Estonia: Wage formation

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  • Observatory: EurWORK
  • Topic:
  • Published on: 30 March 2009



About
Country:
Estonia
Author:
Kirsti Nurmela, Marre Karu
Institution:

Disclaimer: This information is made available as a service to the public but has not been edited or approved by the European Foundation for the Improvement of Living and Working Conditions. The content is the responsibility of the authors.

In general, the situation in Estonia is characterised by rapid wage increases in the past years, with an average increase of 16% in 2006. Wage formation takes place mostly at company level with the exception of some sectors where sectoral level minimum wage agreements are valid (i.e. health care and transport). There is also a statutory national level minimum wage which is agreed by the social partners and established by the governmental decree. In 2007 the minimum wage stood at 32% of the national average wage.

1. Systems of wage formation

a) Please briefly describe the main systems of wage formation in your country (when relevant please distinguish between private-public sector). For example:

  • is the system underpinned by legislation or collective bargaining, a mixture of both, or other factors, such as the labour market?

Legislation has only a minor role in wage formation by prescribing the right to equality in wages and remuneration in special conditions (i.e. overtime, evening and night work etc.).There is also a statutory minimum wage which is obligatory for all employers (see also Chapter 3 below).

The role of collective agreements varies between sectors. While in most sectors there are no collective agreements at all, some sectors have fixed a minimum wages (see for example EE0702059I on health care and EE0801019I on road transport). Therefore, wages in the private sector are mainly regulated by the labour market.

In the public sector, the system of wage formation is underpinned by legislation as wages are dependant on the wage scale defined by government decree. Conditions and extent of additional payments and bonuses are prescribed in the Public Service Act.

  • who are the main actors?

In the private sector, employees and employers are the main actors as individual agreements on wages prevail. In the public sector, the government has the main role.

  • do state bodies play a role in wage setting?

In the public sector state bodies have the dominant role as the system is underpinned by legislation. In private sector state bodies have a minor role - only to the extent of monitoring the implementation of the Wages Act.

b) If collective bargaining is the main determinant, what is the main level at which this takes place (national, sectoral, and/or company level)? Where relevant, please refer to other European Foundation studies that you have written in this context. Where collective bargaining fails, what is the role of labour market institutions (i.e. labour court, labour commission)? Provide an example if relevant.

In general, the membership of trade unions remains very low in Estonia and the role of collective bargaining in the wage formation is not very strong. According to the latest Working Life Barometer (2005), 25% of the employees have a collective agreement concluded in their enterprise.

If collective bargaining fails, the parties can turn to the public conciliator and local conciliators who have the responsibility to conciliate between parties during a labour dispute (for more information on labour dispute resolution processes see EE0402102F).

Persons may also address labour dispute committees if their rights are violated. According to their annual report, conciliators in 2007 received 1,274 claims on unpaid wages (30% of all employee claims) and 83 claims on illegal deductions on wages (2% of all employee claims).

In addition, there is the Labour Inspectorate (Tööinspektsioon) which monitors the legality of employment relationships. In 2006, out of all 1,878 inspections on employment relations, there were 83 cases where wages paid remained under the national minimum wage level and 72 cases where wage conditions were not fixed in the employment contract pursuant to law.

c) Monitoring. What monitoring of collective bargaining is carried out (if any)? Who carries this out? (Joint /Tripartite body at national/sectoral level)? How does it do this? Are there any studies or surveys?

There is a registry of collective agreements managed by the Ministry of Social Affairs (Sotsiaalministeerium) where collective agreements should be registered. However, there are no sanctions for not reporting a collective agreement and thus the number of agreements in the registry remains limited. The Estonian Trade Union Confederation (Eesti Ametiühingute Keskliit, EAKL) also monitors collective bargaining, however only with regard to their own membership. There are no other organisations who monitor collective bargaining.

Due to the rather low level of collective bargaining coverage on the one hand and a lack of reliable information on the other hand, very few studies were carried out with regard to collective bargaining. Consequently the existing studies have been mostly qualitative (for example Kallaste, Jaakson, 2005 and Kallaste et al, 2008) or focussed on a single sector (Anspal, Kallaste, 2003).

In the context of the Estonian collective bargaining, the monitoring carried out in the framework of the European Industrial Relations Observatory (EIRO) is also relevant as there is no other research or monitoring body that would collect periodical information on the collective bargaining developments. At the same time, this monitoring is also selective by concentrating on certain parts of the economy rather than the whole scope of collective bargaining in Estonia. At the same time, this is probably the most extensive monitor conducted on national level.

