Why Wages in Latvia Are Growing Solidly, But Still Too Low

True, in this case it is not a matter of a cardinal increase in welfare, but the fact that covering everyday needs will be easier for the majority than before and they will be able to afford to buy this and that more.

Wages are growing solidly, but they are too low

The need for labor in Latvia is growing, despite the unconvincing economic background. This, in turn, only means that the average salary in our country will continue to grow before the economy begins to experience a noticeable decline. Even if the economic situation and employment opportunities decline, both the average and median wages (which are more representative of the wages of the majority of workers) could continue to rise. This might not happen if the economy will no longer see a slight deterioration of the situation, but bigger troubles. However, even in this case, wages may continue to rise, as was the case in times of crisis, when the average wage reached new records, but the number of the employed population temporarily decreased.

As the “Independent” wrote earlier, although there is a decline in several sectors of the national economy, wages in Latvia have continued to rise, and quite rapidly. According to the data of the Central Statistics Office, in the first quarter of this year compared to the corresponding period last year, the average wage in Latvia has increased by 12.3% to 1462 euros. To many, such a number may seem quite unbelievable due to the usual skepticism in Latvian society regarding the assessment of the economic situation, but there is no reason to doubt these data if we look at the ever-full supermarket parking lots. In addition, in reality, the working person in Latvia is perhaps even wealthier, which would be in accordance with the statements that have been constantly made for years about the large volume of the shadow economy and envelope salaries.

Another myth circulating in the society is that the salary increase is only for employees close to the state management, banking and IT sector employees, and since the salaries here are high, the average salary indicator is also pulled up. The reality is that the median wage index, from which atypically high and atypically low wages are excluded from the calculation and which characterizes the salary of the majority of workers, has grown by 14.5% in the first quarter of this year compared to the same period last year. It is true, however, that the median gross monthly salary in Latvia is extremely low and reached only 1,149 euros in the first quarter. However, the growth of both average and median wages is relatively fast, thus making it possible to largely compensate for the decline in the purchasing power of the population.

However, it must be recognized that the average real wage, which is taken into account when looking at the growth of the average wage and consumer price index in the first quarter compared to the corresponding period last year, has decreased by 6.1%. A six percent reduction in the purchasing power of the average salary is considered very large, and at the same time, there are both positive news and optimistic forecasts for the future. The good news is that in the first three months of the year, the rate of decline in purchasing power has been about twice as low as in previous quarters. On the other hand, the optimistic forecasts are related to the fact that the rate of decline in purchasing power may not only decrease, but may soon stop altogether, and there is reason to believe that already in the third or fourth quarter of the year, the wages of working people could grow faster than prices.

Purchasing power may grow at the expense of lower inflation

Moving on to the potential changes in wages in the coming quarters, there is reason to believe that they will grow at a slower pace than at the beginning of the year. This can be attributed to both the deepening of the economic recession and the fact that as inflation declines, employers will be less stingy about wage increases. As shown by the data on company profits, the period of inflation did not slow down growth for many, but on the contrary – revenues grew, so that there was an opportunity not only to increase profits, but also salaries.

However, in the opinion of experts, inflation in Latvia is too high for the current economic situation and it will most likely decrease significantly in the coming months. Thus, falling inflation will play a very important role in the growth of purchasing power. Even if by the end of the year the wage growth rate will decrease from the mentioned 12% to about 8-10%, the worker will have the opportunity to buy more with what he earned, because the annual inflation will no longer be close to 20% as at the beginning of the year, but could be about 3-5%. Half a year ago, the opinion was that inflation could be close to zero at the end of this year, but it has stubbornly remained too high, because obviously there are enough resources in the economy to pay for the rapid jump in prices.

Currently, a very rapid cost reduction is taking place in connection with the drop in energy prices observed this year, so companies no longer need to increase prices as much as last year in order to achieve the previous profit margins. At the same time, as the economy slows down, overproduction and larger inventories will show themselves more and more, which will push prices down. This, of course, will also affect wages, however, as practice shows, changes in wages are delayed in relation to what is happening in the economy. In other words, it takes time for wages to show an increase in the economic upswing, and likewise, the economy has been in recession for a while before wages start to decrease. If we talk in the context of Latvia’s history, then during the previous financial crisis, the highest pay was achieved in the fourth quarter of 2008, when the decline in the national economy was already in full swing, but the rise resumed in the second quarter of 2010, when economic activity had already increased for some time. If you take into account this relationship and combine it with the reduction of costs and inflation, then, at least for the next few quarters, Latvian workers have reason to expect an increase in purchasing power.