Lithuanian wages growing faster than productivity

The accelerating rate of Lithuanian wage growth has not been met with an increase on labour productivity and the Bank of Lithuania says this could be a problem for the country’s economy.

Labour productivity has always been important, and it is important in the current economy for productivity to grow together with wages. Since 2010, however, wage growth has been nearly double that of productivity.

“Rapid wage growth contrasts with other macroeconomic scales, like, for example, price growth – prices grew by 8.3% – and labour productivity, which grew by almost 11%,” said Bank of Lithuania Economics and Financial Stability service director Gediminas Šimkus. “Wages grew by a bit more than a quarter.”

Wages also rose because of the minimum wage increase. According to Šimkus, people are happy about the minimum wage increases, but these may turn against them in the long run. By paying more for workers, businesses, and especially exporters, reduce their competitiveness, which reduces the number of orders, which in turn reduces wage growth and hiring.

To make labour more productive, not just innovations, but also greater demand for products and services are needed.

“Usually, we look at labour productivity rather simply – that is, when people have good work tools, they work efficiently. But that’s actually not enough. An increase in demand increases people’s productivity. Let’s imagine a village store. If twice as many people come to buy twice as much stuff, that cashier’s productivity has doubled even though she has the same work tools – a cash register, a chair, etc. Lithuania has driven itself into a closed loop where the lack of demand means poor work productivity, especially in the regions,” said Raimondas Kuodis, Bank of Lithuania’s deputy chairman.

According to Kuodis, there are two economies: Vilnius and the rest of Lithuania. Residents in regions depopulated by emigration receive lower incomes than in the capital. They buy less, grow more food on their own, and prepare food at home. It’s hard to expect them to suddenly begin consuming more. This is why businesses in Lithuania’s regions, especially when geared towards domestic consumption, is rarely productive.

This year, however, the bank predicts that domestic demand will rise together with wages. Prices, however, will also rise as Lithuania transitions from a deflationary period to an inflationary one.

LRT