Labour market sends out contradictory messages

On Friday of last week, Statistics Estonia published data on the second quarter employment rate collected during the labour force survey. Messages received from the labour market are somewhat contradictory – employment grew significantly in comparison with the first quarter, but unemployment remained virtually unchanged.

Employment increases, unemployment still at the same level
For some areas of activity, spring and summer are the busiest working times of the year in Estonia. Companies that serve tourists, construction, and agriculture need an extra pair of hands. Therefore, it is customary that employment increases and unemployment decreases during the spring and summer months. This year, these two labour market indicators have not moved together with each other. The employment rate for the population aged 15-74 reached a record level in the second quarter, exceeding 65%; however, at the same, time the unemployment rate declined by only 0.1% to 6.5%. The monthly data from the Estonian Unemployment Insurance Fund regarding registered unemployment even shows an increase in the number of unemployed people in June and July. Should we be worried about the situation on the labour market? At whose expense have unemployment and employment increased?

While unemployment is often depicted as a problem of the periphery, mostly experienced by men, then in the second quarter of this year unemployment has mainly increased in Tallinn and North Estonia, and especially among women. However, employment has mostly increased in North-East, West, and South Estonia, with the latter two having been favourably influenced this year by the rapid growth in domestic tourism. In the second quarter, the employment rate also increased significantly among young men, which indicates an increased workforce demand in areas dominated by men, for example, in the construction sector.
One possible explanation for the increase in unemployment in Tallinn, and the surrounding area, may be the recent rapid growth in salaries. Due to strong competition, the pressure for increasing salaries is highest in Tallinn. Labour-intensive companies where a low salary is paid are vulnerable to salary increases and have therefore started to reorganise their operations in such a way that would allow them to manage with fewer employees. In Estonia, it is mainly women who have gathered into these sectors and jobs where salaries are low. Therefore, the loss of low-paying jobs mainly influences them.

A further decline in the number of unemployed is also slowed down by reaching the so-called “natural” unemployment rate. Even in a very efficient economic environment there are always people for whom there is no suitable job or who do not wish to work at the offered salary level or in the jobs available. Considering the vast changes through which Estonian society has gone during the lifetime of people who are currently of working age, it is not surprising that there are many people who find it hard to find a job due to the lack of appropriate education and experience. According to OECD, the natural unemployment rate in Estonia is above 8%, which means that current level of unemployment is already now below that rate. Helping more people to find a job requires active labour market measures, including training and retraining. As a positive trend, long-term unemployment has declined, i.e. many people who were unemployed for a long period of time have found a suitable job.
All in all, the labour market situation continues to be good and finding a new job, especially in Tallinn and nearby, should not be a problem. Under conditions of high employment the abolition of less promising jobs is rather welcome because it allows people who have lost their job to move into areas in which demand and offered salary are better. The problem is the abolition of jobs in regions where there are not enough possible new employers and thus the danger of falling out of employment for an extended period of time is great.

Moving towards a smarter economy
While the employment rate has reached a higher level than during the economic boom, the question arises of whether the much discussed “structural changes” in the labour market have actually taken place, or more simply stated - whether employees have been added to those areas with a higher salary and better future outlook?

It is difficult to assess whether the changes have been sufficient in terms of scope or speed but, compared to the economic boom, there have been notable relocations in labour structure, with movement in the right direction. When comparing the average level of employment by occupations in 2006-2008 to that of 2014, the percentage of employed people has grown the fastest in occupational, science and technology related activities, as well as in the field of information and communication. The biggest employers in the field of occupational, science, and technology related activities are architectural and engineering bureaus, accounting and auditing companies, enterprises that provide management consulting, etc. In total, the percentage of people employed in this field has increased from 2.9% to 4.3%, and last year 27,000 people were already employed in this field. Another field of activity experiencing exceptional growth is information and communication, which includes information technology and telecommunications enterprises. While in 2006-2008, 2.3% of employed people worked in this field, then by 2014 their percentage had increased to 3.5%. Reformers should be inspired by the fact that at the same time the percentage of people active in the field of public administration has increased from 6% to 7.2%.

In the period of 2006-2008 until 2014 the percentage of people working in the construction sector has decreased the most as a share of total employment - from 11.6% to 9.4%, which is understandable when taking into account what happened when the boom was at its peak. The percentage of people employed in the processing industry has decreased from 20.3% to 18.2%, as well. The decline has mainly taken place at the expense of the clothing and textiles industry, in which more than 16% of the people employed by the processing industry worked during the period 2006-2008. In 2014, this indicator was only 10%. Regarding bigger industries, the percentage of employed people has declined only in the wood processing industry; however, while labour productivity in this field was below the industry average, then this field has now become more productive than average. Larger fields of activity in which the percentage of employed people has increased during the period concerned, are the manufacturing of metal products, the furniture industry, and the food industry.

The further growth of the so-called smart fields of activity depends greatly on human capital - are there enough sufficiently capable people in the labour market? Sometimes it seems like excess demand creates “bubbles” in the labour market, in which a person who is active in a specific field has the chance to earn more than his fair share. Fortunately, IT is an exciting field for young people and the number of people with this education is continuously increasing.

Mihkel Nestor
Economic Analyst, SEB
 

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