Continued high wage growth in Latvia and its effect on

UNCLAS RIGA 000339

SIPDIS

E.O. 12958: N/A
TAGS: ECON AFSN AMGT ELAB LG
SUBJECT: Continued high wage growth in Latvia and its effect on
Embassy Riga



1. According to the Latvian Central Statistics Bureau, the average
gross monthly salary in Latvia in Q1 grew by 28.1% year-on-year. In
absolute figures this translates into an increase from LVL 354 to
453 (USD 787 to 1007). Gross salaries grew by slightly more in the
private sector than in the public sector -- 28.6% and 27.2%,
respectively. The average salary in the private sector, however, was
still lower than in the public sector, LVL 424 (USD 942) and LVL 516
(USD 1147) respectively. Due to a recent increase in tax deductions
for dependents, the average net wage growth - 29.7% -- exceeded
average gross wage growth. Assuming an inflation rate of 16.4%, the
real average wage increased by 11.4%.


2. In March 2008, the average gross monthly salary in Riga in the
public sector reached LVL 640 (USD 1422). In the context of Post's
wage issues, more than a half - 54%, of local staff receive a salary
that is below this level.


3. In response to the worsening economic conditions in Latvia,
particularly soaring consumer price inflation, the government
announced plans to increase the minimum monthly salary and minimum
hourly rate by 12.5%, effective January 1st 2009. Currently, the
minimum gross monthly salary is LVL 160 (USD356) and the minimum
hourly rate is LVL 0.962 (USD 2.14); after the increase, the minimum
monthly salary and hourly rate will be LVL 180 (USD 400) and LVL
1.083 (USD 2.41),respectively.


4. The economic turbulence in Latvia is continuing. The producer
price index, which serves as a good indicator for consumer price
inflation, increased in April to 3.3% month-on-month. With consumer
price inflation nearing twenty percent (17.9% in May, year-on-year)
every report of increasing inflationary pressures is perceived very
sensitively. The other major concern remains excessive economic
slowdown or even a recession, especially in light of Q1 growth
dropping to 3.3 year-on-year.


5. Comment: Despite all the promises from government officials that
inflation will drop later this year, it continues to grow. The
explosive wage growth, combined with global spikes in energy and
food prices, only contribute to inflationary pressures. We are very
skeptical that Latvia can get out of double digit inflation before
the end of the year. Whatever the macroeconomic and political
implications of Latvia's economy increasingly likely hard landing,
this issue is much more personal for us. Our FSN staff has seen
their 2007 wage increase - average five percent - delayed in
implementation and completely eaten away by inflation. FSN morale
continues to plummet and many of our local employees have either
left the Embassy or make no effort to hide that they are planning to
do so as soon as they can find another job. Given the continued
wage growth and overall economic situation in Latvia, we urge
Washington to budget for full implementation of the wage increase
recommendation that emerges from the salary survey as was done this
year. To put it bluntly, we are already facing a crisis which will
only get worse if nothing is done.

Seldowitz