Unemployment remains below its natural rate

As a result of more accelerated economic growth, some signs of labour shortage have emerged. Unemployment has decreased below its natural rate and the cyclical unemployment component [1] has become negative.

With registered unemployment shrinking below 7% and the headline (official) unemployment declining to 8.5% of the economically active population (according to the labour force survey data published by the Central Statistical Bureau today), the number of vacancies is rising rapidly. Consequently, businesses increasingly complain about labour shortages.

The number of the employed has been hovering around 900 thousand for the fifth consecutive year. The stagnating number of the employed reflects the tight labour supply. The number of working age population is decreasing gradually on account of negative net migration and the fact that the mortality rate has exceeded the birth rate for a protracted period.

At the same time, labour demand has increased substantially: the share of the employed in the number of working age population has reached its historical high.

With the number of the employed remaining broadly unchanged, the economic development is expected to continue to rely on labour productivity growth also in the future. Therefore, as many businesses are planning to increase the number of their employees by attempting to acquire them from other businesses, the competition among businesses will grow. On an economy-wide scale, this trend will manifest itself in higher wages and salaries.

At least theoretically, the domestic labour resources have not yet been exhausted, e.g. unemployment still exceeds 20% in certain municipalities. In addition, hidden unemployment also exists, and its rate is almost as high as that of the official unemployment. When adding the number of people, who do not actively look for a job or who are employed on a part-time basis and wish to transfer to full-time employment, it can be concluded that the overall unemployment rate, which according to the broadest definition includes both the official and the hidden unemployed, is approximately 15%. More rapid economic growth opens the opportunity for integrating both the long-term unemployed and those not included in the official unemployment statistics into the labour market.

[1] The cyclical unemployment component is positive when GDP lags behind its potential level, and it is negative when GDP exceeds that level. See Discussion Paper 2/2015 of Latvijas Banka: https://www.macroeconomics.lv/discussion-paper-natural-and-cyclical-unemployment-latvia-new-insights-beveridge-curve-model