Labour costs noticeably lower last year

Labour costs per one hour of work contracted 12.5% year-on-year in the fourth quarter of 2009. This decrease slightly exceeded the annual drop in hourly pay (12.1%), because the voluntary social security payments by employers, expenditure for sick leaves, as well as benefits for employees have all contracted at a faster rate than wages.

It must be noted that the contribution of wages in the drop in labour payment fund keeps increasing, indicating that wages are more flexible than appeared from the indicators of previous quarters. Overall the labour payment fund has decreased by 35%, with the contribution of hourly wage already at 46%. The contribution of the decrease in hours worked that includes both layoffs and reduction of the length of the work week dropped to 54%.

The increase in the contribution of the hourly wage to the drop in labour payment fund can be attributed to the fact that the dynamics of the hourly wage usually lags behind the changes in economic activity. The decrease in wages in the fourth quarter of 2009 was accelerated by the effect of the changes in the employment structure. Initially, as the businesses laid off less qualified and less productive workers, the proportion of highly qualified employees grew resulting in a greater proportion of receivers of higher salaries. According to the Bank of Latvia's estimates, this effect in 2009 acted to accelerate the annual increase in the average wage by 1-2 percentage points in the economy overall. At the end of the year, however, the importance of this effect decreased, which promoted acceleration in the annual drop in the hourly wage and, accordingly, an increase in the contribution of the hourly wage to the labour payment fund dynamics.

Even though the data available on 2009 indicate an increase in wage flexibility, it can be expected that in the next quarters the contribution of the hourly wage in the labour payment fund drop will increase even further. As a result, the currently available data do not yet allow us to make any assessments of the actual extent of wage flexibility in Latvia.