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Friday, May 23, 2008

Estonia Wage Increases in Q1 2008

Wages in Estonia, which has the fourth-fastest inflation in the European Union, rose by 19.5 percent in the first quarter, adding to concerns of about the hardness of the ``hard landing'' which is now underway. The increase is slightly less than the 20.1 percent wage growth recorded in the fourth quarter, but only slightly so, and the Estonian economy is certainly not correcting from its excesses anyhting like fast enough.

Wage growth in the central government sector rose 23.8 Percent, and 25.9 percent in local governments, reflecting growth in among other areas teachers' salaries. Wage growth was the slowest, at 10.7 percent, in transport, with property industry wages rising 15.7 percent and manufacturing wages up 16.3 percent, the statistics office said.

The inflation rate, which hit a 10-year high in April, and more conservative lending by banks have cut consumption and cooled the housing market, with economic expansion almost stalling to 0.4 percent annual growth in the first quarter, the slowest rate in the EU, compared with 4.8 percent in the fourth quarter and 10.1 percent a year earlier.

Rising wages, boosted by labor shortages during the economic boom from joining the EU in 2004, and an outflow of workers to wealthier member states are undermining the competitiveness of companies who sent products abroad. With domestic demand shrinking, export strength is a key to any future growth when it returns, the central bank and the International Monetary Fund warned this week, but I fear the tightness of the labour market may prevent any rapid and "natural" correction to this situation.

Of course real wages are now rising much less rapidly than previously due to the rapid increase in inflation, but that is scarcely a consolation in this situation.

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