The Euro-Area Countries Where Rising Pay Is the Problem

Wage growth in the Baltic nations is outstripping efficiency gains
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As the euro area struggles with low pay growth, hindering its drive to regain price stability, the northeast corner of the currency bloc is facing the opposite problem.

Wage growth in Estonia, Latvia and Lithuania is near its highest since the last boom-bust cycle a decade ago, outstripping efficiency gains. Nominal unit labor costs have jumped more in the Baltic nations than anywhere else in the European Union during the past three years, according to recent data from the European Commission.

“The export sector is particularly sensitive to labor costs outpacing productivity because in a global market they risk losing contracts,” said Tadas Povilauskas, an economist at SEB Bank in Vilnius,. “There needs to be more flexibility, more openness to attracting people from third countries, a stronger boost in labor skills, or otherwise we risk facing serious questions for economic growth.” 

The tiny countries, home to just 6.2 million people in total, are feeling the effects of a labor shortage that’s swept across ex-communist Europe. While salaries are rising quickly as a result, wages still fall well short of what workers can find if they head to the continent’s more affluent west. Emigration from Lithuania is the EU’s quickest, contributing to a 16 percent plunge in the population since it joined the bloc in 2004.

Risks to competitiveness are the latest headache for the Baltic region. Rapid economic expansion has already prompted some officials to recall the days leading up to the crippling recession that followed the 2008 global financial crisis. And inflation in Lithuania and Estonia is the EU’s fastest, with all three nations now members of the euro region and unable to tilt monetary policy to contain it.

While salaries are surging in some industries, other jobs are simply going unfilled. At least 40 percent of Latvian companies are struggling to find workers, with the most acute shortages in manufacturing and construction, according to a September report by local lender Citadele Banka. 

Accepting greater inflows of immigrant workers could ease the labor shortage. Neighboring Poland has taken in more than 1 million Ukrainians to ease its own dearth of workers. While the Baltic countries have been less than enthusiastic to adopt similar tactics, necessity may change that stance.

“While checks on construction sites used to mainly uncover our own citizens working illegally, now it’s more and more people from Ukraine and other countries,” Rivo Reitmann, deputy head of the Tax and Customs Board, told the Aripaev newspaper last month. Companies in many industries are now urging the government to ease immigration quotas, he said.

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