In Estonia, in the first half of 2022, the position of the labour market was very good. This was despite the shock to the economy caused by the conflict in Ukraine, the consequent jump in energy prices, and the slumpy economic growth. According to the Bank of Estonia, there were more people employed in the first half of the year than there were before the Covid-19 pandemic, but the expectations for employees of businesses in manufacturing, trade and construction became more pessimistic during the first half of the year and the strong growth in employment slowed. Although employment was high, there were more people unemployed in Estonia in the first half of 2022 than there were before the pandemic. This was because the labour force participation rate of residents of Estonia increased extraordinarily quickly.

Despite the challenges, the business environment for corporates in Estonia is very strong. The World Bank’s annual “Worldwide Governance Indicators” surveys suggest that the regulatory and legal frameworks are business-friendly and the level of corruption is low. Likewise, the Heritage Foundation’s annual “Index of Economic Freedom” surveys have put Estonia in the top 10 out of some 184 economies in recent years (rank 7 in 2022), reflecting very strong scores with regard to property rights, judicial effectiveness, tax burden, trade freedom and investment freedom. Only labour freedom is scored below average. With regard to environmental sustainability, Estonia scores somewhat less favourably, owing to a low level of renewable electricity output, a moderate recycling rate and relatively elevated CO2 emissions. However, the country does well with regard to energy intensity, water stress and overall vulnerability to climate change. In all, Estonia ranks 70th out of 210 economies in Allianz‘s “Environmental Sustainability Index”.

In the first half of the year, wages rose fast despite economic activity being weaker. Red flag. This was fuelled by a rise of 12% in the minimum wage after it had been frozen for two years, the recovery of wage rises in the public sector that were postponed during the pandemic, and the high inflation in consumer prices. Wages in Estonia are generally not automatically indexed, but inflation is often taken into account in wage negotiations. How rapidly rising labour costs affect the competitiveness of businesses in Estonia will depend on how the production costs of competitors are affected. The capital income of companies increased in the first half of the year at the same rate as labour costs, which means that companies still did not have to use their profits to cover the higher labour costs. This will change if economic activity cools further and wages continue to rise quickly.