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Tuesday, May 20, 2008

Latvia Unemployment April 2008 - Where's The Correction Mechanism?

According to data from the Latvian State Labour Board, Latvian unemployment in April was at 52,897 (or an umployment rate of 4.8%) this was up from 52,806 in March, but only slightly (93 people to be exact, although obviously there are seasonal factors to take into account here. But this figure was still substantially down from the 67,154 (by about 14,350 people) registered in March 2007. Given that the Latvian economy is contracting I think this result is significant.




and the unemployment rate has been dropping steadily.




And the picture doesn't change substantially if you look at unemployment using the EU harmonised methodology. According to Eurostat unemployment in Latvia was running at 4.6% in March 2007 and 4.5% in March 2008, ie it is still down year on year, even though GDP was growing at a strong rate a year ago and is contracting now.



The economy has gone into recession without generating sugnificant unemployment. Of course the labour market does follow movements in GDP with a lag, and we still haven't had the "hard landing", but still, this is a surprising result.

It also helps explain why the rate of wage growth - according to the laytest data we have which is for the last quarter of last year - has't slowed dramatically, although it may now do so.



The position isn't that different in Estonia, since according to the latest data from the Estonian Labour Market board the rate of unemployment in April was still incredibly low there too - running at 2.7% - with only 17,098 people registered at the employment offices. Using the EU hrmonised methodology, the rate is rather higher - some 5.5% in March which is the latest data we have from Eurostat - but to get a comparison this is not up enormously from the 4.9% rate recorded in March 2007 using the same methodology. ie on whichever measure you use unemployment has risen, but not that much, at this point, which would explain in part why wage rises have been so stubborn in coming down in terms of their annual rate. There simply is not that much "surplus labour capacity" in Estonia, and this is of course part of the whole inflation - and now stagnation - issue.




Basically I hate to be a bore, or "party spoiler" at this point, but this is the issue that has been worrying me from the start about the whole Baltics situation, the absence of the ability of the labour market - due to years of very low fertility and substantial out-migration - to correct during a recession.

Without getting too theoretical here, there simple is no homeostatic mechanism to fall back on here to guarantee stability. Since the cohorts leaving the labour force at the upper end are going to be consistently bigger than those enetering at the bottom, there is no build up of surplus labour in the "deposit" during the slowdown.

Leaving aside the length of the present slowdown and its possible severity, we are left with the very unfortunate situation that when growth eventually does start to pick up again, there may be very little surplus labour capacity available to fuel the growth, and logically inflation would then simply start to shoot up yet one more time. Basically I would say that finding a longer term solution to this problem is now one of the most urgent questions facing the Latvian (and Estonian, and Lithuanian) government.

12 comments:

Latvian abroad said...

A Bank of Latvia analyst recently claimed to me that a lot of reported private sector salary increases is now the legalization of "unofficial part" of salaries (forced by the new rules that only allow to issue credits based on official incomes), rather than actual increases.

I don't know how to check that. But it would explain how the salaries can be "growing" by 30%, while the private consumption is starting to decline.

Edward Hugh said...

Hi LA,

"A Bank of Latvia analyst recently claimed to me that a lot of reported private sector salary increases is now the legalization of "unofficial part" of salaries (forced by the new rules that only allow to issue credits based on official incomes), rather than actual increases."

Yep, and I'm sure there is some of this. But we have been hearing all this for a year or so now (same story in Hungary btw) and while there is undoubtedly "whitening" going on, I think there is more to all this now.

My feeling was right from the start of my interest(ie back in the summer of 2007) that wages wouldn't be able to adjust rapidly enough downwards for demographic reasons, and now this seems to be happening.

Also it is so surprising how unemployment isn't rising more quickly. This is a very strange downturn, as many have commented on this blog.

We need to wait a few more months yet to really see more clearly what is happening. Obviously wage increases will start to slow, but how quickly, this is the issue.

Eventually I imagine we could even see real wages fall - ie wage deflation - but the question is how long do you take to get there.

Latvian abroad said...

On unemployment, I think I know the answer to the puzzle. The unemployment is unchanged but the number of vacancies is going down, from 21-22 thousands in September, to 15K one month ago to 12K now.

So, there was a solid cushion in the form of a large number of vacancies. Particularly since most of vacancies were in Riga and most of the unemployed were in rural Southeastern Latvia. Now, this cushion is running out quickly and if the trend continues, we will see unemployment increasing quickly. (Latvian analysts predict 7% unemployment by the end of the year.)

