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20 June 2018

Latvia: labour market developments and the need to improve pensions

With Latvia’s working-age population declining rapidly and an old-age poverty rate that is the second-highest in the OECD, Latvia should reform and improve the mandatory and voluntary funded pension schemes, analysts are saying. However, the ability of social partners and bipartite social dialogue to contribute in this area is limited as a result of low membership and weak representation, especially in SMEs.

Latvia has undertaken a number of reforms in key areas in recent years. The country implemented a major tax reform and is pursuing reforms in other areas like healthcare, education and public administration. The economy is, on aggregate, on a strong footing with productivity growing. According to the European Commission’s semester papers, the country’s economic growth has led to increasing employment opportunities for both men and women, decreasing unemployment and increasing wages and gross household disposable income per capita. Compared to other EU-countries, the gender employment gap is low.

Nevertheless, social safety nets in Latvia are still not effective at reducing high inequality, poverty and social exclusion. The country belongs to the most unequal countries in the EU, where the richest 20% earn around six to eight times more than the poorest 20% (together with Romania, Lithuania, Bulgaria and Spain). Old-age poverty rate is the second-highest in the OECD (after Korea), with more than 25% of people aged 65 and older having an income below the relative poverty line. Poverty particularly affects women, which can partly be explained by their longer life expectancy. More than one-third of females over the age of 75 live in poverty. The absence of a survivor pension for spouses also contributes to this situation. Low participation by the young in active labour market policies is stunting access to the jobs market and hindering achievement of equal opportunities for all.

The 2018 OECD Review of the Pension System in Latvia highlights the challenges facing the pension system. The country’s working-age population (people aged between 20 and 64 years) is expected to fall by about 20% over the next two decades, due to low fertility rates, increasing life expectancy and high emigration. Thus, the working-age population is declining quickly, as a result of negative natural growth and net emigration. The outflow of people with higher education accounted for 40% of net outward migration between 2009 and 2016; an equivalent to 17.4% of the high-educated working-age population. Therefore, the emigration of skilled labour remains a challenge for the country’s competitiveness and economic growth in the long run. In a 2018 ILO-analysis of the impact of industrial relations on convergence, outward migration was also identified as a risk for economic and social convergence. The OECD recommends that the country strengthen old-age safety nets and raise the basic state pension in order to reduce pensioner poverty, especially among women, and address the challenge of a fast-declining population.

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