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Viewing cable 07TALLINN33, ESTONIA: LABOR SHORTAGE LOOMS LARGE

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Reference ID Created Released Classification Origin
07TALLINN33 2007-01-16 15:06 2011-08-25 00:00 UNCLASSIFIED Embassy Tallinn
VZCZCXYZ0030
RR RUEHWEB

DE RUEHTL #0033/01 0161506
ZNR UUUUU ZZH
R 161506Z JAN 07
FM AMEMBASSY TALLINN
TO SECSTATE WASHDC 9434
UNCLAS TALLINN 000033 
 
SIPDIS 
 
SIPDIS 
 
DEPARTMENT FOR EUR/NB 
 
E.O. 12958: N/A 
TAGS: ECON ELAB PGOV EN
SUBJECT: ESTONIA: LABOR SHORTAGE LOOMS LARGE 
 
REF:  TALLINN 0005 
 
SUMMARY: Estonia's dynamic and rapidly expanding economy is 
quickly exhausting the ability of the country's small 
population (1.35 million) to provide labor. The signs of a 
tight labor market are already present - record low 
unemployment, rising wages, increased worker turnover and 
shortages in public and service sectors. Businesses have 
called for higher immigrant labor quotas, but Estonians are 
not eager to bring in large amounts of foreign workers. 
Some foreign firms have stopped expanding operations in the 
country due to the lack of workers.  President Ilves has 
acknowledged that slowing growth is driven, in part, by 
labor issues.  END SUMMARY 
 
-------------------------------- 
SMALL COUNTRY-SMALL LABOR FORCE 
-------------------------------- 
 
1. Since emerging from nearly 50 years of Soviet occupation 
in 1991, the economy of Estonia has been racing.  Annual 
double digit growth rates have been the norm.  Estonia is a 
country of just 1.35 million people with a working 
population of 692, 800 according to the Estonian Labor 
Market Board.  The Ministry of Social Affairs cites a 4.8% 
unemployment rate for the country, and 1.4% in the capital 
city of Tallinn.  Estonia added approximately 40,000 jobs 
in the past year. 
 
---------------------------------------- 
ECONOMIC TRANSITION DRIVES LABOR DEMANDS 
---------------------------------------- 
 
2. The economy is transitioning rapidly as well. 
Traditional industries in Estonia are mining (oil shale is 
a major resource), fishing, agriculture and forestry. 
Employment in these sectors is declining, while there is 
high labor demand in service industries such as tourism, 
hotel and restaurants, construction, security, sales, and 
medicine.  Manufacturing is also a fast growing sector as 
firms from other EU states, especially Finnish and Swedish 
concerns, rushed to build facilities in Estonia over the 
past decade to take advantage of a highly skilled and 
relatively low wage labor force. 
 
------------------------------------ 
ECONOMY MAY HAVE REACHED ITS LIMITS 
------------------------------------ 
 
3. There are increasing signs however, the Estonian economy 
has reached a limit on the amount of labor that it can 
provide to keep the red hot economy growing.  Estonia 
already has one of the highest labor participation rates in 
Europe at 64%, according the Maria Varton, Deputy Secretary 
General of the Ministry of Economy.  Increasingly, younger 
Estonians are opting to stay in school longer (there are 
nearly 65, 000 students enrolled in higher education) and 
to work and study elsewhere in the EU.  According to a 
study published by Hansapank, Estonia's largest bank, 39% 
of 18-24 year olds intend to seek employment outside the 
country.  Most frequently cited reasons are higher 
salaries, better working conditions, a wish to experience 
life outside Estonia and a better climate.  A European 
Foundation for the Improvement of Living and Working 
Conditions report published in October says that 7% of the 
Estonian population plans to leave the country in the next 
5 years. 
 
---------------------------------------- 
LOW BIRTHS AND IMMIGRATION LIMIT WORKER GROWTH 
---------------------------------------- 
 
4.  Compounding the labor migration of the young adult 
workers is Estonia's low birthrate and almost non-existent 
immigration.  Like much of the EU, birthrates are well 
below population replacement levels.  The Ministry of 
Social Affairs cites the children born per woman rate at 
1.3 (2.1 is generally considered the level needed to 
maintain a steady population).  The Estonian national 
government has expanded measures to stimulate birthrates by 
paying parents who choose to stay at home their current 
salary (up to $1600 a month) for up to 1 year and 
guaranteeing them the ability to return to their place of 
employment up to 3 years.  According to the Estonian 
Central Bank's labor market survey, currently 38,000 
potential workers say they are out of the market due to 
family care.  Of course, this initiative will take 18-20 
years to impact the labor force and in the short term, 
actually removes labor from the market. 
 
