Restored competitiveness determined the stable drop in unemployment

With seasonal work ending in the summer, the drop in registered unemployment slowed and remained unchanged since the end of October, ending 2010 with 14.3% of the economically active population out of work. As the economic development takes hold, the annual drop in unemployment remains stable – compared to the historic maximum in March 2010, the rate of registered unemployment and the number of registered unemployed dropped by three percentage points and 32 thousand respectively by the end of the year.

More than a year ago we emphasized that the then rise in productivity could become the corner stone of the further development of the economy, including employment. At the time when the 12-month drop in GDP reached maximum, this conclusion may have very well been met with scepticism. Moreover, foreign experts (see, e.g., here and here) expressed their concern that Latvia will not regain competitiveness because they considered the drop in wages and prices not big enough. Now we can see, that, according to Eurostat data, Latvia posted the fastest rate of employment growth in the EU in the second and third quarters of 2010. The reason: renewed ability to compete over the past few years ensured not only by the drop in prices and costs but also a rise in competitiveness – an indicator previously more or less ignored in the macroeconomic debate.

Although in terms of the drop in hourly wage Latvia holds no record, the rise in productivity was the fastest in the EU, determining a rapid renewal of Latvia's competitiveness. The significance of productivity as an indicator pre-emptive of the economic cycle is obvious when comparing both countries and industries. For instance, the greatest contributor to the growth of employment has been manufacturing which has also posted the most rapid rise in productivity.

During the crisis, the drop in investments prevented a rise in the accumulated capital, and there was also a drop in the intensity of the use of production capacities. Thus the rise in productivity was mostly achieved by raising the efficiency of the organization of work at enterprises. As indicated by the findings of SIA "Fontes", remuneration (including bonuses) is increasingly determined by the performance of a particular employee instead of indicators that are not directly related to productivity, such as price rises or the possibility of emigration. Likewise, when deciding whether or not to award a bonus, it is the accomplishments of the employee that play the decisive role and not his or her seniority or the impending holidays as often was the case before. This approach, whereby the level of remuneration is more closely tied to the productivity of a particular employee, is pursued both in the private and public sectors.

In the third quarter of 2010 the twelve-month growth of GDP amounted to 3.6%, approaching the desirable pace of sustainable development. The economic recovery observed from the beginning of 2010 was reflected in a significant rise in employment in the second and third quarters. The fact that rise in employment outpaced the rise in value added is a trend that cannot be maintained in the long term. Unless economic development substantially exceeds predictions the rise in employment is expected to slow down. Moreover, any rise in employment will be impeded by the large scale structural unemployment caused by the inadequacy of the skills of the unemployed vis-à-vis the demands of the market. The consequences are yet to be reflected in the employment data – we will begin to observe them when the cyclic component of the unemployment, i.e. unemployment caused by the crisis, is about to be exhausted. State policies play an important role in reducing structural employment, including not only raising the qualifications of job seekers in various courses of professional training or retraining but also raising their self confidence and motivating them to find permanent employment, where their strengths could be used to the fullest, as soon as possible.