Latvia faces a growing risk of losing economic competitiveness as wage growth significantly outpaces productivity gains, according to a modern economic barometer report released by the Productivity Science Institute of the University of Latvia’s LV PEAK research center. The findings, published on February 11, 2026, indicate a widening gap between labor costs and output, a trend experts warn could undermine the nation’s economic standing.
The report highlights that labor costs in 2025 have substantially exceeded pre-pandemic levels, while productivity increases have been moderate. LV PEAK Director Professor Inna Šteinbuka emphasized that productivity is a key driver of competitiveness. “Latvia’s productivity in 2025 is estimated to be around 55% of the EU average,” she stated, adding that even across Europe, productivity growth is sluggish.
Šteinbuka noted that Latvian productivity has remained stagnant in recent years, hovering between 54% and 55% of the EU average regardless of domestic economic policies. She explained that a previous statistical correction had temporarily shown a higher productivity figure, nearing 60% of the EU average, but the current assessment reflects a more accurate picture. Two primary factors are contributing to the decline in competitiveness: an unfavorable exchange rate, with Latvia exceeding the acceptable range due to high inflation and a nominal labor cost index that significantly surpasses recommended limits.
The Economic Barometer reveals a moderate economic growth since 2022, with average annual productivity increases of only 0.2%. In 2025, productivity experienced a moderately positive trend, reaching a level 2.9% higher than the previous year during the first three quarters. While this represents a faster rate of productivity growth than the EU average, it hasn’t been enough to close the substantial gap with EU benchmarks. Economic slowdowns, evidenced by negative IKP growth, have not significantly impacted the momentum of rising labor costs.
From 2021 to 2024, labor costs increased by almost 1.3 times, averaging 9.7% annually. Unit labor costs (ULC) rose by 31.6% over the same period, driven by the slow pace of productivity growth. A notable exception occurred in 2021, when a productivity increase of 8.3% mitigated some of the pressure from rising labor costs, resulting in a 0.7% decrease in ULC.
LV PEAK experts point to a continuing trend in 2025, where labor costs significantly outstripped productivity gains. During the first three quarters of the year, labor costs increased by 8.5%, nearly three times faster than the productivity increase of 5.4%, leading to a 5.4% rise in ULC. This surge in labor costs is attributed to unfavorable demographic trends, increasing demand, and intense competition in open EU labor markets.
“Increasing productivity is the only way to counteract the growing cost pressures on competitiveness,” Šteinbuka stressed. The institute believes that future productivity growth will increasingly rely on knowledge-intensive activities, which currently represent a small portion of the Latvian economy. Latvia’s primary weakness lies in innovation – specifically, insufficient investment in research and development, as well as a lack of skilled labor. Although, policymakers must similarly address long-standing issues such as infrastructure deficiencies, regional disparities, and social inequality to foster a comprehensive approach to productivity and competitiveness enhancement.
