Latvia returns to single-digit unemployment

For the first time in seven years, unemployment in Latvia has contracted under 10% (in the second quarter of 2015, it was 9.8% of the economically active population). That is slightly less than in the euro area overall. It does not have a crucial impact on inflation, for the natural level of unemployment is also dropping.

Figure. Actual and natural unemployment in Latvia (% of economically active population)

Source: Author's calculations.

For the description of methodology, see Latvijas Banka Discussion Paper Natural and Cyclical Unemployment in Latvia: New Insights from the Beveridge Curve Model.

The contraction of unemployment is not some statistical mirage. The rest of the labour market indicators are also gradually improving, which indicates better employment possibilities. For instance, the number of economically inactive population, which had lost hope of finding employment, is undergoing a stable decline. The number of those who were forced to work part-time because they were unable to find full-time employment has also gone down.

The rise in employment is slow. Therefore economic growth is taking place on account of productivity, which underpins a steady rise in wages.

The drop in unemployment is expected to continue slowly, without breaking loose from the natural level to any substantial degree. Thus the Latvian economy will still maintain its macroeconomic balance. The number of employed will not change notably, for the drop in unemployment and the rise in participation rate will be compensated by the drop in the number of population and share of working age population.