The Estonian Economy, No. 2 - July 27, 2012: Unemployment, albeit falling, poses challenges

1. The Estonian Economy
Monthly newsletter from Swedbank’s Economic Research Department
by Elina Allikalt No. 2 • 27 July 2012
Unemployment, albeit falling, poses challenges
 The drop in unemployment in Estonia after the economic crisis has been one
of the fastest in the EU, albeit starting from a much higher rate. Although the
pace of decline has stalled somewhat, unemployment is still falling,
supported by strong seasonal factors, and is beating the trend seen in the
EU. The labour activity rate continues to be high.
 Among the main risk groups, youth unemployment has shown the best
recovery. Long-term unemployment, however, has become the most
important problem facing the labour market, posing social risks and limiting
long-term growth rates.
 The educational level and possibilities for retraining are among the key
factors for employment, even more so because of the increasingly
mismatched labour market environment. The youngest age group has proved
to be the most flexible in this environment, but active labour market
measures, as well as a change in social attitudes, can ease the problem for
others too.
The unemployment rate peaked during the recent Unemployment rate in the EU and the Baltic countries, %
(seasonally adjusted)
economic crisis at the beginning of 2010 at almost
20%. The strong economic recovery seen since has 25
almost halved that rate – it fell to 10.9% at the end
of last year before rising somewhat to 11.5% in the 20
first quarter of this year. Nevertheless, registered
unemployment (which is lower than the survey-
15
based indicator but follows the same trend) is
Unemployment rate and registered new unemployed 10
25% 12
5
10
20%
8 0
15% 2007 2008 2009 2010 2011 2012
6 EU27 Estonia
Source: Eurostat Latv ia Lithuania
10%
4
5% showing that the number of new unemployed has
2
fallen to the lowest levels in a couple of years;
0% 0 moreover, the unemployment rate continues to fall,
2007 2008 2009 2010 2011 2012 supported by seasonal factors in the labour market,
registered new unemploy ed, thousands (rs) and is beating the trend seen in the EU. While the
unemploy ment rate unemployment rate in Estonia was one of the
Source: SE, EUIF registered unemploy ment rate highest in the EU during the crisis years, it has now
fallen to almost EU-average levels (10.1% in the
Economic Research Department. Swedbank AB. SE-105 34 Stockholm. Phone +46-8-5859 1000.
E-mail: ek.sekr@swedbank.com www.swedbank.com
Legally responsible publisher: Cecilia Hermansson, +46-8-5859 7720.
Annika Paabut, +372 6 135 440. Elina Allikalt, +372 6 131 989. Teele Reivik, +372 6 137 925

2. The Estonian Economy
Monthly newsletter from Swedbank’s Economic Research Department, continued
Nr 2 • 27 July 2012
first quarter). Nevertheless, despite positive in the construction and transport sectors) has
developments, there are still risks in the labour helped to ease the youth unemployment problem.
market regarding future developments, including The young labour force has proved to be the most
the impact from continuous euro area recession. flexible age group after the crisis – in addition to the
strongest employment growth, the share of long-
The crisis and the subsequent recovery in the
term unemployment for this group is the smallest
Estonian labour market have been characterised by
(about 40% of the total) of all other age groups.
growing activity rates1; these are also the main
After unsuccessful job searches, many young
reason why unemployment has not fallen more
people have chosen to continue their previously
rapidly amidst strong employment growth. The
unfinished studies, supported by a special state-
activity rate has picked up the most among the
initiated programme. Nevertheless, youth
youngest and the eldest labour market participants,
unemployment is still much higher than in other age
while that of the biggest age group (25-49 year
groups; thus it is important not to lose the
olds) has largely remained unchanged.
momentum of recent positive developments,
Activity rate in the main age groups, %
especially considering the important position of this
group in an aging and declining population.
90
Unemployment in the main risk groups
80 (thousands)
70
70
60
60
50
50 40
40 30
20
30
2004 2005 2006 2007 2008 2009 2010 2011 10
Source: SE 15-24 25-49 50-69 Total
0
2007 2008 2009 2010 2011 2012
Conflicting developments in the main risk 15-24 y o non-Estonians
Source: SE 50-69 y o long-term unemploy ed
groups
Unemployment in the main labour market risk
2 Unemployment rate by age groups
groups – the youngest (15-24-year-olds), the
eldest (50-64-year-olds), long-term unemployed, 45%
and non-Estonians – has been declining amidst 40%
overall labour market improvements. The strength
35%
of the recovery, however, has varied across groups.
30%
The best improvement has been witnessed
25%
amongst young people, where the unemployment
rate has almost halved from its peak of 40% at the 20%
beginning of 2010 to 23%, now close to the EU 15%
average. A big part of this development can be
linked to the fall in activity of the construction sector 10%
(which employed many young men) during the 5%
crisis and its steady recovery during recent years.
0%
In addition, an increase in pendulum migration (e.g.,
2007 2008 2009 2010 2011 2012
Source: SE 15-24 25-49 50-69
Developments in the unemployment of elderly
1
The share of working-age population that is either employed people have been similarly positive – their
or actively looking for a job. unemployment rate is down from 17% in 2010 to
2
According to the Labour Market Services and Benefits Act. below 10% at the beginning of this year. This has
2 (5)

