Minimum wage hike can deteriorate Latvian labour market
In the labour market, a lull has set in: there are practically no changes in either unemployment or employment. In the second quarter, the percentage of jobseekers among the economically active population (9.5%) was slightly (by 0.3 pp.) smaller than a year ago, whereas the number of the employed increased only symbolically year-on-year (by 0.3 th.). This confirms our projections that unemployment will continue to decrease ever slower with time (the cyclical component has been close to zero for three subsequent years, and, the lower the structural component is, the more difficult to reduce it further on). The impact of the demand side on inflation is thus not significant and inflation remains low. The impact of the drop in working age population on employment is thus far being compensated by an increase in the participation level.
The overall Latvian data, however do not show the existing substantial differences by region. The number of the employed outside the Riga region has been dropping since 2013, particularly in the private sector. The situation is particularly worrisome in Latgale (Fig. 1) where the unemployment has increased since 2013. The share of Latgale in the number of job places is decreasing faster than in population (Fig. 2). The reason could be the fast rise in minimum wage in 2014 and 2015 (by a total of 27%), which mostly impacted Latgale where the minimum wage is two thirds of the average wage in the private sector – it is the highest indicator in the Baltics.
The dynamic of the labour market in a regional breakdown is a counterargument to the statement "we increased the minimum wage by 40 euro in 2014 and 2015 and nothing bad happened". With the minimum wage outpacing productivity for several years, the ability of enterprises to wriggle out of difficulty by raising productivity and optimizing non-labour costs can become rather circumscribed. Thus every next exceedingly fast raise in minimum wage increasingly limits the competitiveness of enterprises. That may force liquidation of jobs and restrict hiring of new employees. With that in mind, we are of the opinion that right now is not a suitable moment for substantially raising the minimum wage.
Figure 1. Number of jobs (y-o-y growth; %)
Source: Central Statistical Bureau of Latvia (CSB) data
Figure 2. The proportion of regions in the number of jobs (%; Latvian total = 100)
Source: CSB data