Wage growth likely to accelerate next year, says Swedbank

Wages are likely to rise at an increasing rate in Latvia next year, Swedbank said November 29 in a commentary on the issue.

"After surging 8.7% in the second quarter, the annual gross monthly wage growth slowed to 7.5% in the third quarter, which is also the average wage growth in the first three quarters of this year," the bank said in response to latest data.

However, wage growth is likely to pick up again next year as labor shortages become more acute.

"The labor market will continue tightening supporting rapid wage growth. Unemployment will stay on its downward path, averaging at 7.5% in 2018 (8.5% in the Q3 2017). The participation rate is already historically high (close to 70%) and cannot grow much more," the bank said.

"The labor shortage is becoming more visible, with the vacancy rate on the rise and companies indicating labor as a limiting factor to business more often. Labor market tightening and growing wages will cause headache to businesses – unless accompanied by productivity gains, the growing labour costs will dent competitiveness. At the same time, growing wages will be good news for households, boosting their confidence and consumption."

The average gross wage growth will be about 7.5% this year, accelerating to around 9% next year after getting an additional boost from the minimum wage hike. Net wage growth will accelerate from about 6.5% this year to more than 10% in 2018 on payroll tax cuts. The purchasing power of households is expected to increase by about 7% in 2018, almost twice as fast as this year, Swedbank predicted.

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