Opinion of Luminor Bank chief economist Pēteris Strautiņš.
Wage rise in Latvia slowed down considerably at the start of 2022. While in Q4 2021 wages grew by 12.3%, in Q1 of 2022 wages grew by only 6.9%. Latvia concluded 2021 with the most rapid wage climb in the Baltic States. Now it’s the slowest. This is largely the fault of the decision to not increase wages in Latvia this year, which is a political mistake.
Political decisions have slowed wage growth in other ways as well. Aside from «other services» sector, where a wage drop was registered, the slowest wage rise was observed in education (3.9%), which is a sector primarily financed from the state budget. Wage rise was below average in state administration (4.9%). Both sectors have a large number of employees and therefore influence on the general result. The third weakest rise was in construction (+4.4%). This sector is largely dependent on state construction orders.
This seems slightly surprising because this sector was previously expecting to overheat. It is possible companies were forced to limit wage rise because of a sharp and unexpected material price rise.
As for positive factors, the main engines that drive wage growth are exports of services and the decision to lift restrictions on gatherings. The most rapid wage growth was observed in professional and technical services (+15.1%). Wage rise was considerably higher than average in information and communication services (+9.6%).
Detailed data regarding exports of services for Q1 will arrive in a couple of days. Data available for previous months allow for the assumption that the rise of exports of business and programming services has been very strong so far. These sectors are very obviously concentrated in Riga and its surrounding areas. This is why the wage rise in the capital city (+7.5%) exceeded the average rate in the country. Wage rise in Pieriga was also slightly above average (7%).
Wages increased the slowest in Zemgale (+4.1%), followed by Latgale (4.5%).
Unfortunately, the near future does not promise anything good for Latgale – the expected transit drop will affect people employed by Latvian Railway in the region (29% of the company’s jobs are in Latgale). The decision to cut ties with former USSR markets will also have a very strong effect.
Aside from Riga and Pieriga, wage rise was also considerable in Kurzeme, where strong development of manufacturing powers was observed. In Liepaja, for example, processing industry’s turnover increased by nearly 40% at the beginning of the year. This way speeding up the average wage rise in the region is unavoidable.
Among the sectors with the highest wage rise are two sectors that suffered the most during Covid-19 pandemic – art and entertainment (13.6%), public catering and accommodation (13.3%). Although in Q1 these sectors were in a state far from ideal, their operational environment was better than its was a year ago and it is expected to continue improving.
Public utilities and energy sector also demonstrated rapid wage growth (+14.5% and +2.6% respectively).
A surprisingly rapid wage growth was observed in financial services (+11.5%). For several years wage rise in this sector was below average, because the number of employees in it was reduced due to introduction of new technologies and the narrowing of exports of services. It is possible Q1 may turn out an exception dictated by increase of the variable part of wages.
While in the previous decade the nominal wage growth also meant increased purchasing power, this year the situation is different and price rise will exceed income growth. After that Latvia can hope for a period of rapid real wage growth, because global raw material price rise will have a counter effect. It is also possible Latvia may experience a deflation episode in the coming years. But the country needs to make it there first, because while in US and EU there is room to consider stabilisation of inflation, Latvia needs to wait longer. Sooner or later, however, purchasing power in Latvia will recover.