3. The Estonian Economy
Monthly newsletter from Swedbank’s Economic Research Department, continued
Nr 2 • 27 July 2012
been supported by strongly rising employment as of long-term unemployed peaked at the beginning
well as activity. The increase in activity is affected, of 2010 and has now declined by only about 20%.
on the one hand, by the rising pension age of Even more, the share of long-term unemployed in
women and, on the other hand, by the growing total unemployment has held steady above 50%
number of budget-constrained people. since the beginning of 2011, even increasing to
59% in the first quarter of 2012 (one of the highest
The unemployment rate of non-Estonians, who are
in the EU); these are levels that were seen only
considered to have a disadvantaged position in the
briefly more than 10 years ago, when the economy
labour market due to their presumably weaker
was experiencing large structural changes following
language skills, has always been higher than that of
the Russian financial crisis. The increasing problem
Estonians. During the crisis, the non-Estonians
of long-term unemployment – together with its
suffered more due to their higher employment in the
effects on the individual, the society, and long-term
manufacturing, retail, and construction sectors, as
economic growth, as well as the growing risk of its
well as in craft and related trade occupational
long-term costs – has been discussed more
segments. The unemployment rate shot up to 28%
publicly recently; however, measures to forestall
at the beginning of 2010 but has now fallen to
and alleviate it are still scarce.
around 17%. Although the rise in unemployment
during the crisis hit evenly across regions, the Unemployment by duration
heavily industrial northeast region of Estonia (where (thousands)
the non-Estonian workforce is the largest), which
140
has always had a higher-than-average
unemployment rate, was affected exceptionally 120
harder.3 Research has shown, however, that the
non-Estonians have the lowest mobility in entering 100
the labour market3, and that, even with good
80
language skills, the non-Estonians can suffer from
discrimination in their job searches compared with 60
native Estonians4.
40
Unemployment rate in northeast Estonia
20
30%
0
25% 2007 2008 2009 2010 2011 2012
up to 12 months more than 12 months
20% Source: SE
15% Discouraged persons
40% 18
10%
35% 16
5% 14
30%
12
0% 25%
2005 2006 2007 2008 2009 2010 2011 2012 10
20%
8
North-east region The rest of Estonia
Source: SE 15%
6
10%
The most dissapointing developments have been in 4
the area of long-term unemployment. The number 5% 2
0% 0
2005 2006 2007 2008 2009 2010 2011 2012
total, thousands (rs)
Source: SE as a % of unemploy ed persons
3
Working Papers of Eesti Pank No 1/2011. „Labour market
mobility during a recession: the case of Estonia“
4
Master’s thesis by Evelyn Uudmäe (University of Tartu,
2012) „The role of typical Estonian and Russian sounding
names in the hiring process based on the examples from
Tallinn.“
3 (5)

