sector companies with at least 50 employees has been exceeding the limit of 1000 euro since the second quarter of 2018 like in the country as a whole. Thus, it is not unrealistic for people in regions to receive the average wage in the country provided that medium and large companies are operational there. Medium and large companies are able to pay higher salaries since economies of scale enable them to work more efficiently. However, account should be taken of the fact that the share of employers employing at least 50 staff is less than 2% in Latvia.
It is true that a job in a larger company is not a guarantee for a higher remuneration, the industry in which the respective company operates also plays a role. At the same time, in the private sector there are industries where the average remuneration exceeds the average wage in the country about twice, i.e. financial and insurance activities, computer programming and air transport, and there are industries where the average remuneration is even below 70% of the average wage in the country, e.g. the manufacture of wearing apparel and fish processing.
With wages rising, compensation to employees is also increasing. This might motivate companies to decide on investing in productivity-enhancing machinery rather than in recruitment of additional staff to maintain their competitiveness. Meanwhile, external uncertainties can encourage companies to wait or even refrain from large capital investment for some time since a decline in demand for labour will reduce the rapid rise in labour costs. Taking account of the fact that the number of working age population in Latvia is decreasing, it is expected that producing companies will nonetheless decide to invest in productivity growth. In the future, with the emergence of more modern production units requiring less manual work, the number of companies being able to offer attractive wages also in the regions will rise.