Estonian Human Development Report

economic competitiveness of the EU and reduce its technological
gap with the US. One possibility is to modernize
the European social model, including increasing the flexibility
of the labour market.
By implementing certain concepts related to social
and labour policies, the EU is attempting to find a balance
between social security for the workers and the
flexibility of the labour market. This new approach has
started to be called flexicurity, which includes elements
of labour market flexibility and social security 36 . The
basic elements of flexicurity are a flexible labour market,
active employment policy, social protection and lifelong
learning.
Another background element we must inevitably
consider is the financial crisis, which began in the US
in the autumn of 2008 and now affects the global economy,
and the consequences thereof. The global economy
is undergoing difficult and anxious times. The debt crisis
that began in the real estate sector, also bankrupted
commercial banks, and caused a wave of bankruptcies
in investment banks as well. The investment bank crisis
globalized the US crisis, because the projects of US
investment banks are global in scope. This resulted in
forceful governmental intervention, whereby the UK
and the US governments essentially started nationalizing
the financial sector; they were followed by the other
EU member states. Banking was taken under strict government
control and one can probably say that investment
banking in the form we have known will never be
restored.
In 2009, it is still too early to tell what the global
impact of the financial crisis will be on the real economy.
As a rule, the labour market reacts to changes taking
place in the economy with a time delay. An example
is wage formation, where the established principle is
that wages are agreed upon a year in advance. In other
words, 2007 wages were agreed upon in 2006 and 2008
wages in 2007. Therefore, it is not surprising that in many
Estonian industries wages increased by tens of percentage
points in 2007, while at the same time, the economy
was already starting to show obvious signs of slowdown
in the middle of that year. The particularity of Estonia,
and apparently the other Baltic countries, is that the role
of trade unions is relatively marginal and employees usually
agree on wages with their employers individually.
The result is that employee salaries consist of relatively
low basic wages and relatively high additional fees and
bonuses. When the economy is booming, performance
pay increases rapidly, but when things go badly, this may
result in a rapid decline of gross wages in certain sectors.
Are there grounds to compare the financial and economic
crisis with the 1929 crisis in the US and the world,
as some analysts have rushed to do? Probably not. In
1929, workers did not have the same social guarantees
that we see in today’s market economy: starting from
property and life insurance and ending with social guarantees
in case of unemployment. At the end of the 1920s,
the unemployment rate in the US climbed to 25%, people
were ruined, social stratification and poverty increased
sharply, and the same occurred in Europe. In today’s
world, there is no basis for predicting a massive increase
in poverty in developed countries. The governments have
also reacted much more forcefully, intervening actively
with measures to keep the financial system functioning.
In any case, one can say that the economic crisis is a
test for the aforementioned European social and labour
market policies and will probably modify them to some
degree.
Before setting out to deal with individual aspects of
flexicurity, we will pause briefly at changes in the Estonian
labour market as a context for the processes that are taking
place.
General changes in the Estonian
labour market
Since the impact of the global financial crisis was just
starting to affect the real economy at the end of 2008, the
labour market situation in 2008 does not yet reflect the
events that will start to occur.
The cooling of the economy that began at the end of
2007 was accompanied by a notable wave of layoffs in the
second half of 2008, the extent of which is yet to become
clear.
According to Ministry of Finance data, real wages
increased in 2007 by 13% (nominal wages 20%) and productivity
by only 5.6%. Although this gap has probably
decreased during 2008, there is great economic pressure
for layoffs. Many industries that rely on cheap labour have
already laid off workers or even closed their companies
(for instance, Narva Kreenholm). In 2006, the number
of people that received special benefits as a result of collective
layoffs was 1,595, whereas in 2007, the number
stood at 2,567, and the number of people receiving relevant
benefits in the first three quarters of 2008 reached
3,854. This is a relatively small number compared to the
total number of unemployed individuals. Time-wise, the
most exact picture of the number of unemployed is provided
by the data on registered unemployment. At the
beginning of October 2008, 20,000 unemployed people
registered with the Labour Market Board, which is 54%
more than at the same time in the previous year. According
to the data of the Estonian Labour Force Survey,
unemployment in the third quarter of 2008 was 6.2%. At
the same time, we see that change in employment in the
third quarter of 2008 was not especially affected by the
economic recession.
According to Bank of Estonia projections, the average
unemployment indicator in 2009 will be 7%, and in case
of negative growth, unemployment could reach 9–10%. In
next few years an increase in unemployment based on the
economic environment can be predicted, and therefore,
people’s social protection, the effectiveness of active labour
market policies and training for workers will become even
more important.
At the same time, the labour market should not
forego its flexibility, because we are in a situation today,
where fiscal policy in Estonia tends to be pro-cyclic,
and amplify the growth phase during periods of economic
boom and intensify the decline during a downturn.
Active fiscal policies to stabilize the economy are
36
To read more about this in Estonian see the secondary school economic textbook dealing with the globalization of the Estonian economy
(see Eamets, 2008).
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