Wage Function Estimation of Estonia and Latvia

The study of wage determinants goes back to the beginning of economic science, with theoretical and empirical foundations providing the basis for the specification of a model of the wage function. Using the OLS method, we study the determinants of real wages for Estonia between 2006Q3 and 2022Q3 and Latvia between 2004Q1 and 2022Q3. The lagged dependent variable exerts the most considerable impact on real wages, i.e., real wages in the preceding quarter. We find that unemployment has a relatively larger impact on real wage dynamics than real productivity in the Latvian than in Estonian model. In the Estonian model, real productivity has a relatively stronger impact than unemployment in explaining real wages. In both countries, changes in real productivity impact real wages with a one-quarter lag. The findings on the relative influence of real wage determinants guide economic policymakers in targeting measures that could increase real wages in both countries.