Latvian Central Bank governor warns inequality could rise this year

Looking at wage rises in Latvia, a 'two-speed labor market' is emerging, which means a very different growth depending on the demand for specific skills in the labor market, the Bank of Latvia governor Mārtiņš Kazāks told Latvian Television January 3.

Inequality in Latvia has been a painful problem for several years, and the Covid-19 crisis has exacerbated this. It is also expected to continue to grow this year, Kazāks said.

"Targeted support from the government is clearly a good thing, it must be done. But the country cannot give 'a fish' all the time, it has to give a 'fishing rod'," Kazāks said. He urged to work towards improving skills so that residents can earn more by themselves.

Latvia is experiencing a rapid average increase in wages. At the same time, Kazāks pointed out that the situation was very different for different parts of society:

“Unfortunately, a dual nature appears, a two-speed labor market. There are people with very relevant, demanded skills in the labor market for whom wage growth is very rapid, well above inflation. And there is, unfortunately, a share of the population for whom wage rises are much slower or not at all.”

Moreover, for people in the sectors affected by the Covid-19 pandemic, wages may even fall.

At the same time, Kazāks urged policymakers to look at whether productivity is growing fast enough and whether wage growth can be used as an excuse. With wages rising faster than productivity, competitiveness is lost in time and can slow down economic growth.

In order for Latvia's economy to grow rapidly and growth to be inclusive, Kazāks pointed to three things: education, Rīga as the economic capital of the Baltic States, as well as sustainability and the green deal.

As regards inflation, Kazāks said that a small price increase – around 2% – is a good thing but inflation at 8-9% is much too rapid. One of the main risks in this situation may be the “wage price spiral”, which would mean rising prices, resulting in a rise in wages and, accordingly, a rise in prices again.

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