2. Wage developments

a) Please briefly describe any major overall wage development trends over the past five years (refer to previous EIRO updates where appropriate)

The data from Statistics Estonia indicates a significant wage increase in the last years with an 8 to 12% increase in average monthly wages during 2000-2005. In 2006, the increase was at 16.5%. The average wage has increased from EEK 4,907 (about €314 as at 2 June 2008) in 2000 to EEK 9,407 (€601) in 2006. Information on the average wage in 2007 is not yet available. However, the arithmetic mean of four quarters shows an increase up to EEK 11,260 (€720).

b) What developments have there been regarding equal pay between men and women in your country? Is this an issue for debate?

According to Statistics Estonia, the hourly wage of females was 74.6% of males wage in 2005 after remaining constantly at about 75% since 2000. The largest gender pay gap is among technicians and associate professionals (67.2%) and craft and related trades workers (67.6%). The most equal pay is among skilled agricultural and fishery workers (93.4%).

There are no significant debates in Estonia on the gender pay gap and social partners have not included the topic into the negotiations. It is rather discussed among European level social partners than on national level (see also EE0612019Q). Regular data is published by Statistics Estonia on the gender pay gap, but this has not found any extensive feedback in the media.

c) Please briefly describe the main recent sectoral agreements and outcomes in terms of pay

Currently two sectoral level collective agreements are valid which were concluded in 2007. A minimum wage agreement was concluded in the health care sector between the government, the Estonian Hospitals Association (Eesti Haiglate Liit, EHL), the Estonian Nurses Union (Eesti Õdede Liit) and the Federation of Estonian Healthcare Professionals Union (Eesti Tervishoiutöötajate Ametiühingute Liit, ETTAL). Due to disagreements between employee representatives, one group in the sector (mostly doctors) are not covered by the agreement. Still, the minimum wage agreement covers about 88% of the healthcare sector (see also EE0802019Q).

Compared to 2006 the minimum hourly wages for nurses increased by 54% (from EEK 39 in 2006 to EEK 60 in 2008) and for caregivers by 43% (from EEK 23 in 2006 to EEK 33 in 2008) (see also EE0702059I and EE0608019I). Even though the doctors were not covered by the agreement, their minimum wages were still increased by 49% from EEK 75 in 2006 to EEK 112 in 2008.

Another collective agreement including provisions on sectoral minimum wages was concluded on 1 February 2008 in the road transport sector by the Estonian Transport and Road Workers' Trade Union (Eesti Transpordi- ja Teetöötajate Ametiühing, ETTA) and the Union of Estonian Automobile Enterprises (Autoettevõtete liit) (EE0801019I). According to the agreement, in the case of standard working hours, bus drivers and highly qualified repair mechanics earn a minimum monthly amount of EEK 7,060 (€451), drivers EEK 6,560 (€419) and unskilled repair workers EEK 5,470 (€350). According to the agreement, minimum wages will be further increased on 1 January 2009. As a comparison, according to the Statistics Estonia, the average wage in the land transport sector (including transport via pipelines, i.e. NACE 60) is EEK 9,267 in 2006.

d) Are there any noteworthy trends at company level, such as an increasing individualisation of pay setting?

No noteworthy trends could be pointed out. Also, there is no research that would help to observe changes in wage formation on company level.

In general, pay setting has been individualised in Estonian companies and the role of collective bargaining is relatively limited. However, the Estonian Compensation Survey has indicated that the variable pay systems on team or organisational level have become more important in addition to individual level performance (see also EE0803019Q).

e) Recent main actions/strikes /protests on wages

There is a rather low level of industrial action in Estonia. However, there have been a number of cases where trade unions gave notice of strike or held a picket.

In 2006 two collective actions can be mentioned: a picket on 31 August by tram and trolleybus drivers in order to achieve equal salaries with bus drivers. As a result the salaries were raised by 20% (EE0609029I); a demonstration on 14 September by the State and Local Administration Institutions’ Workers’ Trade Union (Riigi- ja Omavalitsusasutuste Töötajate Ametiühingute Liit, ROTAL) to demand an increase of salaries in the civil defence sector (EE0605029I).

