T. Šiaudvytis: Wage growth continues at a robust pace
According to Statistics Lithuania, the average wage in the third quarter of 2018 amounted to €935.7, a year-on-year increase of 10%. Such rapid growth has been fuelled by increasing labour shortages and, although to a lesser extent, government decisions on taxes, the minimum wage, healthcare and education reforms.
Tomas Šiaudvytis, Senior Economist at the Macroeconomics and Forecasting Division of the Bank of Lithuania
Based on data collected by Statistics Lithuania, the unemployment rate in the country now stands at roughly 6%. Such rate was last seen in mid-2006, when the economy was clearly booming. Due to a fall in unemployment, many employers are now facing difficulties in finding workers and often have to attract them from other companies. To do that, firms have to offer increasingly higher wages. However, labour market developments are heterogeneous across regions.
Last year the unemployment rate in Vilnius, Kaunas and Klaipėda – the largest cities in Lithuania – stood at 3.8%, the same as at the peak of the boom years of the previous decade, while unemployment in the rest of the country was roughly 9% – double the rate recorded during last decade’s economic upswing.
There may be several reasons behind such developments. First, areas outside the major cities have long faced a rapid decline in the working-age population which, in turn, led to waning customer numbers, a slower economic growth and, finally, subdued demand for new employees. In addition, firms often cannot find workers with the right skills, for example, a significant proportion of the unemployed in rural areas are older, less fluent in English, or less tech-savvy.
Nevertheless, in terms of wage growth the gap between the largest cities and the remaining part of the country is very narrow. This can be partly explained by migration. Areas outside the major cities encounter both high levels of youth emigration to other countries and migration to the biggest cities in Lithuania. Therefore, small-town businesses have to compete for employees not only with other local businesses, but also major Lithuanian cities and Western European countries, which might serve as an incentive to boost wages. Another possible reason might be the rapidly rising minimum wage. Since wages outside the major cities are lower, the minimum wage increase there has a greater impact on wage growth. Other government decisions are also a contributing factor: in addition to the minimum wage, which now can be paid for unskilled work only, the floor for social security contributions has also been introduced.
This year, a significant change in wage dynamics has been observed in the public sector. After a prolonged period of slower growth compared to the private sector, in the third quarter of 2018 wage growth in the public sector even outpaced that in the private sector. This was driven by government decisions to substantially raise wages for workers in healthcare and higher education, which in the first half of the year increased by 17.4% and 23.1% respectively. It should be noted, however, that public administration bodies (ministries, their subordinate institutions, etc.) have not seen such wage increases.