Swedbank: Wage growth accelerated in the first quarter

  • SwedbankThe growth of the average gross wage accelerated to 7.7%, over the year, in the first quarter of 2018.
  • Families’ assessment of their financial situation is the highest on record.

Rapid wage growth continued in the first quarter, around 8%, over the year, both by Statistics Estonia and the Tax Board. This was above our expectations (our forecast for gross wage growth was 6.0% for 2018).

Higher economic growth means higher demand for labour. As labour supply is limited, at least in the short-term, the scarcity of labour increases, pushing up wages.

Wage growth was the fastest in the public sector. There were several factors behind it: the administrative reform, sector-wide wage agreements concerning teachers and doctors, and a change in the methodology of data collection by Statistics Estonia that now includes NGOs and foundations with less than 50 employees. Wages were also supported by a hike in the minimum wage. Irregular bonuses and premiums added another 0.6 percentage point to the average gross wage growth. Bonuses are the highest in the energy (21% of the average gross wage in the sector) and finance sectors (10% of the average gross wage in the sector).

The average real net wage grew by more than a tenth in the first quarter, over the year (due to changes in methodology, exact net wage data are no longer published). That is of a similar magnitude seen during the peak of the previous cycle. Real net wages were pushed up by a substantial hike in the non-taxable income of most employees. According to the Ministry of Finance, 78% of the people have to pay less tax on their income, and 17% have to pay more tax, after the reform.

Due to a strong wage growth and higher social transfers, families’ assessment of their financial situation is the highest on record (data by the Estonian Institute of Economic Research). According to the Estonian Institute of Economic Research, half of families manage to save a part of their income. The growth of households’ loan portfolio has accelerated but is still modest and below the growth in deposits.

180530 Wage growth accelerated in the first quarter

Tax reform has not lifted consumption so far. Retail sales volumes have grown very modestly in the first quarter (+1.0%, over the year), although changes in taxes (excise taxes, vehicle taxation) and the weather make it difficult to compare the first three months of this and last year.

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