In 2007 a one hour warning strike was held on 26 October with about 250 bus drivers participating and demanding an increase in minimum wages for bus drivers (see also EE0801019I and EE0804039Q). In addition there were several strike threats, for example in the health sector and in one of the biggest textile companies in Estonia, Kreenholm. In both cases the strike was cancelled after a wage agreement had been concluded (EE0702059I and EE0803029Q). Similarly, strike plans were also held among teachers in order to demand a rise in wages. However, no action has occurred until now.

f) What are the main social partners’ views on wage developments in your country?

The Estonian Trade Union Confederation (EAKL) has pointed out that even though the increase of the minimum wage has been the highest in the last two years, more difficult negotiations are expected during 2008 as the economic growth has been declining to a large extent (see also EE0804019I). Under these conditions, negotiations with the employers on wage increases will not be easy. At the same time, despite the economic developments, wage increase are still necessary as the level of inflation remains high (at the level of 6.7% in 2007 compared to 2.4% in EU-27).

With regard to the declining economic growth, the chairman of EAKL, Mr Harri Taliga, has commented that if wages would not be increased, than the economic depression would be intensified even further. Without an increase in wages, income tax and social contributions would decrease while a reduction in consumption would reduce other tax contributions as well. Mr. Taliga demands that wage increase should be higher than the inflation rate.

With regard to the public sector wages, EAKL has been stressing the need to increase transparency in the wage formation system of the public sector by increasing the level of fixed wages and reducing the proportion of additional bonuses (see also EE0703019I). The employers have expressed a similar standpoint. They propose a new system of additional payments that should be directly related to the achievement of strategic goals of the institution instead of the current system of unreasoned additional remuneration (e.g. additional payment for language skills, level of education etc.).

According to the other national level social partner, Estonian Employers’ Confederation (Eesti Tööandjate Keskliit, ETTK), in the context of decreasing economic growth the wage system should remain flexible in order to cope with the changes in the labour market, i.e. the system of wage formation should remain decentralised. Also, ETTK proposed that the wage expenditures in the public sector should be frozen as the increase in public sector wages has been higher than in the private sector during 2007 (see also EE0804019I). According to them the wage increase should follow the principles of the private sector where increases in wage levels are inconceivable without an increase in productivity and competitiveness.

3. Minimum wages

In this section, we are aiming to update information from the previous study on the minimum wage (/ef/observatories/eurwork/erm/comparative-information/salaires-minimums-en-europe)

a) Does your country have a national minimum wage?

Yes

b) How is it defined? How is it set and uprated? Do you have any data as to its level and coverage rates?

The minimum wage, as defined in the Wages Act, is the minimum amount of wage per specific unit of time (hour, day, month, etc.) established by the Government of the Republic. In case of full-time employment, agreements on wage levels lower than the minimum wage are not allowed.

Until 2001 the minimum wage negotiations were held annually on a tripartite principle. Since 2002 the minimum wage negotiations have been conducted on a bipartite basis. According to the agreement concluded in 2001 between the central trade union (EAKL) and employer (ETTK) organisations on the principles of establishing the minimum wage, a new agreement is negotiated each year. After they have reached a consensus on the level of the minimum wage for the following year, the government will establish the minimum wage level with a decree (for information on annual minimum wage agreements, see EE0712019I, EE0701029I, EE0601104F, EE0507101N, EE0501103N, EE0411102F, EE0409101N and EE0311101N)

The minimum wage requirement is valid for all Estonian employers and employees. However, the estimations on how many workers are influenced by the changes in the minimum wage level (i.e. who receive an income at the level of the minimum wage or whose wage is associated to the minimum wage level) vary significantly from 15,000 workers estimated by ETTK to a total of 100,000 workers estimated by the Tax and Customs Board (Maksu- ja Tolliamet).

See data on the level of minimum wages in table 1 below.

c) Are there minimum wages (sectoral, regional) covering a major part of the workforce?

d) What are the views of the social partners and the government on the minimum wage(s)?

In broad terms, the standpoints on minimum wages are the same as pointed out in the previous European Foundation report on minimum wages (ee0504101s).

With regard to the latest economic developments, the central trade union organisation, EAKL has expressed satisfaction with the minimum wage increase in the last two years which have been the highest (EE0712019I and EE0701029I). With regard to the future developments and the increasing consumer prices (see also point 2f), EAKL sees the further increase in minimum wages important as the price increase affects the low-paid workers the most.

