Steady wage growth confirms the first signs of economic overheating

Steady wage growth (8.7% over the year) is a further evidence that Latvia's economy is facing the first signs of overheating:

• Private sector wage growth even slightly exceeds that observed in the public sector, i.e. 9.1% and 8.2% respectively. Consequently, the observed wage growth is not just a result of a government decision to increase wages for teachers et al; basically, it is driven by a sustained labour demand when labour force reserves are rather limited, i.e. unemployment is slightly below its natural rate;
   
• Wage growth is observed across all sectors of the economy. The rise in the average wage in construction, the fastest-growing sector at this stage, is similar to that in manufacturing (primarily focusing on exports) and services (requiring different skills). Broadly-based wage growth points to cyclical overheating threats rather than to a situation where labour deficit in one profession occurs simultaneously with a substantial labour oversupply in another profession.
   
• Wage growth mostly stems from the base wages. The average wage data published today covers both the base wages and bonuses. Had the accelerated wage growth resulted from the payment of bonuses, it could be considered a one-off factor. However, since it is the base wages that have posted a rise (though they are flexible in Latvia, it is more difficult to cut them rather than bonuses), it means that sustained wage growth is likely to persist in the coming quarters.

Moreover, next year a considerable increase in the minimum wage (from EUR 380/month to EUR 430/month) will contribute to the remuneration growth. However, such a sharp increase in the minimum wage is no magic wand that could raise income and thus reduce inequality and shadow economy. Just the opposite, in certain professions and regions with a low average wage, e.g. in Latgale, raising of the minimum wage could result in a substantial labour market distortion, with a negative impact on employment.