About the ILO in Latvia

Solid recovery hit by economic impact of Russia’s invasion of Ukraine

 

Since the dependence in 1991, Latvia has set out on the road to independent democracy and a social market economy. The transition from a centrally planned system to a market economy required a complete overhaul of key economic institutions. EU membership in 2004 further enhanced the successful transition. In line with the EU’s current policy priorities, Latvia seeks to take on the green and digital transitions, expecting positive effects for its economy and labour market.

Latvia has been able to maintain a strong convergence towards the average EU per capita income in the past 25 years although the process is slightly slower than in the other Baltic states. While in the early 1990s, the per capita GDP was below 25 per cent of the EU average, it reached 72 per cent in 2021. Despite wage growth in recent years, levels of inequality and poverty are higher than EU average. Income inequality measured by Gini coefficient was 34.3 per cent in 2022 (EU27: 30.1 per cent in 2021). In 2022, 26 per cent of Latvians are at risk of poverty or social exclusion (EU27: 21.7 per cent in 2021). Poverty among older people is increasing as pensions do not keep up with the economic development. The gender pay gap is also one of the highest in the EU (22 per cent vs. EU average of 14 per cent).

Backed by economic growth, unemployment rates continued to decrease to 6.3 per cent in 2019 but rose to 8.1 per cent in 2020 due to the pandemic. Since then unemployment rates have been decreasing 7.6 per cent in 2021 and 6.9 per cent almost at the pre-pandemic level. The labour market recovery is not uniform across all groups. Youth unemployment rose from 12 per cent in 2019 to 14.9 per cent in 2020, but increased to 15.3 per cent in 2022. The overall employment rate has consistently remained higher than the EU average (76.8 per cent vs. 74.5% in 2022).

The economic recession caused by the Covid-19 pandemic was less severe than originally expected. GDP contracted by 2.3 per cent in 2020 (compared to -5.6 per cent in the EU) and rose by 4.3 per cent in 2021 and 2.8 per cent in 2022. The resilience of the export, manufacturing, and services sectors played a major role, but also the relatively good management of the health crisis and strong fiscal stimulus packages amounting to 7 per cent of the GDP in 2020, with additional spending in the following years. Social partners played an important role in advising the government on the response package.

Latvia’s relatively close link with Russia on trade and energy dependence is set to lead to a loss of export revenue and significantly increase prices for energy and raw materials. The government has taken measures to counter the economic and social consequences of Russia’s invasion of Ukraine. Latvia provides support to the Ukrainian refugees including access to social protection, healthcare, education and housing services, as well as easing access to the labour market. As high inflation continues to weaken household spending and the bottlenecks in manufacturing supplies, growth will stagnate in 2023 (expected 0.3 per cent). It is expected that economic growth will rebound in 2024-27, supported by a rapidly growing services export sector and falling inflation.

A returning labour market challenge in the medium to long run will be shortages of labour. One of the main reasons is the shrinking population. Since the early 1990s Latvia lost a quarter of its population (the country currently has 1.9 million inhabitants). Emigration has accounted for roughly two thirds of the depopulation. Latvia’s population is projected to continue declining by around 1 per cent annually, but the decrease of working age population is set to intensify.

The ILO in the country

Latvia has been a member state of the ILO since 1991.

The ILO assisted Latvia in its economic and labour market transformation and in its accession to the EU in 2004. Main areas of work included social dialogue, the effects of privatization and labour market transition, active labour market policies, labour law revision, and pension reform.

Since the country joined the EU in 2004, collaboration has been ad hoc. The last technical assistance project of the ILO in Latvia was an EU funded project for establishing a youth guarantee scheme (2015 to 2017).

Text last edited May 2023