On salaries, I don't completely believe the "whitening" explanation myself. It would have to be a very massive whitening to have influence on the numbers.

But, then, there is the other puzzle. How can one have salaries still growing at 30% nominal /10+% real and retail sales declining? And "whitening" would explain that, so, I think it's worth considering as a possibility.

BTW, the tax data from Latvian revenue service indicate that salary growth is continuing at nearly 30% y-o-y in January-April.
It's quite puzzling.

Lacitis said...

Hello,
There's another interesting phenomenon concerning Latvian labour but I don't know enough of our neighbours to check whether it is widespread in "New Europe": unefficiency leading to "overemployment".

Let me put this simple using my trade (tourism and catering):

-in France for example, to run a 75-100 customers a day-bar, open 10-22, you find typically 2,5 employees.

-in Latvia, to run a similar place, you find up to 7 employees. This is such a trend that the fiscal administration and labour inspection find it suspect if you can run the place with less than 4 persons.

Though labour cost is going up, it does not look like this situation is so much changing.

But for the lack of middle management -or inefficiency thereof- and strong "family ties" preventing from firing people based on their uselessness, I cannot find any logical explanation for that. Especially as, with the help of in-house training and permanent verification procedures, I am perfectly able to run my businesses based on "minimal staff - maximum efficiency" model.

If Latvia is forced to discover "labour efficiency", it may result in the release on the un-employment market of a huge number of people.

Have a beautiful and sunny day, whatever the weather.

Anonymous said...

Well one possible adjustment is that latvian are leaving country to find job, letting unemployment rate low. Only question is will they come back as latvian economy recovers? Are there stat about recent migration available?

Edward Hugh said...

Hi anonymous,

I think you have a valid point.

"Are there stat about recent migration available?"

Not that I have seen. Basically this is one of the big problems with all the EU10 countries, we simply don't have accurate data on migration. The governments don't seem to have given it the priority I think it needs.

It is very hard to get even accurate information on migration 2004 - 2007 - unless you go to the stats offices of the UK and Ireland (in the case of the Baltics and Poland) or Spain and Italy (in the case of Romania and Bulgaria). Slovaks seem to have gone either to the Czech Republic or the UK, while Czechs and Hungarians don't seem to have moved that much. In the Baltics I have the impression that Estonians have moved a lot less than Latvians and Lithuanians, but then in the Baltic context there is the tricky issue of the first language of the potential migrant.

Basically I think governments have tried to downplay the migration issue since they see it as a political hot potatoe, only recording what they call "permanent migrants", while of course the majority are temporary who may - in cases like a serious economic crisis back home - decide to lenthen their stay (possibly indefinitely).

The thing is from an economic point of view - if the people responsible for these things were at all serious - you need accurate measures of who is in and who is out of the country to make an estimate of the potential inflation free growth rate for the economy. The lack of interest in getting accurate data on this topic from otherwise sensible people like the IMF and the world bank has simply amazed me.

On the other hand both the UK and Ireland (together with Spain) are possibly the worst affected by the credit crunch in housing outside the US (and apart from Kazakhstan) so the employment market in those countries is also deteriorating. Of course Baltic migrants can start to look for new destinations (Scandinavia?).


But at the end of the day you are right, the big danger for Latvia right now is that a lot of those over 50 who find themselves unemployed in the coming downturn simply try to get some form of early retirement or disability, while those under 40 simply up and leave.

As you ask, the big question is going to be, is it realistic to expect them to come back when things finally get better.

I suppose that depends on something we don't know at this point: just how long the crisis will last and just how deep it is going to be.

Edward Hugh said...

Hi again Lacitis,

"There's another interesting phenomenon concerning Latvian labour but I don't know enough of our neighbours to check whether it is widespread in "New Europe": unefficiency leading to "overemployment"."

I think this is a very good point. There is plenty of potential across the entire EU10 for raising productivity. The question is that this is easier said than done, and at the end of the day, from the sort of situations you describe, a lot depends on changing minsets at the individual level, and this is hard, and especially when you have an ageing population.

What I mean is that it is obviously easier to change attitudes among the under 30s than it is among the over 50s.

But the whole business sector needs restructuring if the point you make is in any way representative of the general picture. (I suspect it is and it isn't. That is I suspect there are new enterprises that are a lot more efficient, and that during the crisis we will see a lot of Scumpeter's "creative destruction", with the inefficient entities disappearing, and the survivors having a much "leaner and meaner" look about them - hopefully not produced by an excess of living standard hardship among their employees.

