# **2. ANATOMY OF LATVIA’S LABOR MARKET**

Significant changes to the Latvian labor force have occurred since the transition to a market economy in the early 1990s, and subsequent stabilization. The Latvian population has declined substantially since 1990 and so has the labor force. At the same time, structural changes in the economy have led to labor reallocations between sectors of the economy. As in all transition countries unemployment increased during the first part of the 1990s. However, the economic recovery in the following years has allowed unemployment to stabilize.

This section is devoted to trends and issues in Latvia’s labor market, with a specific focus on demographics, employment, and unemployment. Using data from the labor force survey (LFS) we provide an overview of the evolution of labor force participation rates, employment/population ratios, employment composition, and unemployment rates by age and gender for 1997-2002. Latvia’s labor market indicators are compared with the ones found in other EU accession countries and selected OECD countries, as well as with the EU-15 average figures.

## **A. POPULATION TRENDS**

Effective policy making in Latvia is confounded by demographic trends and uncertainty about the extent of potential labor migration after EU accession which occurred in May 2004. While unemployment will remain a problem in the short to medium term, in the longer term labor shortage is a very likely scenario. The 2003 OECD report warns Baltic countries that “insofar as a possibly emerging scarcity of labor in the future would be unlikely to be offset by a steep rise in immigration or fertility, it will be all the more important to enhance the existing human capital and to ensure that it is productively employed” (OECD, 2003a).

Since the beginning of the transition to a market economy, Latvia has experienced a steep and sustained decline in total population. The population fell from about 2.67 million in 1990 to 2.33 million at the end of 2002 (a drop of about 12 percent or about 1 percent per year). This trend has several explanations, but the key contributing factors have been the negative balance of external migration, low birth rates, and the age structure (see Figures 1 and 2; Box 1). The population decline has not led to a slowdown of economic growth. In fact, recent increases in labor productivity have been so large that Latvia attained an average 5.7 percent real GDP growth during the last 5 years (see Figure 1). This impressive growth was achieved despite the Russian crisis in 1998, which constituted a significant external shock. The growth performance of Latvia appears even more remarkable in per capita terms, at 6.5 percent over the past five years. However, a situation like this will be sustainable only if the labor force is very flexible to the changes in market environment, and has the ability and opportunities to upgrade its capacities.

The decline in the Latvian population is associated both with an increase in the fraction of elderly in the population and with a decrease in fertility. The combination of these factors and a gradual increase in the official retirement age since 1996 has led to a net increase in the proportion of the population of working age (see Figure 3).

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