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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 simply 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.

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