Salaries continue to drop but at a lower pace

Remuneration for work at the beginning of 2010 continued to drop in all the main branches of the economy both year-on-year and quarter-on-quarter. The annual drop in gross hourly wage in the first quarter of 2010 abated slightly, to 8.3%, whereas the net wages dropped at a faster rate (by 12.6%), reflecting a greater income tax burden. From 1 January 2010 the income tax rate grew from 23% to 26% and as of 1 July 2009 the untaxed minimum has been reduced from 90 to 35 lats.

The annual drop in wages in the public sector is still steeper than in the private one, respectively 14.1% and 4.7%. To a great extent, however, this is a reflection of the previously performed substantial wage adjustment in the public sector as a result of which the average salary in the public sector is now approximating the average salary in the private sector: 446 and 420 lats respectively.

The rate of annual drop in remuneration funds has abated in the first quarter of 2010 (to 25.6%) as a result of a slower drop both in hourly wages and hours worked (by 18.9%).

The drop in wages is expected to slow down increasingly over the next quarters and growth is expected to resume in the second half of 2011. From now on, it is the hourly wage in the private sector that could undergo a relatively faster rate of contraction, for wage adjustment began later there. Previously the drop in average hourly wage in the private sector was slow because businesses, in order to recover their competitiveness, cut their costs by laying off their employees and reducing the working week. Layoffs primarily affected lower qualified workers, thus the proportion of recipients of higher wages increased pushing the average hourly wage statistics up. Reducing the duration of the working week gave the entrepreneurs an opportunity to cut monthly salaries in the conditions of dropping demand without cutting the hourly wage.

As economic growth resumes, the number of the employed in the private sector is likely to grow as early as the second half of this year; because of the high unemployment, enterprises will be able to pay newly hired employees salaries that will be lower than the average salary in the enterprise and this effect may reinforce the drop of the average private sector salary in the statistics.