---------------------------------------- 
SIGNS OF STRAIN-RISING WAGES AND LABOR TURNOVER 
---------------------------------------- 
 
5.  Already there are signs of strain on the labor markets. 
Wages and salaries are rising quickly.  The Estonian 
Statistical Service reported that salaries rose 16.4% from 
the 3rd quarter of 2005 to the same quarter in 2006. 
Hourly wages rose even faster, 18.8% in the same period. 
The average monthly salary now stands at 9531 Estonian 
Kroons per month (USD$801) and hourly wages at 54.4 EEK/hr 
($4.58) - more than doubling since 2001.  Unemployment 
rates, already below 5%, are predicted to fall to 3.4% by 
2008 
 
6. The rate of labor turnover is also increasing.  Previous 
surveys showed the average length of time Estonians were 
employed by the same company was 7 years, much higher than 
the 5 year European Union average.    However, a European 
Foundation study published in October found that nearly 55% 
of Estonians plan to change jobs in the next 5 years.   The 
increasing turnover appears to be happening already in both 
service and manufacturing sectors.   The general manger of 
the Radisson SAS hotel in Tallinn, Johann Aschan, cited a 
59% labor turnover at his hotel where 15-20% is his 
company's target for European properties.  At an American 
Chamber of Commerce (AmCham) conference on labor issues in 
Tallinn in October, representatives of a number of 
technology companies said that they cannot hold on to 
engineers and software technicians who are changing jobs 
between companies on the average of every 3 months and 
netting 15% salary increases each time. 
 
-------------------------- 
BUSINESS CALLS FOR ACTION 
-------------------------- 
 
7.  Over the last several months, expatriate business 
groups such as AmCham and the Swedish and British Chambers 
of Commerce have tried to focus GOE attention on the  labor 
shortage issue.  These groups estimate that Estonia needs 
to import 100,000 new workers by 2010 to maintain current 
growth, but note that only 500 non EU workers-primarily 
those with high technical skills-are currently allowed in 
each year.  Companies also complain about long and tedious 
bureaucratic procedures involved in importing workers from 
non-EU countries.  Some foreign firms have said they have 
stopped expanding operations in the country due to the lack 
of workers. 
 
8. The Estonian government has as yet been reticent to 
address the labor import issue and politicians are very 
unlikely to go on record on this issue in the run-up to 
March Parliamentary elections.  Popular support for 
increased immigration is believed to be very weak, 
particularly given that a primary source of additional 
labor would likely be Russian-speaking workers from Russia, 
Ukraine and Belarus.   At the AmCham conference, Ministry 
of Social Affairs (MSA) Secretary General Maarja Mandmaa 
rejected the call for major changes to the tight labor 
immigration polices, although she stated that an economic 
ministry working group was looking at new rules.   Mandmaa 
also highlighted other ways the GOE hopes to deal with the 
labor shortage issue.  Among these are increasing 
productivity, stemming labor migration, recruiting from new 
EU members such as Romania and Bulgaria and improving 
statistical reporting so that there is a clearer picture of 
the evolving situation.   Finally, Mandmaa noted that the 
government has targeted the long term (defined as more than 
one year) unemployed to fill in the shortage of low skilled 
labor.  However, the Bank of Estonia reported in late 
October that this group has decreased by 40,000 and there 
were virtually no workers left who want a job but are 
unable to obtain one. 
 
9.  Though nearly everyone agrees that the labor shortage 
is problematic, there are differing opinions on what the 
effects and solutions will be.  In the December issue of 
the Amcham's Estonian Advantage Magazine government and 
business leaders were asked about this issue. President 
Toomas Hendrik acknowledged slowing growth, called "the 
labor shortage one of the biggest issues we face" and said 
that wages and productivity would have to rise to keep 
workers in Estonia.  At the same time, he rejected calls 
for immigration of "cheap Russian labor".   Alexander 
Tsarkov, the managing director of FusionOne a technology 
 
SIPDIS 
company opines that he "does not see a bright future for 
the labor market in Estonia because it is possible that 
economy will stagnate and that salary levels and a lack of 
work force will lead businesses to move outside of Estonia 
to Russia, China, and India." Alternatively, Vartan of the 
Economic Ministry says that higher labor costs will 
"transform Estonia into a knowledge society" and work to 
draw back Estonians who have migrated for better salaries. 
Finally, Prime Minister Andrus Ansip told Charge (reftel) 
recently he believes the economy can continue to grow 
without expanding its labor force "through increases in 
productivity." 
 
10. Comment:  Only time will tell how much of an impact 
labor issues will have on medium- to long-term economic 
growth in Estonia.  Economic forecasts predict GDP growth 
will slow next year but will remain significantly higher 
than the EU average.  (Recent predictions indicate about 8% 
growth in 2007, down from close to 12% in 2006.)  Despite 
efforts by the business community to press the issue, the 
GOE will likely continue to try and avoid a politically- 
charged discussion about labor immigration for as long as 
it can. 
 
GOLDSTEIN