But the real issue is going to be when we finally do get a recovery just how much labour capacity there will really be in the system. If some people retire early, and others leave to work abroad, then you may not have too much slack in the sytem to actually take up.

I am following the Hungarian labour market and this is what seems to be happening there. There is no real out-migration as such (Hungarians are different in this sense, although there does seem to be some evidence of people crossing the frontier with Slovakia to work in the new car factories there) but the state sector has reduced employment substantially since the introduction of the austerity programme. Employment in the private sector, OTOH, has hardly increased, and unemployment has not risen substantially. Draw your own conclusions. Meantime the central bank is having a very hard time getting inflation much below 7% y-o-y. Basically they are having to half strangle the economy with an 8.25% base interest rate, while Hungarian householders continue to get into debt by borrowing in the much cheaper (interest rate wise) swiss francs.

So while there will be productivity driven growth, it is unrealistic to expect this to be very far above the 2 to 3% per annum range. That is too say this could well be the longer term inflation free growth rate for the Latvian economy without systematic labour imports, and if that is the case Latvia simply isn't going to close the living standards gap with Western Europe.

You also have to bear in mind that as the 2010 - 2020 decade progresses, the elderly dependency ratio is going to increase in a way which will soak up a significant part of that productivity driven growth, and this will need to be subtracted from living standards growth.

Also thank you for your lengthy comment and perspective in the inflation post. I have a lot of sympathy with what you say there. For the moment I will simply pick up on two - inter-related points:

"No real inflation curbing policy was implemented. A so called "anti-inflation plan" was mostly directed toward the consumer with messages such as "spend less, save more", which, in a country riddled by low wages is wishful thinking. The only real instrument was the obligation for loans' applicant to prove their resources by producing an employer's certificate. "Oddly" enough, a rapid deflation off the "real estate bubble" ensued and is still keeping on."

I think this is a key point. Most of the slowdown during the second half of 2007 has been a simple by-product of a sharp tightening in credit conditions, and the impact of this on the construction sector.

This is very similar to the process I am watching day by day here in Spain (where I live), although it is interesting to note that in Spain employment is already 15% up y-o-y and rising rapidly.

So we have yet to see the very corrosive impact of inflation on the real economy. This has probably only started to make its presence really felt during the first quarter of 2008, and especially by the impact on potential for exports. Since domestic salaries have continued to rise in real terms, apart from borrowing for housing or cars people still have money to spend on consumption, and of course unemployment isn't up that much yet. This is probably why the slowdown looks so strange.

So this is a corection which has spread outwards from the financial sector:

"credit crisis (though the main international groups are backing their Latvian operations on the Eurozone stability or on the Russian energetical rent, there are still a handful of local bank who accepted high credit risks -and still do- in order to increase their financial surface)"

and as you note this credit slowdown has been uneven, and probably only now is really reaching its height, we can expect the crisis in the real sector to accelerate significantly as 2008 advances.

"And eventually, is Latvia the model that will show the future evolution of "New Europe's" economy? Can we at least use it positively as a case study to prevent or limit a crashdown that would impact global Europe?"

This is a very important issue. This is the debate I would like to see on this blog.

Basically you mention how in fact the "letting the market do everything" is a very imperfect description of what has been going on in the EU10 over the last 5 years.

In particular I would mention the role of the euro membership condition for EU accession (and the way in which this has affected investors outlook to debt - ie it was seen as being guaranteed ultimately by the ECB, so everything was given more or less investment grade, but cheap interest - as we are seeing - isn't always a good thing).

Also the institutional issue about the peg. This was a political and not a market decision. The difficulty now is how you unwind the position without producing a very loud crash.

There is no easy answer to any of this, or to the question of how we got to where we are now. But the post-mortem will need to be held, and it will extend well beyond the Baltic frontiers.

For the moment, however, we need to get a much more precise diagnosis of where it is exactly we are. Imagine you are in a ship which just hit an underwater rock. The first thing to do is get a measure of the damage, then to try and shore it up and limp back to port, and then you need to think about the structural repairs you need to make so that you once more become seaworthy. ie, right now we need a one step at a time approach.

Edward Hugh said...

Hi again LA:

"On unemployment, I think I know the answer to the puzzle. The unemployment is unchanged but the number of vacancies is going down, from 21-22 thousands in September, to 15K one month ago to 12K now."

OK. This is a good point. This gives us a measure of the extent to which the Latvian labour market was "overtensed", and is now unwinding. But it was clear this tension, and not "global prices" (ie food and energy), which meant that Latvia has inflation in double figures while Slovakia (eg) is currently around 4%.

