17.11.2016.

Inflow of low-skilled workforce would deteriorate the standard of living

The dynamics of the labour market has precisely matched predictions for several consecutive quarters. Unemployment keeps gradually going down (0.2 percentage points over a year, reaching 9.5% of economically active population) and employment rate grew symbolically. Thus lower GDP growth this year (primarily because of the interruption in European Union (EU) fund inflows) had practically no effect on business medium-term expectations, otherwise enterprises would have reduced the number of their employees. It is an additional indication that the growth slowdown will soon be replaced by an upward trend.

From time to time, mass media report (here, for instance) that in yet another survey a number of enterprises have expressed their worries about a lack of workforce, which supposedly indicates that workers will have to be brought in from abroad. I think it is crucially important to distinguish between two completely different things: inviting highly qualified specialists and bringing in unskilled labour. Highly qualified specialists are always needed, but world superpowers are also fishing for them. It is unlikely that such specialists will appear in droves in Latvia if they can earn more in Germany or the U.S.A.  Inflow of unskilled workers, on the other hand, can only lower the standard of living.

It is worth remembering that productivity (thus wages and living standard) depend on the size of physical capital (work equipment) and human capital. An immigrant brings in only human capital. Thus, for immigration to raise the average salary in Latvia, the human capital of immigrants must exceed the sum of local human capital and physical capital. It means that the immigrant must be significantly better qualified than the average resident of Latvia, and that would be a very rare case indeed.  

I don't even see any need for discussions for importing cheap workforce, since there are still 74 thousand registered unemployed (and, adding the unregistered ones, the total number of unemployed in Latvia is 94 thousand, as the Labour Force Survey data published today by the Central Statistical Bureau indicated). If unemployed lack some skills, opportunities of training, re-qualification and other activation programmes should be used more extensively.

We should not allow for the possibility that the current unemployed are written off, yet similarly qualified workers are imported from other countries only because they agree to work for lower wages. If Latvia keeps cultivating low wages and develops only branches with low added value, then we will never reach the EU-average standard of living. Gradually losing the low wage advantage, the structure of Latvian economy will move toward branches of high added value, which require investments and innovations. Trying to impede this process means to fall in a medium income trap.

We must understand that irrespectively of what might be happening in the economy, entrepreneurs will always complain of a lack of workforce and high wages and employees – about low wages and "no work". This -- and no more -- is what such surveys show. 

APA: Krasnopjorovs, O. (2019, 15. sep.). Inflow of low-skilled workforce would deteriorate the standard of living. Taken from https://www.macroeconomics.lv/node/1860
MLA: Krasnopjorovs, Oļegs. "Inflow of low-skilled workforce would deteriorate the standard of living" www.macroeconomics.lv. Tīmeklis. 15.09.2019. <https://www.macroeconomics.lv/node/1860>.

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