The Estonian Economy

Monthly newsletter from Swedbank’s Economic Research Department

by Maris Lauri No. 2 • 9 June 2010

Unemployment reached its highest level in first

quarter, but recovery will be sluggish
 In the first quarter, employment continued to decline and unemployment
increased, but a cold and long winter had a strong effect on the economy.

 Employment is already increasing due to seasonal factors. Growing exports will

push up nonseasonal employment growth in the second half of the year;
however, it will still remain weak.

 Unemployment is shifting from a cyclical to a structural and thus requires

different policy measures. Education and training are the most appropriate way
to handle structural issues, especially considering the aging and decreasing of
population.

As recently issued data show, the Estonian
economy is broadly developing according to our
expectations: in the first quarter, GDP and
employment continued to decline and
unemployment to increase. Some factors caused
results to be worse then projected – e.g., domestic
demand and, consequently, employment suffered
because of a cold and prolonged winter. However,
there were some positive developments, such as an
increase in exports, industrial production, and
seasonally adjusted average wages. In this report,
we discuss the issues concerning the labour
market, as this also reflects the state of the overall
economy. The GDP-related themes will be the
subject of our next monthly letter in July.
activity of the working-age population (the
seasonally adjusted activity rate increased from
66.2% in the fourth quarter of 2009 to 66.7%) and
weather conditions, which had a negative effect on
not only construction and related industries, but
also on household spending (and, hence, on the
retail sector).
Chart 1. Labour market indicators, 1Q 2005 - 1Q 2010
20%
15%
10%
5%

In our latest Economic Outlook, we forecast 0%

unemployment to reach its highest level in the first 2005 2006 2007 2008 2009 2010
half of this year. In the first quarter it reached 19.8% -5%

(19% seasonally adjusted1) and in non-seasonally

-10%
adjusted terms it will most likely be the highest
figure for now as the official unemployment data is -15%
pointing to a usual seasonal pickup in employment Gross wage, y oy real growth
in the second quarter (see also chart 6) Although Sources: SE, Employ ment, y oy
Unemploy ment rate
the decline in employment continued, its pace Swedbank calcluations.

diminished. Still, the results were somewhat worse

than expected. In our view, there were two main
factors behind this: the surprising increase in
1
Seasonal adjustment by Eurostat.
Activity increase in first quarter was
unexpected
The sharp deterioration of the economic situation at
the end of 2008 increased the activity rate to an
unprecedented 67.4%, but afterwards it started to
decrease as the level was unsustainable (practically

Economic Research Department. Swedbank AB. SE-105 34 Stockholm. Phone +46-8-5859 1000.
E-mail: ek.sekr@swedbank.com www.swedbank.com
Legally responsible publisher: Cecilia Hermansson, +46-8-5859 1588.
Maris Lauri, +372 6 131 202. Elina Allikalt, +372 6 131 989. Annika Paabut, +372 6 135 440.
 The Estonian Economy

Monthly newsletter from Swedbank’s Economic Research Department, continued

Nr 2 • 9 June 2010

all the working-age population able to work started persons is very small; hence, the error might be
to look for a job). In addition, the number of relatively large).
discouraged people and students increased too.
However, the beginning of 2010 reversed some of The activity rate will start to decline, thus affecting
those tendencies: the number of discouraged unemployment figures, but one-off increases are
people fell sharply (over one-third from the level in possible as well.
the fourth quarter, and a smaller but important
decline was seen in the number of those studying Developments differ strongly among
(8.5% quarter on quarter). Moreover, contrary to sectors
expectations, the number of retired persons The primary sector (agriculture, forestry, mining,
decreased despite the general aging process. etc.) covers 5.5% of total employment and has
largely maintained its position throughout the crisis:
Chart 2. Active population, 1Q 1996 - 1Q 2010
as of the first quarter of 2010, employment
69% 720 increased by 4.7% year on year; however, it has
68% 710 fallen by about 8% in total compared with the latest
700 economic peak.2 The annual growth is mostly the
67%
690
result of employment growth in mining and
66% quarrying, and probably in forestry, which are
680
65% enjoying earlier recovery from the crisis and
670 benefiting from electricity export growth. But the
64%
660 slow downward trend will inevitably continue as the
63%
650 sector becomes more technology oriented.
62% 640
61% Chart 4. Structure of employment, 1Q in 2007 – 2010
630

60% 620 100%

Priv ate
1996
1997
1998
1999

2000
2001
2002

2003
2004
2005
2006
2007
2008

2009
2010

90% serv ices

80% Public and

Source: SE. Activ e persons, thousand (rs) Activ ity rate (ls)
social
70% serv ices
Domestic
Chart 3. Nonactivity reasons, 1Q 2000 – 1Q 2010 60% trade
(Thousand) 50%
Transport
180 40%
170 30% Const-
ruction
160 20%
150 Industry
10%
140
0% Primary
130 1Q 07 1Q 08 1Q 09 1Q 10 sector
120 Sources: SE, Swedbank calculations.
110
100 The industry sector (including manufacturing,
90 energy supply, etc.) now employs 19.3% of all
80 workers, having slashed jobs by almost 24%, or
34,000. Data show that the biggest job cuts during
2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2008 and 2009 were made in the textile and

