Flash comment: Lithuania

Economic commentary by Economic Research Department November 23, 2012

Real net wages continued contracting in the third quarter

Wages and productivity, annual growth rates
25% 20% 15% 10% 5% 0% -5% -10% -15% 2006 2007 2008 2009 2010 2011* 2012 Gros s nom inal wage, yoy Net real wage, yoy Labour productivity per person em ployed, yoy
* the number of employed updated according to census data from 2011 Sources:Statistcs Lithuania, Sw edbank.

In the third quarter average net wage was 2.4% higher than a year ago, but the growth was outpaced by inflation. Thus real net wages continued contracting and were 0.8% lower than a year ago. Gross wages in public and private sector have been increasing at a similar pace by 2.8% and 2.7% respectively. Highest annual wage increase was recorded in electricity and gas supply, telecommunications, and mining sectors. Outlook The recovery in wages is somewhat overdue. GDP and productivity have been growing strongly since the beginning of 2010 and companies have already restored the competitiveness lost in the pre-crisis period, when wage growth outpaced productivity growth. The employee wage negotiation power is increasing, as job vacancies are at the highest level in four years. A number of unemployed per one vacancy has also dropped from 61 at the end of 2009 to 13. Although still high, it suggests that employees will have to start competing for employees more fiercely. There is still a lot of uncertainty related to the developments in euro area and future economic policy of the new government. This keeps the lid on business expectations and wage growth. Further increases in minimum monthly wage are likely next year (although it is still not clear by how much) and will have a positive impact on average monthly wages. However, we think that regulation of minimum monthly wage is a double edged sword, which could restrict creation of new jobs and hurt those who are still unemployed. We think that a more sustainable approach would be to find possibilities (we see quiet a few of them) to lower labour taxes on low earners. This would not hurt the competitiveness of business, lower income inequality and encourage a more transparent remuneration practices.

Labour market
350 300 250 200 150 100 50 0 2008 2009 2010 2011 2012 Unemployed persons , th (ls ) Vacancies, th (rs) Unemployed per vacancy (rs)
Sources: Statistics Lithuania, Sw edbank.

70 60 50 40 30 20 10 0

Nerijus Maiulis Chief Economist + 370 5 258 2237 nerijus.maciulis@swedbank.lt

Swedbank Economic Research Department SE-105 34 Stockholm, Sweden ek.sekr@swedbank.com www.swedbank.com Legally responsible publisher Cecilia Hermansson, +46 8 5859 7720

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