What should be done?

In reaction to this news item (‘the Confederation of Finnish Industries demands that all possible flexibility is taken into use’) – the point is that this confederation wants to do everything allowed by the framework agreement to increase competitiveness and (labour) productivity.
First, the quest for increased productivity is usually a codeword for redundancies or other reorganizations to reduce personnel or use it flexibly. The point is to save on personnel costs. Why? Labour productivity is Total Production/Personnel (or Personnel Hours, sometimes). Which means that labour productivity increases if you decrease personnel and somehow get the employees to do the same production with less people. Therefore, unfortunately, this call for flexibility and increased productivity usually goes hand in hand with increased pressure on employees, stress, absenteeism etc. The report of the Occupational Health Institute on the Finnish paper industry is instructive in this respect.
Still, the employers are paying the wages of the employees, and if the Finnish industry is going under, then it doesn’t bode well for employees either. Like I pointed out in this post and this post, there are two issues that are worrying for the Finnish (export) industry: an increase of Real Unit Labor Costs in comparison to Germany and a worsening trade balance (although the latter is possibly a result of the former in combination with weakening demand in Germany and elsewhere). Also the apparently increasing inflation in Finland is a fairly bad sign (at least regarding exports).
So, as far as I can see, for the good of the Finnish economy and its employees, something has to be done.  Like I said in the previous posts, it seems that domestic demand is holding up fairly well for now, although apparently consumer confidence is currently extremely low if not zero. But the more important issue is the condition of the export industry, since this is where Finland, like all small open economies, earns its money.

In my opinion, there are two border conditions for a new central agreement. First, wages are extremely sticky downwards, which is an empirically well-established element of Keynesian macro–economics (see e.g. this post by Paul Krugman on recent research). Note that this refers mainly to nominal wage rigidity. As the Finnish experience of the 1990s crisis has shown, wages may be sticky but a so-called ‘zero line’ is nonetheless (temporarily) effective in cutting real wages, at least if inflation estimates are more or less correct. Second, for Finland there is no use trying to compete in manufacturing with lower-wage countries. Finnish unit labour costs are simply relatively high, for a multitude of reasons, and simply trying to cut wages is not enough. Furthermore, Finland is where it is, so that there is always the extra burden of transport costs.

Here, I don’t want to discuss the potential of leaving the euro, because the only condition for when that is rational is when Finnish inflation is so high, that the negative effects on the exchange rate from leaving the euro are compensated by this. But since this is akin to throwing Finland’s financial credibility (AAA status etc) away, this is a completely insane idea. Only if Finland could credibly devalue against whatever currency Germany uses, without endangering the national economy, this might make sense but is extremely risky. If anything, currently Finland’s and Germany’s membership in the euro most likely represses their potential exchange rate against dollar and yen.

So, given these restraints, what can be done? Finnish companies in the export sectors can only compete on superior quality and the best service there is. These things do not reduce unit labour costs, but they make the price difference worth it. As for improving labour productivity, squeezing more work in less time is a kind of old-fashioned method. Re-organizing production processes, so that employees’ individual input can increase might be more effective and the trust endowed on employees might also reduce absenteeism and make for better well-being at work.

The truth is of course that Finland is a kind of post-national country when it comes to the value chains of the products Finnish companies sell. Pekka Yli-Anttila of ETLA had this presentation at some point, in promotion of a very good study of the value-added in the Finnish economy. The main point that he stressed, was that Finland shouldn’t be doing is the actual production of goods (like phones) – that should be done in lower-wage countries. For the Finnish economy this would leave design, R&D, sales, maintenance and branding.

To my idea, this very realistic scenario raises some very hard questions about the current system of industrial relations, the Finnish welfare-system and programs for re-schooling. If the ideas of Yli-Anttila are to be taken seriously, this would necessitate a great change away from the dominance of SAK and TEAM (as openers for collective agreement negotiations) and a very broad policy to move employees away from manufacturing to other sectors (or to other jobs within manufacturing that do not involve ‘making’ stuff).

In fact, the required changes do to some extent tie in with labour market shortages in some sectors, due to changing demographics. But simply said, I do not believe current politicians (of any party) have either the vision or the courage to promote the (admittedly radical) policies that are needed to keep Finland’s social, environmental and economic welfare intact. Now is the time – not to cut wages to keep manufacturing alive a bit longer,but to ensure that employees can get out before it is too late (I am not suggesting ALL manufacturing should disappear from Finland, I only suggest that a realistic view should be taken to industries in difficulties on the world market).

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