Analyst: Estonian low wages have become a long-term risk

26.11.2012, 12:00

Former Swedsbank macroanalyst Maris Lauri wrote in Äripäev last week that Estonia’s stubbornly high unemployment and lack of available workforce is starting to restrict growth.

This is a structural problem, and these are not easy nor cheap to solve. The good news is that this could be Estonia’s chance because most of Europe does not want to admit right now that any changes are necessary.

In market economy, demand and supply are adjusted  through prices.  This is true for all prices, including wages. If employees are unwilling to do the work for a certain wage level, employers must pay more.

Usually entrepreneurs dislike this option because they see it as weakening their competitiveness.

In fact, companies have two options in such cases: to make production more competitive or to stop doing it altogether. Companies that want to survive must constantly change and if some activitity or product is no longer profitable, it must be given up.

Estonian people no longer want to work for peanuts and are actively searching possible employment in Finland and Sweden.

Low salaries are no longer Estonia’s competitive advantage – they have become a long-term risk for the Estonian economy because the rise in the price of primary goods and services has cut into real income of most salaried employees.

Wages offers that do not cover minimum needs go unnoticed because there is a clear alternative to unemployment: to go work in Finland.

At the best case this is a temporary solution, but if wages offered at home do not improve, people will leave and take their families with them.