Wage increase is driven by businesses' need to attract employees
According to the first-quarter data on wages released by the Central Statistical Bureau of Latvia, at the beginning of the year the average wage growth decelerated, whereas wages in the private sector continued rising at a steady pace. This indicates that wages have not yet responded to Latvia's economic slowdown in the first quarter of 2019.
The gross average wage grew by 7.8% year-on-year in the first quarter of 2019. By comparison, the average year-on-year wage growth was above 8% in each quarter of 2018.
The average wage in the public sector is affected by decisions to raise wages in individual sectors. For instance, the wages of medical practitioners, judges and prosecutors were increased in the first quarter of this year. As a result, over the year the monthly average gross wages grew by 6.8% in the public sector overall and by 6.7% in the general government sector in particular.
Meanwhile, based on market principles, wages in the private sector are largely driven by the businesses' need to attract labour and less so by political decisions. On the one hand, competition for employees puts pressure on businesses to raise wages to attract new employees and retain the existing ones. On the other hand, GDP declined in the first quarter of 2019, and the growth rates will continue to fall below those witnessed earlier. Data on remuneration in the first quarter of the year suggest that the private sector saw the most rapid annual increase in the average monthly wages (8.4%). Thus, the strongest impact came from the competition for employees over this period. This is not only due to the desire of businesses to retain and attract employees but also a result of the short-term rigidity of wages. Therefore, the average wage growth is expected to decline, albeit in the periods to come.
While a rise in remuneration boosts the purchasing power of households and improves their well-being, it also poses risks to long-term economic growth. Eurostat aggregated data indicate that the increase in Latvia's labour costs was one of the largest in the EU in the fourth quarter of 2018. Compared with the same period of the previous year, hourly labour costs in Latvia grew approximately four times as fast as those in the EU on average. While labour costs in Latvia remain among the lowest in the EU in absolute terms (euro), the above trend suggests that is becoming increasingly difficult for businesses to compete in the foreign markets with lower production costs, in particular when producing labour-intensive goods and services.
To preserve competitiveness, businesses have to increase their value added and efficiency. They need to find new ways to produce more with the existing employees or to make sure that customers are willing to pay more for their products. This can be achieved by attracting smart, creative and, accordingly, well-paid employees which will use innovations to create goods and services with the advantages of non-price competitiveness. For instance, even though Denmark's average net wages are among the highest and its labour costs are the highest in the EU, the products of Denmark's businesses are also purchased by customers in countries with a lower level of income. This is possible because these businesses create high-value-added products which are in demand and, moreover, can be produced efficiently. High productivity creates preconditions for businesses' capacity to pay higher wages to their employees and invest more in further development of their products.
It is clear that enhancing productivity is not an issue that can be solved in a day or even a year. Moreover, the issue should be considered in view of the developments in education, science, tax policy, etc. At the same time, productivity should be on the agenda of both the private and public sectors.