4. The Estonian Economy
Monthly newsletter from Swedbank’s Economic Research Department, continued
Nr 2 • 27 July 2012
On the positive side, active labour market measures flexible as its willingness and ability to learn and
5
and changes in laws have increased the incentives change career profiles is on average better than
to remain active even after a long period of others. This difference in age profiles is best visible
unemployment. Nonactivity due to discouragement in long-term unemployment – its share in the oldest
has not increased significantly, especially compared age group is almost 70%, while amongst the
with the increase in long-term unemployment. The youngest it is around 40%. Even more, as is visible
number of discouraged people is more than twice in the chart, amongst the eldest age group,
as small as it was a decade ago. unemployment increases the most for those with
the highest-level education, even more than for
Education, training, and labour market peers with a lower-level educational profile; this
measures – the key factors indicates greater inflexibility in retraining for this
On average, the lower the educational level, the group.
higher the possibility of becoming unemployed and,
in turn, of remaining unemployed. Inefficient skills Ratio of particiaptions in active measures
(% of registered unemployed)
and a low educational level are considered to be
the main reasons for unsuccessful (re)entrance to 70%
employment. While people with the lowest
60% Other
educational level have the highest unemployment
rates in every age group (see chart below), they
50%
account for only about 20% of total unemployment. Wage
The largest share of unemployed (about half of the 40%
subsidy
total) has a upper-secondary education. This
Job search
educational level covers most of the special-skill 30%
training
workers, who are the most likely in need of
20%
retraining due to structural changes in the economy. Work
Although people with the highest educational level related
10% training
have the lowest unemployment rate (except the
Career
eldest), they make up only about 30% of total 0% counselling
unemployment. 2008 2009 2010 2011
Unemployment rate by age group and educational level in Source: EUIF
2011
35% Although public expenditure on active labour market
6
measures is quite low in Estonia, there was a
30%
considerable increase in the usage of labour market
25% training programmes7 last year. Amongst these,
work-related training was the most used active
20%
measure (see chart); this helps to raise
15% qualifications of unemployed with a low education
level and nonefficient language skills, i.e., factors
10%
that are amongst the main unemployment risks.
5% Job-search training, which helps the unemployed to
become more competitive in their job hunts, has
0%
increased in popularity. Wage subsidies, which
Av erage 15-24 25-34 35-44 45-54 55-64
encourage employers to hire long-term
total
below upper secondary education unemployed, have been well received by market
upper secondary education
Source: SE tertiary education
participants as well – in 2011, almost 5,000
unemployed were hired through this measure.
Although the unemployment rate is the highest in all
educational levels among the youngest age group,
this group has proved to be more mobile and
6
0.2% of GDP in 2010, being one of the lowest among OECD
member states; OECD average was 0.7% of GDP. OECD
Employment Outlook 2012
5 7
For example, registering as an unemployed and actively These measures are offered by the Estonian Unemployment
searching for job guarantee access to basic state health care Insurance Fund (EUIF) and are partially cofinanced by the EU
services. structural funds.
4 (5)

5. The Estonian Economy
Monthly newsletter from Swedbank’s Economic Research Department, continued
Nr 2 • 27 July 2012
Several social tax changes were introduced two the crisis to almost 10% now), it is still twice as
years ago that aimed to encourage employers to small as the EU average. Part-time employment
hire, in addition to long-term unemployed, part-time can be very useful in encouraging unemployed of
workers. While part-time employment has increased several risk groups to enter employment or remain
in popularity (from 6-7% of total employment before employed.
Swedbank
Economic Research Department Swedbank’s monthly newsletter The Estonian Economy is published as a service to our
SE-105 34 Stockholm customers. We believe that we have used reliable sources and methods in the preparation
Phone +46-8-5859 1028 of the analyses reported in this publication. However, we cannot guarantee the accuracy or
ek.sekr@swedbank.com completeness of the report and cannot be held responsible for any error or omission in the
www.swedbank.com underlying material or its use. Readers are encouraged to base any (investment) decisions
on other material as well. Neither Swedbank nor its employees may be held responsible for
Legally responsible publisher
losses or damages, direct or indirect, owing to any errors or omissions in Swedbank’s
Cecilia Hermansson, +46-8-5859 7720
monthly newsletter The Estonian Economy.
Annika Paabut +372 6 135 440
Elina Allikalt +372 6 131 989
Teele Reivik +372 6 137 925
5 (5)