The Lithuanian Economy

Monthly newsletter from Swedbank’s Economic Research Department

by Ieva Vyšniauskaitė No. 2 • 26 July 2010

Labour market crisis is unlikely to be short lived;

public policy will play a vital part in making the
situation somewhat better
 Despite the stabilisation of economic activity, a visible drop in unemployment
is still miles away. The unemployment rate jumped to a record level of 18.1%
in the 1st quarter of 2010, while registered unemployment statistics during the
summer months show only meagre signs of improvement.

 Employment continues to decline and long-term unemployment is rising

rapidly, reflecting both permanent job losses in industries like construction
and the length of the recession. The persistence of joblessness well into the
recovery shows the urgent need for a more flexible labour market, more
effective retraining programmes, and other proactive policy measures.

 An approaching large wave of emigration will improve the unemployment

statistics. In a couple of years, however, this is likely to lead to labour
shortages and exacerbate the already vast problems present in the social
security system.

Unemployment rate seems to have been particularly affected. Due to heavy layoffs in
stabilised at a high level sectors such as manufacturing and construction,
the unemployment rate for men reached 23.2% in
It would be naïve to expect a visible improvement in the 1st quarter of this year, while for women it stood
the labour market as of yet, given the depth and the at 13.1%.
length of the economic downturn. The magnitude of
the deterioration in the labour market during the first Labour Market Indicators, 1Q 2006 – 1Q 2010
half of the year, however, was still somewhat larger
40% 70%
than expected. The unemployment rate jumped to
18.1% in the 1st quarter, an increase of 2.5% over 35%
the last quarter of 2009. The number of 30%
65%
unemployed rose by 99,500 over the year, reaching 25%
293,400 in the 1st quarter. Employment was 20%
declining rapidly as well, signaling the unwillingness 15% 60%
of the firms to start hiring, while long-term
10%
unemployment increased sharply, raising concerns
5%
about the long-term persistence of joblessness as 55%
0%
the economy starts to recover.
-5% 2006 2007 2008 2009 2010

Most of the adjustment in the labour market, i.e. the -10% 50%
reduction of workforce, work-hours, and wages, Unemploy ment rate (l.s.)
Y outh (15-24) unemploy ment rate (l.s.)
occurred in the private sector. Employment in the Wage growth (l.s.)
construction, mining and quarrying, retail, and Employ ment rate (r.s.)
accommodation service industries were affected the
most, while the number of employed remained
relatively stable in IT and related sectors, as well as
agriculture. Low-skilled workers and youth have

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, 08-5859 1588.
Lina Vrubliauskienė +370 5 268 4275. Ieva Vyšniauskaitė +370 5 268 4156.
 The Lithuanian Economy

Monthly newsletter from Swedbank’s Economic Research Department

Nr 2 • 26 July 2010

Number of employees, 1Q 2010 Unemployment rate by highest education level achieved,

(annual growth, %) 1Q 2004 – 1Q 2010

Human health and social work -0.9 45%

Real estate -1.2 40%
Education -3.6
35%
Public administration -3.8
Inf ormation and communication -6 30%
Agriculture -9.4
25%
Transportation -10.3
Total -10.7 20%
Financial and insurance -12.8 15%
Wholesale and retail trade -13.1
10%
Manuf acturing -14.1
Administrativ e and support serv ice -14.9 5%
Accomodation and f ood serv ice -15.6 0%
Mining and quarry ing -19.6
2004 2005 2006 2007 2008 2009 2010
Construction-30.7
Total Tertiary education
-35 -30 -25 -20 -15 -10 -5 0 Upper secondary education Lower secondary education

Registered unemployment until May this year was The registered unemployment statistics showed
rising sharply as well: the number of unemployed some signs of improvement in June, mainly due to
during March exceeded the 300,000 threshold, and the pickup in demand for temporary employment in
further rose close to 325,000 in May. The increase construction, agriculture, and restaurants, among
in registered unemployment can partly be blamed other sectors. The demand for permanent workers
on the changes in the mandatory social security increased somewhat as well, but it will not be
insurance payment requirements (labour force possible to assess whether this is sustainable in
survey results were also affected, but to a lesser the second half of the year.
extent): according to the new rules, all residents
living in the territory of Lithuania are required to pay
a monthly fee regardless of their employment Job creation will be very slow going
situation. If unemployed, they must register at the forward
Labour Exchange to be exempt. Thus, a large Household expectations regarding employment
proportion of the population, especially those who growth have recently become more optimistic. The
are working informally, are discouraged from likelihood that job creation will significantly lag
looking for work, or have left the country but have behind the pickup in output presents a strong risk,
not so officially declared have now decided to join however, that unemployment will stabilise at a very
the ranks of the unemployed. high level.
Unemployment rate, 1Q 2006 – 1Q 2010 Household sentiment and employment expectations,
25% Jan 2008 – Jun 2010
20 120