Source: SE. Retirement Students Other clothing industry (over one-third), in wood and
timber processing (the crisis started there a year
Reasons behind the increased activity rate might be
(1) the cold winter and higher heating bills, which
encouraged people to look more actively for jobs;
(2) the somewhat better position of older workers in
the labour market, due to higher qualifications and 2
We consider this to be in the second quarter of
modest wage demands (the unemployment rate for 2007, although it varies between sectors.
ages 50-74 is 13.5%); and (3) a survey error on Comparisons with that period are made on a
detailed levels (e.g., the number of discouraged seasonally adjusted basis.

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 The Estonian Economy
Monthly newsletter from Swedbank’s Economic Research Department, continued
Nr 2 • 9 June 2010
earlier, so the total decline has been 36% since
2007), in metalworking (about 30%), in different
chemical industries (which only began to suffer from
falling demand in 2009), and in the production of
transport equipment. However, employment
continued to increase not only in companies
producing electronics, and other machinery and
equipment, but also in paper processing and related
industries. Still, those industries employ a relatively
small number of workers, and very few of them
were untouched by the fall of global demand in
2009. The main exporting sectors are expected to
start increasing employment already this year, and,
besides the above-mentioned industries, the
production of transport equipment, wood and timber
processing, and the food industry may be among
those hiring more workers, as export and
production figures improve. The production volumes
in those sectors are close to or above pre-crisis
level; with diminished jobs during 2008-2009, (and
increased productivity), the need to increase
employment becomes clearer. Several companies
in those sectors have already done that.
Quite expectedly, the biggest slash in employment
has been in the construction sector: 47% from the
peak or almost 40,000 jobs. Still, the process has
been slower than we initially expected, as the mild
winters of 2007-2009, relatively strong external
demand (construction works abroad were up by
127% in 2009 from 2007), and public sector orders
softened the inevitable contraction in this sector. As
public sector orders fell and winter conditions
limited construction works, more people lost their
jobs. Still, we expect some improvement in summer
(supported by infrastructure construction) and also
at the end of the year, as some new real estate
developments are planned.
Employment in the transport services sector has
been relatively stable in comparison with 2007. The
crisis affected mostly road transport enterprises,
while Russian export-transit flows increased,
allowing Estonian companies to increase
employment. Slow employment growth in this
sector is expected to continue in the mid-term
perspective; however, there is still ample room for
increase in efficiency. In addition, there are
uncertainties regarding how the opening of the road
transport services market in the EU will affect the
Estonian transport companies.
The peak in employment in domestic trade
companies was reached at the end of 2008 and has
since fallen by more than one-fifth (about 22,000
jobs). The job cutting in this sector might continue
(excluding the seasonal pickup in the summer) as
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household demand has remained weak; some
improvement is probable only at the end of the year
at the earliest.
Employment in the public and social services sector
(including education, health, etc.) has been rising
despite budgetary restraints. This has occurred
mostly because many public sector institutions were
still increasing employment in the early phase of the
crisis: after budget cuts were introduced in mid-
2009, cutting wages was generally preferred over
cutting employment. In addition, there was also
some job creation in the public sector last winter. As
of now, a further increase in public sector
employment is very unlikely.
Chart 5. Gross monthly wages, 1Q 2006 – 1Q 2010
(Annual growth)
30%
25%
20%
15%
10%
5%
0%
2006 2007 2008 2009 2010
-5%
Total
-10%
State
-15% Local gov ernment
Estonian person in priv ate law
Source: SE. Foreign person in priv ate law
The employment level in the remaining sectors (i.e.,
private services) has been quite stable for more
than half a year, as the biggest cuts were made
mostly during 2009. As this sector includes many
small subsectors, its employment data are
fluctuating strongly; nevertheless, one can see that
the accommodation, catering, financial, and
business-supporting services, as well as different
leisure-time services, have cut employment during
the past six-nine months the most. Further cutting is
possible in some spheres, but it will not be very
significant. Sectors that are well situated in respect
of external competitiveness (e.g., ITC and R&D) will
most likely increase employment already this year.
In conclusion, we foresee that, besides a seasonal
increase of employment during the summer,
exporting sectors will start (and some companies
already have) to hire more people this year, mostly
in the second half, when the possibilities for
increasing the working hours and workload of
 The Estonian Economy

Monthly newsletter from Swedbank’s Economic Research Department, continued

Nr 2 • 9 June 2010

existing workers will have been exhausted. As the economy has stabilised and begun to show
However, employment growth will be slow. signs of recovery, unemployment is becoming
increasingly long term, as new jobless claims
Chart 6. Registered unemployment and job vacancies, 24th decline. This process clearly indicates that cyclical
week 2009 – 22nd week 2010 unemployment is transforming into structural
(3-week averages)
unemployment. Structural unemployment bears
3,000 high direct and indirect costs for the economy and
society as it leads to higher social spending and
2,500
falling tax revenues.
2,000
Chart 8. Structure of unemployment, 1Q in 2005- 2010
1,500 100% 25%
> 24
90%
1,000 months
80% 20%
500 12-23
70%
months
0 60% 15%

