Estonia Unemployment January 2008

According to data released last week by the Estonian Labor Market Board there were 15,758 people registered unemployed in Estonia in January, and this was a rise of 11.7 pct compared with December. Now looking at the data for last year it is not unusual that unemployment should rise from December to January, but if you look at the chart you can see that unemployment touched a low in June, and since then has been steadily rising. In fact there is a 27% rise on the level of January last year.

Of course, as the Estonian economy slows this increase in unemployment is hardly surprising, but if we follow it as the slowdown deepens it should give us another measure of the extent of things. The difficulty is - in macroeconomic rather than human terms - that due to the very constrained Estonian labour market, and the low level of arrival of young people into the market, registered unemployment may not rise anything like as rapidly as demand collapses. This presents a difficulty, since it means that prices may not be able to adjust as quickly as they should (in the literature this is called "sticky prices"), thus making it difficult for the economy to adjust, and hard to "bleed" inflation out of the system. This is a technical problem, but its impact is real enough. The consequence would be the the recession would be longer and deeper than necessary (as we are beginning to see in Hungary) as domestic prices deflate back - by whichever is the preferred method of the Estonian authorities, real wage reductions or currency adjustment - to internationally competitive levels. This is important, since given the extent of the recent "excesses" and the impact of the correction on domestic demand when coupled with the population ageing component, it seems pretty clear that there will be a "before" and an "after" here, and Estonia will need to re-invent itself as an export driven economy on the Swedish or Finnish model. Anyway, we will keep following unemployment as we move forward here as there is a lot we can learn from Estonian labour market dynamics.