Labour market performance in 2014: drops in unemployment and employment

Even though the unemployment level dropped last year, the rate of this drop, under the conditions of economic slowdown, is gradually decreasing. This year, the drop in unemployment is expected not to exceed 0.5 percentage points.

According to our predictions a year ago, the rate of drop of the unemployment level in Latvia in 2014 slowed down substantially – to 1.1 percentage points (from 11.9% to 10.8% of the economically active population). It is natural, because the cyclical component of unemployment that ensured an almost double drop between 2010 and 2013 has been exhausted and the structural component cannot diminish quickly. Moreover, at the end of the year, the drop in unemployment was slowed down by the slackening rate of economic growth.

Labour Force Survey data of the Central Statistical Bureau (CSB), which reflect both the formal and informal economy, point to a drop in employment in 2014. In part, it could be a reflection of changes in methodology (the 2013 Labour Force Survey was based on the number of the working age population at the beginning of the year, but in 2014, it was updated every quarter) and in part, of the drop in the number of population and contraction in the share of working age population, which cannot be compensated by a slow rise of participation rate and drop in unemployment. At the same time, it could point to a drop in shadow employment while workplaces in the country increase. The sources of statistics of the official economy (CSB business survey data on the number of occupied posts; State Revenue Service data on the number of employees who make mandatory social insurance payments) still point to rising employment.

Currently, 10.2% of the economically active population are looking for work – slightly less than the euro area average.  This year, drop in unemployment is expected to be less than last year and could be below 0.5 percentage points. In a situation where the economy is cooling off faster than projected and confidence level is dropping, entrepreneurs may assume a wait-and-see position regarding expanding their business. This is also confirmed by operational statistics: the monthly rise in registered unemployment in January 2015 (by 0.5 percentage points) was greater than usual seasonal increase. Under such conditions, the legalization of the shadow economy may be delayed, which makes the principle of caution in planning budget revenues more urgent (this year, about 50 mil. euro is projected as part of budget revenue on account of reducing the shadow economy, but it may not be achieved at that level).