The employers (ETTK) on the contrary have stressed the need to approach the minimum wages more flexibly, i.e. the increase in minimum wages should be moderate in order to enable to provide jobs to older workers, persons with special needs and other risk groups in the labour market as these groups are affected the most (see also EE0409101N). To that purpose they have also proposed to compare the minimum wage level to the median wage rather than the average wage as is the case currently (see also point 3f). They have also proposed to lose the national minimum wage requirement and bring the minimum wage negotiations to the sectoral level, i.e. the minimum wage level would be differing across sectors. However, the proposal has not found support until now.

Since 2002 the government did not intervene in the minimum wage negotiations and there have been no standpoints announced recently. They only establish the minimum wage with a decree (see also point 3a).

e) Is the minimum wage a subject for debate in your country?

Is there any debate on minimum wage and minimum income? Please indicate the main issues and policy implications that are debated in this respect.

With regard to the minimum wage negotiations, the standpoint of the social partners is reflected each year in the media. However, there have been no further debates besides the negotiation process.

f) Do you have any data on the minimum wage in relation to average wages, how it interacts with the tax system and any effects it is having on employment?

In 2001, EAKL and ETTK concluded an agreement on the long-term principles of minimum wage negotiations establishing the increase in the minimum wage rate up to 2008 (EE0311101N). According to this agreement, the minimum wage should represent 41% of the national average wage by 2008. However, with the current minimum wage level the proportion remains around 33% of the expected average wage (see also EE0712019I).

There are also some sectoral level agreements which set minimum wages for certain sectors or occupations (see also point 2c). However, as these cover only a small part of the economy, only the national level minimum wage is described below.

Table 1. National minimum wage in relation to average wage, 2000-2007
  Monthly minimum wage (EEK, €) Monthly average gross wage % of minimum wage in relation to average wage
2000 1,400 (€89) 4,907 (€314) 28.5
2001 1,600 (€102) 5,510 (€352) 29.0
2002 1,850 (€118) 6,144 (€393) 30.1
2003 2,160 (€138) 6,723 (€430) 32.1
2004 2,480 (€159) 7,287 (€466) 34.0
2005 2,690 (€172) 8,073 (€516) 33.3
2006 3,000 (€192) 9,407 (€601) 31.9
2007 3,600 (€230) 11,260 (€720)* 32.0
2008 4,350 (€278) 13,027 (€833)** 33.4

Sources: Statistics Estonia, Ministry of Finance (Rahandusministeerium), authors’ calculations

Note: *2007 monthly average gross wage, arithmetic mean of four quarters; **prognosis for the monthly average gross wage by Ministry of Finance

The social partners state that increasing minimum wage levels reduces the proportion of undeclared wages in the economy, as many employers pay taxes only on minimum wages. However, the impact of the minimum wage on undeclared work is negligible as the number of persons directly influenced by it is rather small. The share of full-time employees on minimum wage has been slightly decreasing and was only 4.8% in 2005 in Estonia (Leetmaa, Võrk, 2007).

There has also been some research on employment incentives in relation to Estonia’s tax benefit system, particularly for low-wage earners (Võrk, Paulus, 2006) (see also EE0701069I). The analysis concluded that although the country’s tax benefit system is relatively straightforward, it creates several disincentives for low-wage earners to enter into employment or to increase their working time. However, the report also suggested that these groups are not very large: only about 1% of employed and 2% of inactive or unemployed people actually face a potential loss of a proportion of their earnings due to increased income taxes and reduced social benefits when increasing their work efforts marginally or when entering employment on the minimum wage. Several earlier studies have confirmed the existence of the disincentives in the Estonia’s tax and benefit system which have a significant effect of de-motivating low-wage earners to seek employment (see EE0701069I).

The impact of the minimum wage on employment during 1995-2000 has been analysed by Hinnosaar and Rõõm (2003). The results implied that an increase of the minimum wage leads to employment reduction for the group of workers who are directly affected by this change, i.e. those whose wages have to be raised as a result. An additional negative effect of increasing the minimum wage is that the rate of compliance with this regulation diminishes as a result, thereby enlarging the share of workers whose salaries remain below the legally set minimum.

4. Wage formation within the IT sector

Please describe indetail the wage formation process in the IT sector in your country.

