Productivity Trap in Latvia
Productivity Trap in Latvia

Summary/Abstract: Along with a more rapid economic growth tension can be observed in the Latvian labour market. Number of economically active population is decreasing because of negative natural increase of the population and emigration, while number of job vacancies is rising and labour shortages become more acute. As a result wages are rising rapidly, and it, in turn causes increase in production costs and negatively affects the competitiveness of domestic firms. Changes in productivity and labour costs from 2011 to 2016 show that the increase in labour costs exceeded productivity growth more than two times in the manufacturing as well in the total economy of Latvia. Convergence of labour costs is inevitable in the conditions of free labour movement (open labour market), thus further economic growth of Latvia will largely depend on its ability to reduce the productivity gap with the advanced economies. The purpose of the research is to evaluate the dynamics of labour productivity in Latvia and its level in comparison with the EU average, as well as to reveal the most important factors limiting productivity increase in Latvia. The tasks of the research is to determine the main factors that influence labour productivity in Latvia in last 10 years, to compare productivity levels in Latvia and other EU country and to evaluate the current policy measures to increase labour productivity in Latvia. Different quantitative and qualitative research methods are used in the analysis, for example analysis of scientific literature and economic policy planning documents, statistical data analysis methods, shift share analysis etc. The results of the research show that productivity growth rate in Latvia was one of the fastest in the EU during the last five years that enhanced productivity convergence with the advanced economies. Raise of the productivity level was mostly influenced by the improved business conjuncture and optimization of the number of employees at the sectoral/firms’ level. Nevertheless, the contribution of structural transformation was insignificant on productivity growth. The main conclusion of research shows, that two mutually interconnected processes determine increase of productivity level. First, they are the entrepreneurs’ choices about competitive advantages on which their business strategies are based, which define the business management and technological decisions (to modernize production or to move resources across sectors, to other region or even other country). Second, it is the ability of the country to ensure the reallocation of the its resources to the most productive firms and sectors, i.e. to promote structural reforms or “technological upgrading”.

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