Swedbank Chief Economist Martins Kazaks

The labour market of Latvia recovers, yet there still are structural challenges to tackle, shows Swedbank economic review.

The situation in the labour market has improved faster than it was expected over the first half of the year; the unemployment rate has been falling since April – the amount of registered unemployed people has dropped. The volume of people currently unemployed has decreased as well due to the emigration and labor market programs.

What is even more important is the fact that in the second quarter, for the first time since mid 2008, growing employment has been registered due to both seasonal work and new permanent job positions creation. Number of job vacancies has also increased, salary reduction process appears to have come to an end as well and the income starts to rise gradually, indicates the chief economist of the bank Martins Kazaks (Mārtiņš Kazāks).

However the specialists point out that despite the improving situation in the labour market – medium-term challenges that will affect the workforce supply and quality are still looming. For example, the increasing duration of unemployment indicates that the situation of structural unemployment worsens. Especially young people are in the worst position – the number of job seekers among 15-24 year old is about twice the labour market average. Young people are also the most mobile ones, which means that they are disposed to emigration; thus the workforce may be lost for a long time or even permanently.

Inappropriate skills for the needs of the market can cause rise in salary levels that are more rapid that productivity growth – along with the development of the economy, demand for workforce grows, which cannot be satisfied with the existing supply, because the unemployed persons lack the necessary skills.

Labour market imbalances may lead to rising inflation in the coming years and create similar competitiveness problems as few years ago. There is a risk to step on the old rakes. They will be smaller this time for sure, yet it is better not to step on them at all. The economists add that in the first half of the year the competitiveness continued to grow, yet it is forecasted that the recovery of it, based on cost reduction, will have to finish. The further recovery process should be based only on the rise in productivity.

The economists emphasize that the lesson of the «bubble» was especially important for the private sector, where the remuneration level should be set depending on the achieved results, in addition it should be linked with the salaries of the sector in order to improve employees’ motivation.

Perhaps immigration policy should be changed in a way it would allow to attract skillful workforce and reduce excessive wage pressure. Favorable tax policy for creating new job positions is very important, namely, lower social security contributions for certain target groups such as long-term unemployed or young people should be clearly limited in time. And the last but not the least – professional and higher education reform has to be implemented in order to ensure that the labour market is supplied with the necessary qualifications.