Estonia Needs to Slow Minimum-Wage Increases, IMF Official Says

  • Productivity, exports threatened by wage growth, Klingen Says
  • Estonian central bank sees better non-price competitiveness

Estonia has to increase its minimum wage more slowly after 2017 to avoid eroding its competitiveness, the head of the International Monetary Fund’s mission to the Baltic country said.

Decelerating productivity growth and weaker export expansion show that Estonia can’t afford to continue with increases like those agreed last week, for a 10 percent bump next year and 9 percent in 2017, the IMF’s Christoph Klingen said in an interview in Tallinn on Monday. The monthly minimum wage, at 390 euros ($441), is negotiated between trade unions and employers, with the government holding the right to veto.

“You see productivity growth being negative,” Klingen said. “You see export-market shares, which used to be on a rising trend for the longest time in Estonia, now flattening out. So that kind of tells you that the point where it becomes problematic and where it leads to a loss of competitiveness is not very far away.”

The country’s recovery from its record recession during the global financial crisis has been held back by weak export demand from recession-hit neighbors Finland and Russia since 2013, while labor costs in the nation of 1.3 million have grown at the European Union’s fastest pace in the past two years, according to Eurostat data. Estonian entrepreneurs have improved their competitiveness in the 28-nation bloc’s market based on other factors, central bank Governor Ardo Hansson said at a conference Sept. 30.

The Estonian government also needs to make boosting productivity a priority by setting up a unit similar to those in New Zealand and Australia that would set clearer targets instead of “sometimes contradictory” strategies on the ministerial level, Klingen said.

Productivity, Exports

Nominal unit labor costs, or the ratio of wages to productivity growth, rose 6.5 percent in the first quarter, the most since 2008, followed by a 4.6 percent increase in the second quarter, according to the national statistics office. Even as Estonian exports of goods and services exceeded global market growth by 2.1 times in nominal terms in 2000-2013, the performance leveled out after 2011, according to the central bank’s competitiveness report, published in March.

While the minimum wage was unchanged for four years after 2008 as the economy contracted by a fifth over two years, it has risen 34 percent since 2012. This compares with a 19 percent gain in the average monthly salary, at 1,082 euros in the second quarter. Last week’s wage deal emerged in a compromise proposal by a state mediator after the initial union demand for 25 percent raises in each of next two years had deadlocked the talks.

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