Flash comment: Estonia - August 30, 2011: Wage growth surprisingly modest in 2Q

1. Flash comment: Estonia
Economic commentary by Economic Research Department August 30, 2011
Wage growth surprisingly modest in 2Q
Gross wage, annual growth
According to data released today by Statistics Estonia, average
25% monthly gross wage grew by 4.2% in annual terms in the second
quarter; real growth, however, was still negative with -1% reported.
20%
We expected the nominal growth to be higher as well as the real
15% wage decline to be smaller.
10% The fastest increases in gross wage were reported in real estate
activities (11.7%), whole and retail trade (9.8%) and manufacturing
5%
(5.4%). Wage growth in the construction sector was much slower
0% than we estimated – only 3.1%. Our expectations regarding the
2005 2006 2007 2008 2009 2010 2011 construction sector wage growth were higher due to increased
-5%
Monthly wage investment activity and labour shortage in the sector. The latter is
Hourly wage
-10% Monthly wage, real growth impacted by developments in the Finnish construction sector which
Hourly wage, real growth
attracts a lot of construction workers who became unemployed
Construction sector, annual growth during the recession. Although labour shortage is already
40% influencing construction prices (most of the price growth is driven
30% by increasing labour costs), it is not yet visible in the wage
20% statistics. Labour cost index, which is available only for the first
10% quarter, indicates a structural shift in the wage earners or an
0% increase in the shadow economy because (1) labour cost in the
-10% 2006 2007 2008 2009 2010 2011 construction sector declined by 4.3% (by 3% in s.a. data), however
-20%
(2) gross wage nominal growth reached +3%, but real growth
-30%
-2.3%; (3) employment in the construction sector declined by 4.5%.
-40% Real wage Construction v olumes Wage growth in more open sectors was also weaker than expected
Construction prices Employ ment
– real wage grew by mere 0.2% in manufacturing in the second
quarter, pointing to the continuous use of cost advantage edge in
international competition, as most of the production is exported.
However, average wage increased in several service sector
activities, for example real wages in the whole and retail trade grew
for the second quarter in a row, reporting 4.4% in the second
quarter; wage dynamics in this sector are most likely influenced by
strong tourism season outcome as well as tax policies in some
neighbouring countries.
Our current real gross wage growth forecast for this year is around
2% on average; however, in light of these recent data this might be
too optimistic. In addition to lower than expected nominal wage
outcome, there is a risk that inflation might not slow as much as we
currently estimate. In our opinion, wage growth during the second
half of this year will be driven by energy supply, ICT and
construction sector, which will be later followed by other sectors,
including the public sector.
Annika Paabut
Acting Chief Economist
+ 372 6 135 440
annika.paabut@swedbank.ee
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