Last year's wage growth surged to one of its highest levels in recent years

In 2023, wage growth in Latvia surged to one of its historical highs in recent years. The data of the Central Statistical Bureau of Latvia suggest that the average wage was 1537 euro in 2023, with the average nominal wage increase reaching 11.9% year on year. In the last quarter of 2023, however, the growth rate of wages was slightly lower than the annual average growth rate, recording 11.6% year on year.

In the last quarter, the increase in wages may have been held back by a slight rise in unemployment at the end of 2023 as well as a decline in inflation, already evident over the past year. However, despite a lower increase in nominal wages, the purchasing power of households continues to recover, with the average wage growth exceeding inflation in all sectors. Moreover, the inequality in labour income is also declining – the share of employees earning less than 1500 euro has diminished, suggesting that these employees are now better paid. This was partially due to the minimum wage growth in 2023 as well as the decision to further increase the minimum wage from 1 January 2024 because some businesses may have already raised their wages in advance.

Meanwhile, a sharper rise in wages puts pressure on the cost competitiveness of companies. The productivity growth of companies has been more subdued than the increase in real wages, and the cost of labour per unit of output has risen. In a situation where the cost of wages grows faster than productivity, companies may have to consolidate their costs in other areas. This, in turn, means fewer possibilities for companies to introduce new technologies needed to boost their productivity.  Reducing the number of employees may provide an alternative to raising wages. However, amid tight labour market conditions this can also be a challenging task as there is no guarantee that the company will be able to quickly find new employees, should the need suddenly arise.

Against the background of the increased minimum wage, low labour supply and strong competition for employees, the growth rate of wages will continue to exceed its long-term average in 2024. Despite the fact that the labour market activity rather weakened than strengthened at the end of the last year, wages are expected to increase further at a relatively rapid rate owing to the gradual economic recovery projected for Latvia in 2024, which will be supported by the recovery of the external environment in the second half of the year.