The labor market in Estonia recovered strongly from the Covid-19 crisis in the second half of 2021 and in early 2022. Growth in employment accelerated in the summer, and the restrictions imposed in the autumn to stop the spread of the virus did not deliver any major setback to employment. Expectations of companies for developments in employment and their perceptions of labour shortages were back to where they were before the pandemic. Unemployment fell in the second half of 2021 as employment recovered but the labour force participation rate fell. The number of people unemployed was higher than before the pandemic despite the recovery in the labour market, while data from the Bank of Estonia show labour shortages increasing at the same time. This indicates that the vacant jobs required different qualifications to those that the available labour could offer. This mismatch can be partly explained by the number of jobs in accommodation and food service, which was the sector hit hardest by the coronavirus, being a fifth lower than before the pandemic.

At the same time, wage pressures increased in the second half of 2021 as a large share of companies were looking to hire additional workers, and there was a shortage of suitable candidates for the new jobs. Wages rose fastest in the private sector, especially in sectors where they had risen more slowly during the pandemic. Even though wages rose fast, productivity increased even faster. The growth in productivity over the past 16 years has been supported by changes in the structure of the economy, as employment has increased in sectors with higher productivity, like information and communications, and has declined in sectors with lower productivity like agriculture and production of textiles and clothing. High inflation in the fourth quarter meant that the purchasing power of the average wage declined, as prices rose faster than wages. The danger of a wage-price spiral occurring remains strong.

In effect, the consumer basket was 15.2% more expensive in March than a year earlier. The biggest driver of the inflation was energy prices, which were up 54% over the year. Prices for electricity and gas were some 70% higher even though the government had set a price ceiling for them. Motor fuels were up 44% over the year in March as the reduction in supplies of oil from Russia has not yet been fully replaced on the global market. Food prices have risen particularly fast in Estonia for fruit and vegetables, which are 22% more expensive. As most supplies of fruit and vegetables in Estonia come from abroad, the long supply chains may have increased inflation for imported food products.

The broadly based increase in the price of the consumer basket will reduce the real incomes of residents, as wages are likely to rise more slowly than prices. Increased costs for essential expenditures are expected to change consumption habits as consumers will have less money left over for buying services and consumption goods.