Fast recovery from limited impact of the pandemic, Lithuania faces challenges of high inflation and supply disruption by the war in Ukraine

After regaining its independence in 1990, Lithuania embarked on a major economic transition from command to social market economy. This contributed to a catching-up towards the living standards in the European Union. The country’s EU membership in 2004 further helped accelerate convergence. Lithuania’s per capita GDP in 2021 is 89 per cent of the EU average. Labour markets benefited from these developments before the Covid-19 pandemic. In 2019, the employment rate stood at 78.0 per cent, above the EU average of 73.2 per cent, while unemployment fell to 6.3% below EU average of 6.8 per cent.

The economic recession caused by the Covid-19 pandemic was mild. In 2020 GDP contracted only slightly (0.0 per cent), while the EU average was -5.6 per cent. The economy returned to its pre-pandemic size in early 2021, one of the fastest recoveries in the region. Strong pre-pandemic growth, relatively low dependence on tourism and specialisation in manufacturing products, and a rapid and robust government response to Covid-19 helped to weather the crisis. The fiscal stimulus package (11 per cent of GDP) focused on income support for households, liquidity for businesses and support for the healthcare sector. Social partners participated in the design of the package.

The labour market recovery required more time. Unemployment increased from 6.3 per cent in 2019 to 8.5 per cent in 2020, but subsequently decreased to 7.1 per cent in 2021 and 6.0 per cent in 2022. Youth employment quickly expanded from 11.9 per cent in 2019 to 19.6 per cent in 2020 (EU average 16 per cent) but then fell at 14.3 per cent in 2021 and 11.9 per cent in 2022. The challenge of labour shortage is apparent in the near double digit percentage increase in wages, which stands at over 4 per cent for 2021 higher than the gain in productivity.

The country's open, export-oriented economy has heightened its exposure to external disruptions stemming from the effects of the war in Ukraine. Concerns about inflation became prominent, as the import-dependent economy posted one of the highest inflation rates in the EU (18.9 per cent in 2022). Higher energy costs and monetary tightening will entail a stagnation in 2023 (expected 0.2 per cent GDP growth) with expected rebound in 2024-27.

One of the medium and long term challenges is that the gains of the country’s rapid economic development have not been equally shared. The risk of poverty or social exclusion remains higher than the EU average (23.5 per cent vs 21.7 per cent, 2021). The country also has higher income inequalities among all EU countries. Income inequality measured by Gini coefficient was 35.4 per cent (compared with EU27: 30.1 per cent) in 2021. Yet, the gender pay gap in Lithuania is relatively low (13 per cent vs.EU27 average of 14 per cent), as is the gender employment gap - at 2% the lowest in the EU. The pandemic underlines the need for a more inclusive growth model with strengthened social protection.

The shrinking population became a major bottleneck to growth. Lithuania’s population has fallen by nearly 25 per cent since the early 1990s due to high emigration and adverse demographic trends. Although net migration turned positive in 2019, the outflow of skilled labour continued, limiting the potential for growth. The shortage of workers has been growing in recent years while labour migration from non-EU countries is growing.

The ILO in Lithuania

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

The ILO assisted Lithuania in its economic and labour market transformation and in its accession to the EU in 2004. Main areas of work included social dialogue, labour force surveys, effects of privatization and labour market transition, active labour market programmes, and labour law reform.

In 2021, the ILO supported Lithuanian trade unions to establish legal advisory services for migrant workers from Ukraine and Belarus.

Text last updated May 2023