I] Please give the main features of the sector

a) Importance of the sector in the economy

Research on the Estonian ICT sector has been conducted by the Estonian Association of Information Technology and Telecommunications (Eesti Infotehnoloogia- ja Telekommunikatsiooni Liit, ITL). According to the research, the number of information and communication technology (ICT) companies is around 2,000 in Estonia. As a comparison, according to Statistics Estonia there were a total of 56,565 companies in the economy in 2006. Thus in terms of companies, the sector forms about 3.5% of the economy. However, it should be noted that in addition to ICT companies, there are IT divisions of large companies and self-employed persons which are not included in the data.

b) % of the workforce in the sector

According to ITL there are a total of 13,000 employees in ICT sector (an estimated 7,000 are active in IT). As a comparison, according to Statistics Estonia there were a total of 594,700 employees in 2006. Thus about 2.2% of the total workforce is employed in the ICT sector.

c) Main pay-related characteristics, such as: low pay, differences in pay between men and women and/or older and young workers, wage drift;

No such pay-related characteristics could be pointed out as there is no statistical definition of the IT sector and no statistics describing the sector. Also, there is no research on such pay-related characteristics in specific sectors.

II] Describe the main characteristics of the sector pay decision process

a) Is the wage formation process in this sector shaped by institutions? If there is a collective bargaining process, how does it work? Eg:

  • at sector level only;
  • at sector level, which then provides a framework for company level;
  • at company level only

Who are the main actors?

There is no information on collective agreements in the IT sector. The main actors in wage formation are thus employers and employees as the wage formation takes place at enterprise level or individual agreements.

b) Specific issues : upward pressures on pay such as wage competition between firms, the effects of a tight labour market, and using pay as an attraction and retention tool, the effects of migration on pay, the effects of the presence of multi-national firms within a sector and whether comparisons have been made between the pay offered by multinationals and local companies

According to ITL, the main problem in the sector is lack of qualified workforce. Namely, it is estimated that the optimal number of companies in the sector would be 100-150. Currently, the estimated number of companies is around 2,000. Thus the issue of lack of qualified workers and consequently wage competition has emerged.

As a result, the labour expenditures have been increasing to a large extent. For example according to a research on the ICT sector in 2006, the increase in labour expenditure was 33% among the IT companies. At the same time, the increase in turnover and profits were 21% and 14% respectively.

At the same time, ITL has also announced in 2007 that the number of young persons graduating in the field of IT only fills 15% of the demand in the sector. Most (about 90%) of the 640 persons graduating in the field are already employed. At the same time, there is a demand for 400 qualified specialists in the sector. This will most probably further intensify the wage competition between companies.

III] Analysis on trends and views of the actors

a) Are there any major differences between this sector and the rest of the economy in terms of wage formation?

As a result of the rapid growth and development in the sector, the need for qualified workforce is increasing and this has currently an important effect on wage formation. At the same time, the general rapid economic growth has created similar effects in other sectors as well. Thus, currently no major differences could be pointed out.

b) Are there any noteworthy trends at company level, such as an increasing individualisation of pay setting?

In the IT sector, as in most of the economy in general, the wage formation has been governed by individual level agreements. No noteworthy trends in this respect could be pointed out.

c) What are the main views of the social partners in this sector on wage formation?

The most important problem in the sector, as stated by the sectoral employer organisation, ITL, is the intense wage competition between companies as a result of the lack of qualified workforce.

d) Are there any positions of the authorities on the sector’s wage policy ?

In general, the authorities do not intervene into wage formation in the private sector. At the same time, the IT sector is seen as a motor of the Estonian economy and thus the lack of qualified workforce is addressed by promoting IT education among young persons. For example, this includes the activities of the Information Technology Foundation (Infotehnoloogia Sihtasutus) which supports the training of higher-educated IT specialists and other educational activities related to ICT. One of the founders and a member of the board is the Ministry of Education and Research (Haridus- ja Teadusministeerium, HTM).

5 Views of the national centre

The wages have been increasing rapidly in the past few years, with an increase of 16.5% in 2006. However, in 2008 the economic growth has been declining (see also EE0804019I). As a result, the economists from the Bank of Estonia have pointed out that sustainable economic development will be threatened if the increase in labour productivity is continuously lower than wage increases – as has been the case in Estonia. The problem is also evident in the IT sector.

References:

Kirsti Nurmela, Marre Karu PRAXIS Center for Policy Studies

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