About the ILO in Estonia

Moderate impact of COVID-19 pandemic but high inflation and supply chain realignment create challenges

After independence in 1991, Estonia introduced comprehensive economic reforms transiting to a market-based economy. A strong political consensus helped to go for fast and substantial reforms building an open economy based on foreign trade and foreign direct investment. Based on an advanced digitalization policy, Estonia also established itself as a regional hub of information and communication technology. EU membership in 2004 further enhanced the successful transition.

As a result, Estonia has been able to maintain an impressive rate of convergence towards the EU. The average annual growth of real GDP per capita was 3.7 per cent from 2010 to 2019, among the highest in the EU. While in the early 1990s the per capita income was 30 per cent of the EU average, it has reached 89 per cent in 2021. The labour market benefitted from the economic expansion and performed well prior to the COVID-19 crisis.

The impact of the COVID-19 pandemic on the Estonian economy has been moderate and limited in time. In 2020, Estonia’s real GDP declined by 3 per cent – less than in most EU Member States, followed by a strong rebound of 8 cent in 2021. The relatively mild contraction was due to sustained consumer spending as COVID-19 restrictions were limited and lifted swiftly.

Russia’s invasion of Ukraine is expected to affect some sectors of the Baltic nation, such as construction, transport, and energy, which still have strong links with Russia. Due to the invasion, Estonia has seen a large inflow of Ukrainian refugees (around 2.5 per cent of population). In the framework of temporary protection, the government supports their accommodation and integration in education and labour markets. The real GDP growth was -1.3 per cent in 2022 and a further contraction is expected in 2023 because of high inflation and reorientation of supply chains. A rebound is expected only from 2024 onwards.

In the medium to long run, labour shortages may put a damper on growth and could make wage questions more prominent to attract a workforce that can help to sustain the growth. Labour shortages are driven by a shrinking working age population, which has been decreasing since 2005. While in recent years the total population increased due to positive net migration, population ageing has offset the positive effect on the number of persons that could work. The working age population will further decrease by around 12 per cent in the next two decades due to low birth rates.

While poverty has been gradually decreasing (the rate of at risk of poverty or social exclusion was 22 per cent as compared to 21.7 per cent in EU in 2021), it remains high in certain groups, including the unemployed, elderly, and people with disabilities, raising questions of adequacy of social security benefits. Income inequality measured by Gini coefficient was 30.6 per cent which is only slightly higher than in the EU (30.1 per cent, 2021). The reported unmet need for medical care is one of the highest in the EU, pointing to gaps in access to and coverage of healthcare services. Population ageing is putting pressure on the long-term care system, which can hardly meet the growing demand.

The ILO in Estonia

Estonia has been member state of the ILO since 1992.

The ILO has assisted Estonia in its economic and labour market transformation and in its accession to the EU in 2004. Main areas of work included social dialogue, active labour market policies, labour law reform, occupational safety and health, and social protection.

In early 2023, the ILO helped to establish a collaboration between the public employment services of Estonia and Ukraine helping to modernise the Ukrainian agency.

Text last edited April 2023