Banks, Direct Speech, Financial Services, Latvia

The private sector saw a steeper rise in wages in the third quarter. This suggests that businesses felt rather confident, as also evident from the business survey data. The largest contribution to the private sector wage growth has come from the sectors such as mining and quarrying and information and communication technologies (ICT), recording a stable increase in wages. The rise in the average wage was also a result of a decrease in the number of employees in low-paid sectors. 

This year, the largest fluctuations in wage growth were observed in the sectors where wages were among the lowest already before the COVID-19 shock. Due to operational constraints, in spring wage declines were recorded in the sectors of accommodation and catering services and arts, recreation and entertainment services, as well as in the transport sector. In the third quarter, the average wage in arts, recreation and entertainment services recovered from its lows as people unleashed their pent-up demand from spring. However, in annual terms the sectors such as accommodation and catering services and transport continued to experience less pronounced declines in wages. It should be also noted that the actual income in the accommodation and catering sector might have declined further as people were tipping less generously due to precautionary considerations and lower personal income. 

The second wave of the COVID-19 pandemic and the associated state of emergency return like boomerangs hitting the sectors, which have been already previously affected. Lower wages in these sectors will increase the already significant average wage differences across different sectors of the economy. The number of hours worked and that of employed persons are expected to decrease due to the second wave of the pandemic and the restrictions imposed on business operations. With the economic activity weakening under the impact of the second wave of the pandemic and the financial situation of businesses deteriorating, the growth rate of wages is likely to moderate towards the close of the year. However, the range of the government support measures available to households will be expanded. Furlough benefits have been accompanied by wage subsidies aimed at compensating for a decline in employee income due to cuts in hours worked in case of partial employment. This will stabilise the labour market conditions in the event of a temporary state of emergency and help the employed persons to preserve their income.

Looking a bit further down the road, on the one hand, next year wage growth will slow down due weaker economic activity and abundant labour supply. On the other hand, increases in the wages of medical and teaching staff, as well as the raising of the minimum wage will exert pressure on wages. A higher minimum wage might, however, negatively affect employment in regions where the average wage is lower (e.g. in Latgale) and in the COVID-19 affected sectors with a large number of employees receiving the minimum wage.