Wage increases continue to keep up the pace

Latvian central bank economist Andrejs Migunovs provides analysis of current trends in the wage and labor market.

The growth rate of wages has returned to the game and since early 2023 has been trying to catch up on everything that was missed a year ago succeeding so far. According to the Central Statistical Bureau of Latvia, in the second quarter of 2023, the average wage increase reached 12 % year on year.

One of the main reasons behind the wage rises seen in the second quarter of 2023 is the persistently high inflation of the previous periods that only started to find reflection in wages in the respective quarter a year ago, and the process has not yet ended.

However, inflation has dropped markedly and therefore already does not reduce the purchasing power of households – the annual growth rate of wages has somewhat outpaced the rise in prices observed in the second quarter of 2023. This suggests that the average purchasing power of Latvian employees started to rise again.

The labor market has also been relatively tight in this period, thus stimulating the competition among employers and encouraging them to raise wages since, with the labor supply contracting, the replacement of labour requires even more resources. Moreover, the effect of the increase in minimum wages observed in early 2023 has not disappeared either.

As the economic growth decelerated in the second quarter of 2023, businesses might become more cautious in the future and start consolidating their expenditure of which wages are a key component. This could also reduce the pressure on the rate of wage growth.

However, at the same time, the remuneration scheme reforms in the public sector that might alleviate skilled labor shortages through raising wages are currently under discussion. For instance, one of the national priorities is the wages of teaching staff to which additional funding will be allocated at the beginning of the 2023–2024 academic year.

Although currently wage increases have almost caught up with inflation that will continue to decline in the future, it will still take some time for households to recoup the purchasing power lost since the beginning of 2022. The fact that real wages will no longer decrease is already a positive step towards a more prosperous future.

This commentary was first published on the Latvian central bank's dedicated English-language news and analysis website, where you can find all the latest data and forecasts: https://www.macroeconomics.lv/

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