The LFS unemployment rate came in at 5.3% in Q4, compared to 5.2% in Q3 and 6.6% in Q4 2016, data of the stat office showed on Wednesday. The number of unemployed fell by 17.5% y/y, following 31.0% y/y decline in Q3. The fall was broad-based and thus the youth unemployment rate was very low as it stood at 6.2%. Employment growth picked up to 4.6% y/y, recording its highest rate since Q4’11. This likely reflected further solid increase of GDP growth and high economic sentiment, which was boosted by corporate optimism about the future. The employment rate rose marginally in q/q terms to 68.4%, recording a new 20-year high. The labor force expanded by 3.1% y/y due to the 9.1% y/y decline of inactive people which came on the back of government measures to boost labor force participation of disabled people and pensioners, as well as by continuing solid wage growth which attracted more people to enter the labor market. These were more than enough to compensate for the further contraction of working-age population.
In regards to 2017, the LFS unemployment rate fell to 5.8% from 6.8% in 2016. This was marginally lower than the 5.9% forecasted by the central bank in December. It was tangibly below the 7.0% projected by S&P in December, 6.9% forecasted by the OECD in November and by government in October. The number of unemployed people declined by 13.8% due to the 2.2% increase of employment which came on the back of the solid GDP growth which most likely exceeded 4% last year. Labor force participation rate rose to 71.6% boosted by the greater-than-expected results of the government labor capacity reform, which had the biggest impact in Q2, when the number of inactive people fell by 17,000 q/q. Overall, the low unemployment rate once again suggests that any fiscal stimuli are more than unneeded as they would result in further acceleration of wage growth, which would hurt Estonia’s competitiveness. Looking ahead, we believe that the LFS unemployment rate will increase somewhat due to disabled people entering the labor market, many of whom need time to acquire the needed skills to get a job. Moreover, employment expansion should slow down, affected by slower economic growth and companies’ efforts to reduce its reliance on labor due to the notable increase of labor costs. Still, we believe that shortage of suitable workers will remain the biggest hurdle before Estonian companies.