Can convergence keep up with a declining population?
After more than 50 years as part of the Soviet Union, Latvia regained independence in 1991 and 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, with support from the European Recovery and Resilience Facility.
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% of the EU average, it reached 70% in 2020. Backed by economic growth, unemployment continued to decrease to 6.3% in 2019 but rose to 8.1% in 2020 due to the pandemic. Youth unemployment went down to 12% in 2019 from 36% in 2010 during the Great Recession, rising to almost 15% in 2020. The overall employment rate has consistently remained higher than the EU average (77% vs. 72% in 2020).
The economic recession caused by the Covid-19 pandemic was less severe than originally expected. GDP contracted by 3.6% in 2020 (compared to -5.9% in the EU) and rose by 4.5% in 2021 (5.1% in the EU). 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% of the GDP in 2020, with additional spending in the 2021 budget. Social partners played an important role in advising the government on the response package. ILO estimates show that a relatively low amount of working hours were lost due to the pandemic in 2020 (4.4% vs. 7.4% in the EU) and 2021 (2.1% vs. 2.7% in the EU), which were equal to 39,100 full-time jobs in 2020 and 17,800 full-time jobs in 2021 (based on a 40-hour week). However, as can be seen from the unemployment rate in 2020, not all jobs could be saved through reduction of working time.
A returning labour market challenge during the current recovery 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% annually, but the decrease of working age population is set to intensify.
Despite wage growth in recent years, levels of inequality and poverty are still high. 26% of Latvians are at risk of poverty or social exclusion (EU27 average: 22%). 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% vs. EU average of 14%).
The ILO in the country
Latvia is 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 on 03/22