The temperature on Latvia's labour market: comfortable for the country's economic growth
The first-quarter labour market data are compelling even against the background of the strong data registered in the second half of the previous year. The unemployment rate shrank by impressive 1.2 percentage points over the year (to 8.2% of the economically active population). The decline in unemployment is expected to continue at a slower rate averaging around 8% in 2018.
The number of the employed rose by 1.8% over the year. Meanwhile, economic growth largely continued onto productivity track. The number of the employed remained broadly unchanged over the last four years, since higher participation in the labour market (in the age group above 55 years in particular) and the decline in unemployment (in all age groups) was offset by a population decrease (among young people in particular; see Chart).
Chart. The annual growth rate of the number of people employed by component and age group (percentage points; averages for 2014–2017)
Over the last year, the unemployment rate fell below its natural rate; however, this does not mean that a further reduction in the unemployment rate is not possible or should not be pursued. Natural unemployment in Latvia is significantly higher than that in Estonia, Germany or the Czech Republic. We should try to reduce it by implementing well-designed competence development and regional mobility programmes and – in the long term – by improving the quality of education and health care, otherwise it would mean an unforgivable waste of human capital.
However, it is also clear that, for the time being, additional attempts to boost the domestic demand might be more risky than beneficial. Using the pool analogy, water temperature (business cycle) and water quality (structural unemployment) are two different dimensions. Just like a water treatment unit cannot be replaced by additional water heating units, the competence development cannot be replaced by additional domestic demand stimulation.
Has the current labour market temperature become too hot already? With the economy balancing around the macroeconomic equilibrium, this question has raised legitimate concerns among economists for several quarters (e.g., see here and here). The fact that, over the past few years, remuneration has been increasing faster than labour productivity or that the core inflation continues to grow , directly results from the warming up of Latvia's labour market. While it is clear that the wage share in the total value added cannot increase indefinitely, no serious competitiveness issues have been observed so far: a record-high share of businesses report no significant obstacles to their activity; businesses' profitability ratios and the share of Latvia's exports in global imports are stable. At the same time, the rise in the labour market temperature observed so far represents an opportunity for the long-term unemployed to re-enter Latvia's labour market and could facilitate remigration.
 Consumer price inflation excluding indirect taxes, food, energy and administered prices.
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