The economist explains that by reducing premature mortality at working age, the growth rate could be accelerated by 0.2 percentage points per year, by activating the internal reserves of labor – by 0.3 percentage points, by increasing the level of education – by 0.2 percentage points, by increasing the quality of education – by 0, 5 percentage points, improving the health of the employed population – by 0.1 percentage points, and attracting highly qualified migrants – by 0.6 percentage points per year.
During the last ten years, the size of Latvia’s economy grew by an average of 2.5% per year. Krasnopjorov points out that the same modest performance in the future will not be enough to reach at least the level of Lithuania and Estonia in terms of income.
The number of people available for the labor market in Latvia will continue to slowly decrease in the coming years, but this does not mean that the contribution of the human capital component to the dynamics of the potential gross domestic product will inevitably be negative. Krasnopjorov points out that there are three instruments that can be used to achieve a positive contribution of human capital to the growth of Latvia’s economy – to increase the number of people of working age, to fully employ people of working age, to increase the level of employees’ abilities.
Krasnopjorov reminds that Latvian society suffers from premature mortality – the country has one of the highest mortality rates in working age among the European Union (EU) member states. Only Bulgaria and Romania have higher mortality in the working age (Hungary also in some cohorts). By reducing mortality to the average level of the most developed EU countries (Sweden, Finland, Ireland, Belgium, the Netherlands, Denmark), Latvia can save more than 4,000 lives every year.
Applying this number of saved lives to the age-specific employment level, we get an additional number of employed people of around 3,000 per year, writes Krasnopyorov. Such a large number of additional employees can accelerate the annual growth rate of Latvia’s gross domestic product by 0.2 percentage points.
The birth rate in Latvia has been low for decades, but contrary to a widespread myth, the number of children per woman in our country is not lower than in most other EU countries, says Krasnopjorov. The economist emphasizes that the birth rate can and should be promoted, for example, by improving the availability and quality of kindergartens, as well as by protecting new mothers from the risk of poverty, however, even a significant increase in the birth rate would not provide immediate support for the pace of economic growth, as there is usually about 20 years between birth and the start of the working life years.
“If the number of working-age population in Latvia decreases by 15,000 every year, wouldn’t it be wise to “import” this missing amount of labor from abroad? In my opinion, a distinction should be made here between attracting highly qualified specialists and “importing” low-skilled labor. In order for immigration to promote not only the volume of the economy (or gross domestic product), but also the standard of living in the country (gross domestic product per capita), attracted migrants must have higher qualifications than the average level of the local population,” writes Krasnopyorov.
Although some entrepreneurs would also benefit from the massive recruitment of low-skilled workers to the Latvian labor market, as they could cost less than local workers or investments in the automation of production processes, the introduction of cheaper labor will not be able to achieve an increase in the standard of living for the entire Latvian society. There is also no hope that the growth of Latvia’s economy could be supported by the arrival of refugees from distant African or Asian countries, as the skills of the majority of their population do not meet the needs of the European labor market, the economist says.
In general, highly qualified immigration can be a significant support for the growth of Latvia’s economy – every 2,000 immigrants per year (with similar qualifications to local residents) would increase the annual growth rate of the gross domestic product by 0.1 percentage points, the economist calculated. The current amount of immigration in Latvia is around 0.6% of the population per year. This is twice less than in neighboring countries (Estonia and Lithuania) and in several developed EU countries, such as Denmark, Belgium, Germany, the Netherlands, Austria, and Slovenia.
If the intensity of immigration were to be raised to the average level of the above-mentioned countries, it would mean 12,000 additional immigrants per year for Latvia, which would increase the annual growth rate of the gross domestic product by 0.6 percentage points. However, Krasnopjorov emphasizes that it is much more important than driving up immigration numbers to create such living conditions for the local population that the masters of their trade would want to move to Latvia en masse.
The historically low number of unemployed people in Latvia may create a false impression that there is no internal labor reserve left in Latvia, but this is not the case, says Krasnopjorov. If the level of employment here in each age group was no less than in Germany, Denmark, the Netherlands, Ireland, Sweden and Estonia, the number of employed people in Latvia would be 73,000 more, the economist calculated.
“The internal reserve of labor – 73,000 – at first glance seems an unrealistically large number. This is more than the number of officially unemployed people in Latvia (51,000 according to the registers of the State Employment Agency and 63,000 according to the survey of the Central Bureau of Statistics). However, it should be remembered that several dozen more thousands of people without a permanent job are not looking for it, but would be ready to start working, for example, after retraining courses or receiving a tempting job offer,” explains Krasnopyorov.
According to him, it would not be correct to believe that the contribution of each of these 73,000 people to Latvia’s economic potential would be similar to the average level of the currently employed. First, a large part of the domestic labor pool is young and pre-retired – many of whom would only work part-time. Second, when “reservists” return to the labor market, their productivity is likely to be lower than that of current workers. Assuming that the contribution of “reservists” to Latvia’s economic potential is on average one half of the contribution of currently working individuals, the gradual activation of internal labor reserves within ten years can accelerate the annual growth rate of Latvia’s economy by 0.3 percentage points.
On the other hand, when talking about increasing the level of employees’ capabilities, Krasnopyorov points out – the more capable individuals are, the higher their productivity. So by increasing the ability level of workers, the economy can produce more with the same number of workers. Among the most important observable factors that determine the level of wages (and thus productivity) of workers are their education and health.
Employees with higher education in Latvia have a 48% higher salary (at other constant factors) than employees with secondary education. A similar higher education premium, which reflects the positive contribution of education to employee productivity, exists in other countries as well. Currently, 43% of Latvia’s economically active population has higher education, which is only a few percentage points less than in EU countries with high employment. If the share of the economically active population with higher education in Latvia gradually increases from 43% to 50% within ten years, it would increase the annual growth rate of the gross domestic product by 0.2 percentage points.
Improving the quality of education at each level of education (primary school, secondary school, professional education, higher education, including master’s and doctoral studies) in such a way that the average salary of graduates increases by 30% (which, according to graduate monitoring data, is not a large number), can raise the gross domestic product annual growth rate by 0.5 percentage points, writes Krasnopyorov.
Employees suffering from chronic diseases in Latvia (at other constant factors) have a salary 8% lower than that of healthy employees. The same thing happens in other countries – workers with health restrictions have lower productivity and thus lower wages. Gradually (within ten years) improving the health status of the population of Latvia to the average level of EU countries with high employment, the annual growth rate of the gross domestic product of Latvia can be increased by 0.1 percentage point, Krasnopjorov believes.
2024-03-10 20:38:00
#human #capital #component #increase #growth #rate #Latvias #economy
