First green shoots of a labour market recovery?

Where do we still see ice in the labour market? Since the peak of the economic cycle, the number of employed in Latvia has decreased by 56 thousand, whereas the number of unemployed has grown by merely 16 thousand. The remaining 40 thousand people who lost their jobs were not considered economically active, mostly because they were not active job seekers.

Consequently, the 2 percentage points increase in unemployment recorded during the pandemic (from 6% at the end of 2019 to 8.1% in the first quarter of 2021) provides but a partial indication of the crisis magnitude.

It is also true that in the absence of the ample government support in the form of furlough benefits, wage subsidies and support to businesses, the drop in employment (and the rise in unemployment) would have definitely been much steeper. The government support measures have overall fulfilled their purpose: the cascade of insolvencies has been prevented and the crisis has affected only specific sectors.

Where do we see the first heralds of economic recovery? April was the first month in the last half-year, when a tiny increase of 0.1 thousand (month-on-month; seasonally-adjusted data) was reported for the number of employed rather than the continuous decline in employment observed during the previous months.

Spring saw the sectors swiftly come back to life and qualified workers return to work as soon as the virus containment restrictions were eased.

With the hairdressers reopening in March, the number of working hairdressers increased to the level of last November and is currently only slightly below the pre-pandemic level. Most hairdressers, however, reopened with new prices, and a haircut now costs almost 10% more that at the turn of last year. That being said, the physical distancing requirements do increase the service costs. The minimum wage also grew significantly at the beginning of the year. Nevertheless, such a significant and sudden price raise would have been impossible if not for the unleashing of the substantial pent-up demand that could not be matched by the limited supply (actually, it reflects rather good purchasing power of consumers). Café and restaurant terraces that opened in May are equally busy; hence, employment (and price) developments in this sector could be similar.

The crisis effect of the pandemic on the labour market has been uneven since the very onset. The most significant downsizing was reported in accommodation, food, tourism services, water and air transport. The composition of the employed in those sectors determined the fact that mostly young people, residents of Riga and Jūrmala as well as low-income earners were laid off. At the same time, there were virtually no employment losses in some other sectors. Many companies outside the sectors affected by the crisis continued their talent hunt, and even raised the salaries of their top employees. The number of employees with a monthly gross wage over four thousand euro in the private sector is currently larger than before the pandemic. Hence, the policy makers are facing a major challenge of providing sufficiently ample support to the economy to steer it out of the recession and, at the same time, improving the long-term economic development potential, preserving the right economic stimuli and preventing overheating in certain sectors (because then a major part of the government’s support would be wasted as it would only result in higher prices).

Overall, the developments in Latvia's labour market are so far consistent with the March projections of Latvijas Banka.