Raivo Vare: Estonia suffering from problems of a wealthy society

The interior ministry pulled the covers off a bill last week that aims to place greater responsibility on companies that make use of short-term foreign labor. Subcontractors will be expected to verify whether foreign rental labor providers have actual business activity in their home country.

Do you support the interior ministry’s initiative of increasing the responsibility of subcontractors and employers who hide behind other subcontractors?

Like it is with all political problems – and this is primarily a political problem – the consequences can either be ill or very ill. The idea in itself is noble – to contain illegal transactions and ensure tax discipline. Nevertheless, the bill seems undercooked. The economic idea behind it is unfinished.

What bothers you the most about it?

The effect of the bill is estimated at €3.5 million in increased tax revenue, which is a good thing. But no one is considering what would happen were we to sever access to foreign labor for a lot of companies in different sectors.

In other words, finding workers would become even more difficult, even though a lot of companies are already strapped for workers?

Absolutely! I agree gray areas and schemes are being employed, but we would do well not to throw the baby out with the bathwater. We are not just talking about construction companies that are often made out to be the bad guys. We are talking about a lot of companies going under at this point. For example, agricultural enterprises that grow vegetables for whom it has become utterly impossible to find people in Estonia willing to harvest them manually. It’s tough and sad, but it is a fact.

The Estonian Electronics Industries Association, members of which are responsible for 25 percent of Estonia’s industrial export, recently said the planned amendment concerns them too. They are also suffering from labor shortage.

Looking at the macro level, Estonia is moving into a stage of development characteristic of wealthy societies. It is the start of psychological-sociological processes that will come to affect the simplest work in all sectors.  People simply refuse to work for a modest salary or do simple work, while no one is offering high salaries for unskilled work. The process will culminate in certain industries finding themselves unable to compete.

Could the altered situation lead to higher salaries?

No! Maybe in some places but not in general. Some areas will simply not be able to facilitate salary advance, with businesses forced to close shop, which is what we’re already seeing in agriculture.

Therefore, “Helme’s changes” will raise the question of the viability of companies?

Not just viability but also the financial side of things. The total turnover of the economy and value added in different sectors. Sectors in which it will fall and where it will stop. No one is looking at these aspects today. Few are thinking in the mid-to-long-term. Little will change in the short term, with the setback manifesting 1.5-2 years from now.

On the other hand, market mechanisms will push certain sectors out. No one can say today whether that’s good or bad. Some of those sectors are not participating in international competition but are aimed at the domestic market. The suffering of these sectors will likely bring price advance. That will benefit the state budget through increased revenue. All in all, it’s a double-edged sword. We cannot say it’s bad or good.

Where lie the roots of the problem?

There are several sources. First, there’s social dissatisfaction. While our salaries are still growing rapidly and faster than productivity, it is not enough as we are drawn psychologically to the Scandinavian standard of living. Politicians are forced to adapt to that psychology, which is what they’re doing. We can add to that political preferences (the Conservative People’s Party’s (EKRE) anti-immigration stance – editor).

Ukraine is currently a major source of labor for the Baltics, Poland, Hungary, Slovakia and allegedly the Czech Republic. And we’re talking about relatively qualified labor. Having ties to companies I will not name, I know that positions that require technical education are filled by Ukrainian engineers with higher education. They are doing good work and are happy making two average salaries in Estonia.

Why? Because it is impossible to find local labor in the sector, no matter how much you offer to pay. The industrial and agricultural sectors simply don’t have people. And we’re not talking about construction workers whom we could theoretically bring back from Finland.

The foreign labor quota is besides the point? These schemes are used to bypass the quota.

It is largely irrelevant because it is too strict – 1,315 people a year – and gets filled in just a few days in January. It has had its day. It would need different stages, but that is a long story. Exempt from the quota – thank God – are IT specialists. Without it, we would be in the dark. At the same time, electronics specialists and engineers have no exception, even though they need one.

Is getting these schemes under control realistic?

To some extent, I’m sure. I’m reminded of the EU’s struggle against international tech giants, like Google. Attempts to tax income where it is generated and not where it is registered. Proceeding based on that logic could help remedy the situation, instead of trying to solve the problem through fines.

The planned changes would saddle entrepreneurs with the burden of proof instead of the state. If you are an entrepreneur, good luck trying to find out what someone is doing in the Czech Republic or Poland. Fear of fines will scare away subcontractors, forcing main contractors to compete for those that are left and some to eventually stumble onto the burden of proof problem. A very difficult situation. Some schemers will balk at the €64,000 maximum fine but definitely not all of them.

Does that mean everyone stands to lose?

That’s just it! Everyone is treated the same. The state’s inability to separate cutlets from flies, so to speak, is the main problem as I see it. As is unwillingness to try. Instead, we see efforts to obligate others to shoulder the state’s tasks, demands and punishments.

The Finns have calculated that in order to retain their current standard of living – not boost, just retain – they need 55,000 new foreign workers every year. They have their own game rules as construction companies are also subject to tax checks and other control mechanisms. However, in Finland, state agencies are in charge of checking the legality of workers, not contractors who in Estonia will be required to check whether their Polish partners are swindlers.