2009 W24 2009 W34 2009 W44 2010 2010 W11 2010 W21 50% 6-11
Vacancies in Estonia Vacancies in abroad months
40% 10%
New unemploy ed
Source: Estonian Unemploy ment Insurance Fund. 30%
<6
20% 5% months

10%
Unemployment becoming more structural Unemp-
0% 0%
The characteristics of unemployment in Estonia are loy ment
1Q 05 1Q 06 1Q 07 1Q 08 1Q 09 1Q 10 rate, rs
very similar to those in other countries: the most
Sources: SE, Swedbank calculations.
affected are people with lower qualifications and the
younger generation. For the 15-24 age group, the
unemployment rate reached 40.6% in the first Average wage increase in first quarter due
quarter; for the 50-74 group, it was 13.5%; and, for to structural change in employment
the rest, 19.3%. However, Estonian unemployment
Contrary to expectations, gross monthly wages
is much higher among men than women: for the
declined only by 2.3% and hourly wages by 2.7%
former, the unemployment rate is 25.2%, including
on a year-on-year basis in the first quarter. This
26.9% in towns. The reason is that the crisis
means that both measures increased in seasonally
affected mostly sectors where traditionally male
adjusted terms (0.8% and 0.4%, respectively). As
employment dominates, viz., construction, and
base wages and bonuses were not increased, but
related manufacturing industries.
rather cut, only a structural change in employment
can be behind this growth. It means that higher
Chart 7. Unemployment rate, 1Q 2004 – 1Q 2010
qualifications (and higher wages) are now taking
30% bigger shares in than in the past. This is explained
for example with the fact that as of the first quarter
25%
of 2010, the share of blue-collar workers had
declined to 52.6% from 54.5% a year earlier and
20%
55.5% two years ago.
15%
Monthly wage declines may accelerate in the
second and third quarters as many employees in
10%
the public service sector will have unpaid vacations
(see above). This structural shift affects the average
5%
gross wage level in 2010, but an actual increase in
payments is expected only in 2011.
0%
2004 2005 2006 2007 2008 2009 2010
Urban settlement Women
Source: SE. Rural settlement Men

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 The Estonian Economy

Monthly newsletter from Swedbank’s Economic Research Department, continued

Nr 2 • 9 June 2010

Chart 9. Wage growth, annual growth (n.s.a. and s.a.) increase in the flexibility of labour market,
(seasonally adjusted) encouragement of businesses, etc. However, the
25% tight budget situation makes it difficult to find the
appropriate policies to implement. As of now, very
20% strong efforts should be made to ensure that
unemployed with inadequate education/training
15%
levels will have the opportunity to improve their
10%
education and training. While much has been done,
a more flexible approach (e.g., allowing people to
5% acquire new professions instead of just adding
higher qualifications) is needed, so that those
0% previously working, for example, in construction can
2006 2007 2008 2009 2010 find jobs in sectors with a better growth outlook.
-5%

The structural unemployment might become the

-10%
quarterly growth
Source: SE; s.a. by Swedbank. annual growth
Structural unemployment requires different
policies
The policies meant to handle structural
unemployment are far different from those geared
towards cyclical unemployment: the former are
more costly and time-consuming, and have more
facets. As a result, politicians are not so motivated
to work with these issues, particularly in the face of
elections where short-term and immediate-effect
policies are preferred. The general approach is
repeatedly mentioned by analysts (and often by
politicians themselves), viz., education, training, an
biggest medium and long-term risk for the Estonian
economic development, because together with
declining population the number of active people
will decline too, but the costs of structural
unemployment are high. Economic growth will be
difficult to obtain even on its own, and high
unemployment would mean even higher costs.
Furthermore, if unemployment remains high in a
shortage of labour situation, (as the qualification of
unemployed do not match with the demand), the
wage growth will pick up again leading to falling
productivity, as was seen during the latest boom-
years.

Swedbank
Economic Research Department Swedbank’s monthly newsletter The Estonian Economy is published as a service to our
SE-105 34 Stockholm customers. We believe that we have used reliable sources and methods in the preparation
Phone +46-8-5859 1028 of the analyses reported in this publication. However, we cannot guarantee the accuracy or
ek.sekr@swedbank.com completeness of the report and cannot be held responsible for any error or omission in the
www.swedbank.com underlying material or its use. Readers are encouraged to base any (investment) decisions
on other material as well. Neither Swedbank nor its employees may be held responsible for
Legally responsible publisher
losses or damages, direct or indirect, owing to any errors or omissions in Swedbank’s
Cecilia Hermansson, +46-88-5859 1588
monthly newsletter The Estonian Economy.
Maris Lauri +372 6 131 202
Elina Allikalt +372 6 131 989
Annika Paabut +372 6 135 440

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