Why Finns earn four times more an hour than Estonians?

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Estonian economist Andres Arrak writes in an opinion article in Delfi that Estonians like to compare themselves with other European nations and to measure their economic success or failure.

For instance, a comparison of GDP per capita shows that Europe’s richest country in 2011 was Luxembourg with USD 81,100, while Finland’s figure was USD 36,700 and Estonia’s was USD 20,600 per person. Estonians are finding only a small consolation in the fact that Lithuania’s figure was USD 19,100 and Latvia’s one was even smaller, at USD 15,900.

Does it mean that the living standard of Estonians is four times lower than that in Luxembourg and twice lower than in Finland?
Of course not - anyone who travels knows that living standards in Baltic states, Finland and Luxembourg are not so vastly different.

But why people north and west of Estonia earn several times more for same type of work? Why so-called economic refugees keep leaving Baltic states to become nurses, doctors, bus drivers or construction workers in the West? One thing that has always struck me is that for some reason Estonians still look down to Russians who live in Tallinn’s Lasnamäe and in 1970s or 1980s moved to Estonia from the rest of the Soviet Union for exactly the same reason.

Why is the resident of Lasnamäe who has no roots in Estonia and speaks no language so different from a health care worker who has emigrated abroad from Estonia? Teachers, rescue workers and medical nurses who work and live in Estonia don’t understand why they receive several times less than their counterparts just 100 km north. So it’s not surprising that they criticise the government that refuses to increase public sector wages and start to strike, as recently in the health care sector.

The fact is that most of the added value for the society is generated not by teachers or nurses, but by manufacturing industry whose taxes pay for the public servants. The difference is that while a tree is cut down in Norway, it undergoes a long added-value chain and finally becomes highly valuable plywood that is used to produce expensive furniture. When a tree is felled in Estonia, it is often exported as roundwood, without adding any value to it and, therefore, at a very cheap price. It’s all about the productivity of a workhour. When a Norwegian works one hour, he or she creates EUR 68.7 worth of value. The figure is EUR 48.5 in Denmark, EUR 44.4 in Sweden and EUR 40 in Finland.
On the other hand, it is EUR 10.8 in Estonia, 9.2 in Lithuania and 7.8 in Latvia.
And this is the answer. One workhour in Estonia is six times cheaper than in Norway and four times cheaper than elsewhere in Scandinavia.

And this allows these countries to pay their teachers or medical workers several times higher wages. Wages of non-productive sectors including civil servants can be increased only when the productivity of the manufacturing sector increases and not by increasing taxes because it would deteriorate Estonia’s business climate.