Coping with Growth and Emigration: Latvian Labor Market Before and After EU Accession

Abstract

In 2002-2005, Latvian labor market has witnessed dramatic changes related both to unprecedented economic growth and to a massive outflow of labor force after EU enlargement in May 2004. This study, based on micro-level analysis of Latvian Labor Force surveys 2002-2005, provides a detailed analysis of these changes, with a particular focus on developments which are likely to improve living standards of formerly disadvantaged segments of population. The findings suggest that emerging shortage of labor has led to strong wage growth and reduction of unemployment. The author documents increased employment rates and improvements in labor market position of ethnic minorities, elderly, fixed-term workers, the low-skilled, and other disadvantaged groups. Wage growth, in turn, has fostered labor force participation, resulting in further increase of employment rates. This analysis may be of interest for policy makers in countries entering a period of transformation or exposed to external shocks. The study also provides an in-depth analysis of the labor market integration of the sizable Russian-speaking minority in Latvia. The author finds, on average, modest occupational segregation but somewhat larger segregation as far as the sectors of the economy are concerned. In both cases, segregation index is inversely related to Latvian language skills; the same is true for the observed ethnic wage gap. The unexplained ethnic wage gap reaches its maximum (6 percent) for workers with medium Latvian language skills.