Factors triggering wage growth

A government commissioned study into wages in Latvia, ‘Wages and factors influencing them’, was published in October 2006. The report found that wage increases are affected by factors related to the individual, such as the worker’s education, sex, age, Latvian language ability, working time, as well as duration and type of employment contract. Further factors come into play at company level, such as the size and the economic situation of the company as well as the sector and region in which the company operates. The extensive study analyses wage models, the nature of bonuses and responsiveness to bonuses, the role of the social partners in wage issues, in addition to negative aspects relating to wages – the shadow economy, ‘envelope’ wages and other issues.

Aim of the research

Wages in Latvia have risen sharply since 2005, and the rate of actual wage growth is exceeding that of gross domestic product (GDP). In order to understand the reasons for wage growth, the Ministry of Welfare (Labklājības ministrija, LM) commissioned the study Wages and factors influencing them (in Latvian, 3.7Mb PDF). The study was conducted in 2005–2006 by the research partnership RS Group, which includes the Baltic Institute of Social Sciences (Baltijas Sociālo Zinātņu institūts, BSZI) and the marketing research agency Factum.

This is the first of 13 studies being organised by the Ministry under the auspices of the Labour Market Study Programme, which is financed by European Union Structural Funds.

Methodology

The study is based on a survey of 4,000 employees and 800 employers, and includes econometric analysis of data for 2003 and 2004 from the Central Statistics Bureau (Centrālā Statistikas pārvalde, CSP).

The analysis looks at the procedures for regulating wages, the role of the social partners in wage issues and the factors influencing wages in Latvia, more precisely how these factors determine wages, forms and structure of remuneration. Furthermore, the report examines alternatives to wage-regulating policies, including those controlling the minimum wage differentiation in the construction sector, with the objective to improve the application of the Labour Law’s article 18 on collective agreements. Moreover, the report considers negative aspects relating to wages, such as the shadow economy and the prevalence of ‘envelope’ wages, meaning payment in cash that is not officially recorded for tax and social security purposes.

Influencing factors

According to the study, wages are influenced by factors relating to the individual, as well as by company characteristics. The factors relating to the individual are the following:

  • education – employees with higher education receive 24% higher wages than those with secondary education;
  • sex – women’s wages are 21.5% lower than men’s wages;
  • age – the 30–35 year age group is paid higher wages than other age groups;
  • knowledge of the Latvian language – without good knowledge of the national language, wages are 10.5% lower;
  • length of employment relations – employees with work experience earn wages 26.1% higher on average than those who do not have such experience;
  • working time – part-time workers receive 23.6% lower wages than full-time staff;
  • type of employment contract – employees on temporary contracts receive on average 9% less than those in permanent jobs.

Moreover, wages vary among sectors of the economy, with the highest wages paid in the construction, energy and financial services sectors as well as in government bodies. Overall, wages of public sector workers are lower than those of private sector employees. Salaries in small companies are lower than in large companies, and companies that are expanding have higher wages. The highest salaries are earned by people in the capital city, Riga, while the lowest are in the most remote districts.

Findings

As wages are currently rising faster than productivity, overall labour costs are increasing in Latvia. The study found that employers are being forced to increase wages without considering productivity indicators in order to avoid losing staff. The report disputes the belief that there is a lack of employees due to low wages (LV0605029I, LV0512104F).

Furthermore, the study reveals that the wage system in companies is usually driven by individual motivation, namely in relation to bonuses for an individual’s work results, or by general collective work motivation, mainly due to bonuses for the company’s work results. Conversely, bonuses for the work results of a team or a separate unit are not common.

Half of all employees have received at least one form of non-monetary remuneration in the last year, such as a health insurance policy, a work-related trip, reimbursement of transport and communications expenses, or bank loan guarantees or loans for employees. Employees are sceptical about the extent to which they benefit from such bonuses in addition to their wages.

Commentary

This comprehensive and valuable study uncovers facts about wages not highlighted by official statistics, for example, about the shadow economy, illegal employment and ‘envelope’ wages. It has been calculated that undeclared wages constitute 20%–40% of wages nationally, and this form of pay is possible because employees agree to work without employment contracts, hoping to receive higher wages than they would under a standard contract. The study shows that, in fact, employees working without regular employment contracts receive less pay because it is easier to manipulate such workers as their legal and social security rights are reduced.

The Latvian government has begun an active campaign against illegal and unregistered employment (LV0606019I).

Raita Karnite, Institute of Economics, Latvian Academy of Sciences

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