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The Latvian economy continues to experience a rapid rise in wages and the average wage in Latvia has exceeded the € 1,000 before tax for the second consecutive quarter, while, according to my predictions, the average salary in Latvia could already exceed € 1,100.
In the third quarter, according to data published by the Central Bureau of Statistics, the average wage in Latvia increased by 8.0% in one year and rose to 1006 euros. This means that the average wage in the hands of Latvia has reached 744 euros and similar wage growth is similar in the other Baltic states as well as in other Eastern European countries. Regarding wages, Lithuania is still ahead, with an average salary of 936 euros in the third quarter, but it is still lagging behind Estonia, where it is already around 1,300 euros.
From a sectoral point of view, wages are currently rising in almost all sectors, except for finance, where they remained at the same level as the previous year. The fastest increase is currently seen in the health care sector, where wages and salaries grew by 15.9%, largely due to the addition of budget funds to the sector. In other sectors, in general, wages tend to increase more rapidly in sectors where average wages are lower. For example, in the accommodation and food services sector, average employment increased by 11.6% and other services by 10.7%. This is good news because the average salary is a very general indicator of a relatively small number of people. It is therefore important to reduce the number of low wage earners. In addition, strong wage growth is also observed in the information technology and manufacturing sector, where average wages increased by 8.4% and 9.2% respectively. Surveys of Citadele Index entrepreneurs show that these sectors are also the most difficult to find a job.
Strong wage growth is now linked to generally favorable economic conditions, the still high income gap with Western Europe, the decline in the working-age population and one of the lowest unemployment rates. over the past 30 years, as well as changing the structure of the economy. Over the last three years, the highly-paid information technology sector has created about one-third of all new jobs in Latvia, although the sector accounts for only about 3% of the economy.
These factors suggest that wage growth in Latvia will not change in the near future, although next year growth rates will be slightly lower than this year, as there is no expected increase in the minimum wage and that economic growth will likely be slower. The situation on the labor market is changing rapidly nowadays and when there will be a shortage of jobs since the restoration of independence in Latvia, it will turn in the short term into a shortage of labor. The work and demographic projections suggest that this situation will not change in the next 10 years. Therefore, according to my forecasts, the average salary in Latvia could increase by 7.5% and should exceed 1100 EUR at the end of 2019.
This is good news for workers and it will boost domestic consumption, but wage growth continues to outpace productivity gains and entrepreneurs' ability to earn a living. This implies a gradual increase in domestic service prices, while firms and exporting industries face a major challenge in maintaining their competitiveness. For economic models whose competitive advantage lies in low wages, the expected wage growth could prove to be unjustified in the years to come. Therefore, unless unforeseen global shocks, the job market will be the biggest challenge of the Latvian economy in the coming years.
The current wage increase is sufficient to reach the European average around 15 years. At the same time, can the question be able to contain it? Private investment in Latvia is currently very low, investments in research and development represent well under 1% of GDP and, in terms of quality of education, we are only at about the average level OECD countries. Such an economic model will probably not be enough to maintain the current rate of wage growth without provoking a new crisis.
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