20%
80
0

15% 40
-20
10% 0

-40
-40
5%

-60 -80
0% 2008 2009 2010
2006 2007 2008 2009 2010 Consumer conf idence indicator (l.s)
General economic situation ov er next 12 months (r.s)
Women Men Rural areas Urban areas
Unemploy ment expectations ov er 12 months (r.s)
Financial situation of households ov er next 12 months (l.s)

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 The Lithuanian Economy

Monthly newsletter from Swedbank’s Economic Research Department

Nr 2 • 26 July 2010

We are of the opinion that the unemployment rate
st
peaked in the 1 quarter, has stabilized during the
summer months, and will slowly begin receding
towards the end of the year as recovery
commences in the economy. We forecast the
unemployment rate in 2010 to reach 16%, only
slowly decreasing to 15.5% in 2011. Higher than
projected economic growth in 2010 would not,
however, necessarily result in a lower
unemployment rate. Because of the excess
capacity that was created by the downturn, many
companies would first adjust working hours of the
existing workforce before considering hiring
additional workers.
The unemployment rate is only one of the
measures of the drastic deterioration in the labour
market; it does not reflect the involuntary cut in
work-hours, the decline in wages, or the number of
discouraged workers, which is expected to be rising
significantly from now on. In fact, the rise in
discouraged workers could even partly
underestimate the unemployment rate going
forward. Until the end of 2009, the opposite effect
might have been more significant: the
unemployment rate rose somewhat more due to the
“added worker” effect, as some household
members, especially women, chose to enter the
has already occurred and forecast wages to decline
by 5% during 2010.
Job creation will be uneven across sectors going
forward. The demand for labour will first increase in
export-oriented sectors, especially manufacturing
and transport enterprises, which appear to have
started on a firm path to recovery at the end of last
year. Next, some cautious job creation could
become visible in the financial intermediation and IT
sectors. The construction sector, as can be already
seen from the pickup in demand during the summer
months for temporary workers, is likely to slowly
start hiring more labour as well. Despite the
increased need for temporary employment during
the summer months, the deterioration in the labour
market will be much more prolonged in the services
sectors, especially in accommodation, restaurants,
and other domestic demand-oriented industries.
Employment expectations over the next 2-3 months,
Jan 2006 – Jun 2010
80
60
40
20

labour force. 0
2006 2007 2008 2009 2010
Labour costs in selected countries, 1Q 2010 -20
(annual growth, %)
-40
Bulgaria
Romania
-60
Finland
UK -80
Slov enia
Industry Construction Retail Serv ices
Poland
Germany
Portugal
Hungary Youth and long-term unemployment raises
Austria serious concerns
Slov akia
Czech Rep A particularly alarming issue is the disproportionate
Estonia impact of the labour market crisis on youth in all
Latv ia Baltic States. In Lithuania, the youth unemployment
Lithuania rate in the 1st quarter jumped by 6.8% quarter on
-15 -10 -5 0 5 10
quarter and stood at 35.9%. At the onset of the
economic downturn, youth in Lithuania were
already twice more likely to be unemployed than
Wage flexibility has an important role to play in adults. The youth unemployment rate increased by
mitigating the persistence of high unemployment 25.9 percentage points from the end of 2008 to 1st
levels. Lithuanian private sector enterprises were quarter of 2010 while the increase in the adult rate
indeed quick to decrease labour costs last year and was 13.2 percentage points. The government
also continued to reduce costs rapidly in the 1st introduced subsidies for firms choosing to employ
quarter of the year: wages fell by 6.6% year on younger workers, effective beginning this August
year, labour costs declined by 10.5% yoy. However, and valid for two years. Labour market entry for
we are of the opinion that most of the adjustment younger workers, however, is likely to be difficult
during the recovery period, no matter how

