OPINION | Latvia’s labour market is being crushed

Pēteris Strautiņš, Luminor Bank economist
Labour market data for Q3 2023, when compared to Q2, shows that nothing has changed in any significant way – not the unemployment level, not the employment level, and not the number of employed people. However, it can be said that the situation has worsened slightly regardless.
The unemployment level went up by 0.1 percentage point in a time when it should have gone down because of seasonal factors, reaching a total of 6.5%. Compared to Q3 2022 the number of employed people in Latvia has gone down by 8.6 thousand. This can be considered a notable change – but it’s only one percent form the total number.
Unemployment went down by 0.4 percentage points over the course of the year – but this is because the number of economically active residents went down by 15.3 thousand people due to lasting demographic processes.
In many ways, the data for the third quarter resembles the previous quarter – because unemployment remained unchanged in a time when it should have gone down due to seasonal changes. In reality it can be said that it even went up slightly. There is reason to expect

moderate downturn in the labour market will continue at the end of the year

and the first half of next year. There are concerns that unemployment may go up considerably locally – in certain regions, cities and even regions. This year industrial output went down by 4-5%. Next year, however, this sector is expected to have either stagnation or even slight growth. This is why there is a risk of unemployment going up in regions in which industrial economy plays a major role. The main reason for the drop in manufacturing output is the crisis in the European housing market. This affects Latvia’s economy the most directly through woodworking. The jobs it creates are often concentrated in locations where there are few other job opportunities.
A moderate risk for employment also comes from the echo coming from this year’s rapid wage growth. In the first half-year wage growth was 12%. The year’s general wage growth rate will definitely be above 10%. The acceleration of wage rises is an echo of last year’s strong 16.2% GDP jump. There was a healthy real GDP growth, as well as a less healthy price increase, which has a beneficial effect on the turnover of companies.

Latvia’s GDP will grow very slowly in monetary terms next year.

The real increase will likely turn out below 2%. The impact of price changes will be close to zero. This also means turnover of various businesses will go up slowly. This will make many feel the pressure of this year’s rapidly growing wage fund on profitability. Some companies will try to overcome this situation with patience and savings formed in previous years, because it will be difficult to recover laid off employees.
However, some companies, especially in the goods sector, may be forced to lay off employees. There is no reason to expect an employment crisis – service industries will have both better performance in real terms and more favourable price dynamics. Thus, the market situation for workers will be more favourable in the part of Latvia where unemployment is already the lowest, that is, in the capital and its immediate vicinity. Service industries play a particularly important role here.
It is possible the labour market will be crushed from different sides at the end of this year and next year. Employment will be impacted by the commodity export crisis and rising wage costs, the interaction of which could lead to a slight rise in unemployment. However, companies looking for employees will not feel very comfortable. The impact of demography will not disappear, the shortage of employees will not geographically coincide with the shortage of jobs.
This means the media will reports lots of controversial complaints. The general welfare of employed people will improve as real wages continue going up. But will be available in statistics, because it is not accepted in Latvia to say out loud that things are going well.
Also read: Latvia among 14 European countries with a drop in exports
Follow us of Facebook and X!