Wages have been continuously growing faster than productivity for many years in Latvia. This has not had much impact on Latvia’s external competitiveness so far, but we’ve seen signals that this is beginning to change. While export volumes continue rising, our exporters’ market shares stay the same.
Market shares have even decreased in some of the largest trade partners in recent years, warns Swedbank economist Lija Strasuna.
Wages have been growing more rapidly than productivity since the middle of 2012. Although no serious competitiveness problems are expected, Swedbank economists mentioned risks years ago. Declining unemployment levels along with the significant gap between Latvia’s and Europe’s average income levels (and immigration risks) retain pressure on wages. With that, labour costs continue growing but productivity improvements cannot keep up with the powerful wage rise, which leads to weaker competitiveness of Latvian companies.
«Latvia’s export volumes continue growing. Recession in Russia and the embargo have forced Latvian exporters to reorient their businesses to other markets. The rise of exports to Eurozone has become more rapid in 2015. At the same time, market shares of Latvia’s exporters remain unchanged, at least in Europe, where Latvia exports 70% of its goods. The situation varies from market to market. For example, Latvia’s shares in markets of Poland and Germany, two of the largest partner states, have reduced. It should be taken as a warning that Latvia’s exporters are no longer able to compete with more successful competitors,» – explains the economist.
According to her, wages should continue growing, but only unless unemployment starts growing as well. More rapid rise in productivity is one of the main conditions for healthy competitiveness. «Unfortunately, the easy tasks have already been completed and the lowest hanging fruits have been gathered – companies have done what they can to improve productivity and develop new products. But in order to achieve more rapid productivity growth than the current 2-3% and gather fruits from branches higher up, it is necessary to use additional tools to reach them. In other words, it is necessary to carry out structural changes from policy-makers’ side in order to improve productivity and help increase added value growth in current sectors and companies as well as in the development of new innovative industries and companies,» – said Strasuna.
According to her, there is a lot of work in areas like education (commercialization of ideas, making businesses and academic environment closer to one another and stimulating innovations) and taxes.