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 The Lithuanian Economy
Monthly newsletter from Swedbank’s Economic Research Department
Nr 2 • 26 July 2010
favourable are the government policies, with
negative consequences for the workforce in the
longer term.
Given the effect of the downturn on the labour
market, a large wave of emigration in the upcoming
years, especially among younger, more skilled
workers, seems inevitable. According to the
Eurobarometer survey on geographical and labour
market mobility, Lithuanians rank the fifth among
EU member states most likely to consider working
abroad. On one hand, the looming emigration wave
will improve unemployment statistics somewhat, but
it will also cause a litany of problems, such as aging
of the population, additional pressures on the
already indebted social security system, a likely
decline in innovation absorption, productivity, and
others. The government has recently stepped up its
efforts to attract appropriate investments, with a
lofty goal of doubling FDI in the next five years. This
year, investments from Barclay PLC, Western
Union Com., IBM Corp., and other contracts have
been secured; however, the risk of a paradoxical,
skills-mismatch situation, in which the quality of
labour supplied is inadequate, is increasing.
The number of long-term unemployed rose to
99,600, up from 71,700 during the last quarter of
2009, and from 38,100 a year ago. The rate of
increase in long-term unemployed does not seem to
be subsiding, signalling that a large number of the
losses are permanent and showing the urgent need
for better retraining programs and policies
improving the matching between employers and job
seekers. Those unemployed for 6 months or more
will soon lose (or have already lost) their
unemployment benefits, thereby increasing social
tensions.
Unemployment structure by length of unemployment,
1Q in 2007 - 2010
100%
> 24
months
80%
6-11
months
60%
3-5
months
40%
1-2
20%
months
<1
0%
month
2007 1Q 2008 1Q 2009 1Q 2010 1Q
4 (5)
More proactive labour market policies are
needed to avoid a jobless upturn
Some solace in the current situation can be taken
from the fact that the government appears to have
taken steps aimed at speeding up the possible job
creation process: the decrease in the joblessness is
considered a priority task, and efforts to fight illegal
unemployment have been increased. The
government will subsidise the employment of
younger workers, accelerate the appropriate
retraining of workers and subsidise the employment
of workers who have completed their training and
changed occupations. All these policies will come
into effect in August and will last for two years.
Some of the protected workers’ privileges, such as
the length of the termination notice, were made
more flexible, making it easier and less costly for
businesses to restructure. Especially welcome is
the decision to allow temporary contracts for two
years for permanent positions, without sacrificing
the privileges, such as the right to competence
development and training, which are enjoyed by the
permanent employees.
There has been a call recently by ILO and other
international organizations for improvements in
worker protection regulation and in the conditions
for temporary workers in countries characterized by
so-called dual labour markets. Different policies are
needed for Lithuania, where the share of temporary
employment is extremely small (about 2.5% of the
total, compared with Spain, where the percentage
stands at about 25%), and worker protection
regulation has so far been considered rather
cumbersome. The government can fairly be
criticized only for not adopting some of
aforementioned measures sooner.
Share of temporary employees in selected countries, 2009
(% of total)
30
25
20
15
10
5
0
Sweden
Czech
Poland
Spain
Netherla
Finland
German
Greece
Ireland
Bulgaria
Estonia
Lithuania
Romania
Portugal
UK
Denmark
Belgium
Slovenia
Slovakia
Latvia
Italy
Hungary
 The Lithuanian Economy

Monthly newsletter from Swedbank’s Economic Research Department

Nr 2 • 26 July 2010

Worker protection regulation certainly has its

positive side. In addition to increasing welfare
resulting from higher job security, employment
protection certainly improves the employer–
employee relationships and stimulates investment
in the human capital of employees. This leads to
higher productivity in the longer term, which is also
very much needed in Lithuania. Less flexible labour
markets, however, widen the distance between the
so-called labour market insiders and outsiders. And
most importantly, presently, there are significant
negative side-effects to worsening firms’ flexibility.
Enterprises, especially small and medium-sized
enterprises (SMEs), are likely to be extremely
cautious about increasing employment and
therefore need the greater flexibility in the labour
market to be able to see that restructuring again, if
necessary, is doable easily.

Ieva Vysniauskaite

Swedbank
Economic Research Department
SE-105 34 Stockholm
Phone +46-8-5859 1028
ek.sekr@swedbank.com
www.swedbank.com
Legally responsible publisher
Cecilia Hermansson, +46-88-5859 1588.
Lina Vrubliauskienė, +370 5 268 4275.
Ieva Vyšniauskaitė, +370 5 268 4156
Swedbank’s monthly newsletter The Lithuanian Economy is published as a service to our
customers. We believe that we have used reliable sources and methods in the preparation
of the analyses reported in this publication. However, we cannot guarantee the accuracy or
completeness of the report and cannot be held responsible for any error or omission in the
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
losses or damages, direct or indirect, owing to any errors or omissions in Swedbank’s
monthly newsletter The Lithuanian Economy.

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