Wage growth remains moderate
Wage growth remained moderate in Q4 2013 (4.8% y-o-y), not creating inflationary pressures and disproving the worry about competitiveness may be diminishing.
The Latvian economy now is at a macroeconomic balance, evidenced by several factors: the output gap is close to zero, unemployment is close to its natural rate, the average wage matches productivity (see Figure).
The main goals of macroeconomic policies are, first, to move faster along the balanced frontier (in the coordinates of wages-productivity, it means that both productivity and wages are growing more rapidly) and second, to minimize cyclical departures from the macroeconomic balance (so that the departure of wages from the equilibrium level determined by the labour productivity would be minimal at any time).
The rate of sustainable development of an economy can be raised with fundamental factors, e.g., investment in more powerful production equipment, better infrastructure, higher quality education and healthcare, more modern technologies and more efficient work organization.
Achieving the second goal of macroeconomic policies is also not endangered: it can be expected that in the future as well the Latvian economic situation will remain close to the macroeconomic balance, including real wage rise being mostly based on increased productivity, thus not threatening competitiveness and not creating a substantial pressure on inflation.
Figure. Productivity by hour worked and index of real wages (historic average =100; seasonally adjusted data)
Source: CSB data, author's calculations
*4Q 2013: provisional productivity data