So if Latvia wants to grow strongly again at some point this issue needs to be addressed (see earlier comments).

"So, there was a solid cushion in the form of a large number of vacancies."

This wasn't simply a cushion, it was petrol flowing into a furnace that was already nicely alight.

"But, then, there is the other puzzle. How can one have salaries still growing at 30% nominal /10+% real and retail sales declining? And "whitening" would explain that, so, I think it's worth considering as a possibility."

One other caveat here, the stats office do give a monthly breakdown of the quarterly wage rises, and the rate did drop month by month between Oct-Dec (in December it was down to 25% approx). I imagine this has continued in the first quarter, and this will be interesting to see, but my fear is that getting into single digit wage rises (which is a minimum for starting to turn things round) may take a lot longer than would be normal in these circumstances.

Lacitis said...

Hi again Edward,
And thanks for your lengthy and comprehensive comment.
On the topic:
"What I mean is that it is obviously easier to change attitudes among the under 30s than it is among the over 50s."

My experience as a "service quality consultant and trainer" in Latvia shows that (at least in the 14 restaurant and hotels and 2 schools paying for my services) 35 y.o. + women are the most likely to accept efficiency re-training, implement it on a daily basis and show few signs of "drifting" or "degrading" the methods during an 18 months follow-up. They are as well a strong and active reservoir for emigration.

At the other end of the scale, 35 y.o. + men are the least receptive to such training.

Interestingly enough, young male (18-35 sorry we don't keep more detailed stats) come close to the latters. Young female show a "success rate" of about 45%.

I'm not sure that the limited segment of tourism and catering service industry is representative of the bigger labour picture. But my exchanges with other managers and trainers usually point into the same direction.

Another interesting index to take into consideration (but this is a plague of most former soviet countries) would be the alcoholism rates by sex and age categories. This is enough a problem in our region to have deep consequences in all fibers of the society fabric.

This may look like bringing us far from economics, but too much thinking "inside the box" is also what brought us here.

Latvian abroad said...

Hi Edward,

"I imagine this has continued in the first quarter, and this will be interesting to see"

here are data from state revenue service on the revenue from the social security tax. Latvian social security tax is flat-rate up to a quite high threshold (higher than almost all salaries), so, this is a good approximation for the rate at which salaries are increasing.

November 2007: +41.7% y-o-y
December 2007: +24.2%
January 2008: +34%
February 2008: +34.2%
March 2008: +23.8%
April 2008: +37.6%

24.2% in December looks like an exception rather than a trend.

I agree with lacitis' point on "overemployment". Unfortunately, it doesn't look like a generational thing: it's quite widespread in sectors of economy where most employees are under-35.

Edward Hugh said...

LA

"this is a good approximation for the rate at which salaries are increasing."

Whoof! Thanks for this, but if these April numbers are a real reflection of what is happening - as I imagine they may well be - then the goose is going to get well and truly cooked here.


Lacitis

"This may look like bringing us far from economics, but too much thinking "inside the box" is also what brought us here."

I absolutely agree.


"Another interesting index to take into consideration (but this is a plague of most former soviet countries) would be the alcoholism rates by sex and age categories."

Generally speaking I use the expression "low male life expectancy" as a kind of euphemism for this issue.

The big point is that the world bank, OECD and EU commission are all - quite unrealistically in my view - using the idea of increasing participation rates among the over 55s as a way of compensating for the shortage of younger workers, without taking this sort of question into account. (See eg "From Red to Grey" from the world bank).

Getting males between 60 and 65 back to work in Germany or Japan is a rather different proposition from doing this in Ukraine or Latvia, but few seem to have been thinking about this.

Latvian abroad said...

"Whoof! Thanks for this, but if these April numbers are a real reflection of what is happening - as I imagine they may well be - then the goose is going to get well and truly cooked here."

Unfortunately, I have to agree.

"Getting males between 60 and 65 back to work in Germany or Japan is a rather different proposition from doing this in Ukraine or Latvia, but few seem to have been thinking about this."

Actually, it might be easier in Latvia, since we lack an adequate social security system (pensions are hard to live on) and, due to the recent economic history, almost all people don't have savings on which they could comfortably retire. So, if a person between 60 and 65 can work in Latvia, they are going to do that.

As a result, our 55-64 employment rates are 64% male/52% female (6th highest and 4th highest in EU27, 10-15% above EU averages).