Decline in economic growth and rise in unemployment
Economic growth has declined significantly during the past two quarters in Latvia. Real gross domestic product fell by 4.6% in 2008; during the first quarter of 2009, it fell by 18% compared with the first quarter of 2008. The decrease in economic growth is accompanied by an increase in unemployment and a risk of deepening social polarisation. In April 2009, the number of people receiving unemployment benefit doubled compared with the previous year. The average unemployment benefit was increased in April 2009.
One of the primary indicators of the recession’s impact on the Latvia’s economy is unemployment levels. Since the country’s independence was restored, the highest level of unemployment was recorded in 1996, at 20.5%. In comparison, this figure stood at just 0.5% of the active population in 1990. After Latvia’s accession to the EU, its economy had been growing rapidly – at about 10% a year up until 2008. The availability of credit had stimulated an increase in domestic demand that had been conducive to a reduction in unemployment levels. In 2004, the level of unemployment stood at 10.4% and continued to decline in 2005 (8.7%), 2006 (6.8%) and 2007 (4.4%). However, in 2008, all of the country’s economic sectors experienced a decline in growth. Real gross domestic product fell by 4.6% in 2008; during the first quarter of 2009, it fell by 18% compared with the first quarter of 2008.
Negative impact of recession on employment
The decrease in domestic demand at the end of 2008 was accompanied by an increase in the number of persons who have been made redundant. The level of unemployment registered in December 2008 was 7%, compared with 4.9% in December 2007. In April 2009, unemployment reached 11%, which represents a 0.3 percentage point increase compared with the figure for March, when unemployment stood at 10.7%.
Also in April 2009, the number of people receiving unemployment benefit doubled compared with the previous year. The average unemployment benefit in April 2009 has been increased by 37% compared with the amount granted in April 2008, and currently stands at LVL 185 (about €263 as at 25 June 2009).
In 2008, the sectors with the highest number of employed persons were trade (16.6%), manufacturing (15.2%) and construction (11.2%). According to data for 2007–2008, the most rapid decrease in the number of employed people occurred in agriculture and forestry (20,000 persons) and the mining industry (3,800 persons). At the same time, the number of employed people increased in the education sector (8,600 persons) and manufacturing (6,200 persons).
|. Number of unemployed people||Number of economically active people|
|First quarter||Second quarter||Third quarter||Fourth quarter||First quarter||Second quarter||Third quarter||Fourth quarter|
Source: Central Statistical Bureau of Latvia (Latvijas Statistika)
Changes in social insurance policy
On 19 May 2009, the cabinet decided to make changes to the country’s social insurance policy. Accordingly, it is planned that the period during which unemployment benefits can be received from 1 July 2009 to 31 December 2011 will be nine months.
In accordance with Article 9 of the Law on insurance for the case of unemployment, which is currently in force, unemployment benefit is granted for four months to persons who have been made redundant and accumulated up to nine years of service, and for six months to persons who have been made redundant and amassed between 10 and 19 years of services. For persons who have been made redundant and whose length of service is 20 or more years, unemployment benefit is granted for nine months.
In the current situation, in order to receive unemployment benefit in Latvia, a person must fulfill certain conditions, namely: they have to obtain the status of unemployed person; their length of service should be at least one year; and they must have paid compulsory social insurance contributions for no less than 12 months in the past 18 months before obtaining the status of an unemployed person. As of 1 July 2009, however, the period of compulsory social insurance contributions for eligibility to receive unemployment benefits will be changed: all employees will have to pay social insurance contributions for at least nine months over a period of one year.
Impact of recession on social environment
According to social policy experts of the Free Trade Union Confederation of Latvia (Latvijas Brīvo Arodbiedrību savienība, LBAS), the country’s social benefit policy should be developed in accordance with social justice principles. Changes in the unemployment benefit system are expected to be in force by 31 December 2011. Moreover, the amount of benefits in the extended period will be LVL 45 (€64) – that is, four times less than the value of the minimum consumer basket of goods and services at the beginning of 2009.
According to the Central Statistical Bureau of Latvia, the Gini index in Latvia stood at 0.37% in 2007. Along with the increasing number of unemployed persons in 2009 – which is partly due to the number of collective redundancies – the degree of social polarisation between households has been deepening.
Irina Curkina, Institute of Economics, Latvian Academy of Sciences