Estonia Cabinet Backs Higher Minimum Wage, Defying Central Bank

Estonia’s government approved a 22 percent increase to the minimum wage over the next two years, defying the central bank’s warning that it may stoke inflation and harm competitiveness in the euro area’s newest member.

The minimum gross monthly wage will rise to 355 euros ($483) in January from 320 euros, and to 390 euros at the start of 2015, the government’s press office said today in a e-mailed statement. The Confederation of Estonian Trade Unions and the Estonian Employers’ Confederation earlier agreed on the increase.

The Baltic country, which became the first former Soviet republic to adopt the euro in 2011, needs to stem accelerating wage growth and housing prices to protect its economy, central bank Governor Ardo Hansson said Nov. 2. Wage pressure, driven by excess labor demand in some regions and industries, is starting to spill over into inflation, he said.

Consumer prices advanced 1.5 percent in October from a year earlier, slowing for a fourth consecutive month from as high as 3.8 percent in June. The impact of rising labor costs on inflation is being offset by one-time effects for now, Hansson said Nov. 22.

A 10 percent increase in the minimum wage this year was among the main reasons for faster wage growth, together with collective pay deals in the public sector and a decline in unemployment, the central bank said in a statement Nov. 26.

Estonia’s average gross wage grew 8.8 percent in the third quarter, accelerating for a fifth quarter. The country’s workers had the fastest pay growth of the EU’s 27 members in the second quarter, before Croatia joined the bloc in July, according to Eurostat data.

Gross domestic product advanced 0.4 percent from a year earlier in the third quarter, the slowest pace since it exited a recession in 2010, as construction slumped and export demand from Finland and Russia weakened.

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