On the Country-specific Recommendations for Finland in the context of the European Semester

Last week, a slew of reports in the context of the European Semester 2013 came out. Their goal is to point out what to do to restore growth and jobs and ‘The recommendations are based on a thorough assessment of every Member State’s plans for sound public finances (Stability or Convergence Programmes, or SCPs) and policy measures to boost growth and jobs (National Reform Programmes, or NRPs).’ The reports and associated documents can be found here. I apologize that most of the links are in Finnish.

There is a lot of material here to discuss, and it probably takes time for me to work through it all – even regarding just Finland. But this bit caught my attention:

The next wage agreement should aim for lower wage growth, in line with productivity growth.
Negotiations between the employer associa
tions and trade unions will start in 2013.
Given the current state of the economy, the
employer associations are hinting towards a
nominal wage freeze as their starting position fo
r the negotiations. This would help to bring
wages back in line with productivity levels.
Productivity developments should be considered
explicitly in each wage negotiation round. Sectoral agreements as opposed to one centralized
agreement could help ensure wage growth does
not outpace productivity growth in one of the
sectors. The approach of the 2007 round of sectoral
agreements however should be avoided, where the first concluded sectoral agreement was taken up by the other sectors as a minimum benchmark, with each sector outbidding the other sectors’ wage growth.
First of all, this recommendation is a bit weird, because research by Traxler et al (2003) shows that it is quite possible that exactly at the sectoral level wage drift is most likely to happen, if there is not some kind of mechanism to keep sectoral wage increases in check.  The characterization of Finland’s 2007 bargaining rounds is more like the Finland of the 1970s and 1980s than of current Finland – because this ‘outbidding’ might have been fine as posturing, but given the apparent lack of strikes (apart from the health care sector!) it is not at all clear that there was any success in trying to get higher wages.
No, 2007 was characterized, like earlier periods of sectoral bargaining, by an ‘opening’ by the main industry sectors, whose agreed wage increases were then taken as a kind of standard for other sectors. As shown in the article here, the health care sector was the big exception, and a story of its own. But the people who wrote the Country Specific Report for Finland really stretch the truth by stating that the first collective agreement was taken ‘by the other sectors as a minimum benchmark, with each sector outbidding the other sectors’ wage growth.’ And while the wage increases (in nominal terms!) were relatively high, so were those in Germany at the time. Furthermore, it should be remembered, that Finland saw at the time quite rapidly rising inflation, so in real terms the developments were more or less the same as before. In picture of the link there is a sharp uptick in the real wage, which is entirely due to a lag in nominal wages relative to the sharp drop in inflation following the start of the Eurocrisis in 2008 – which was of course unexpected. As can seen in this graph, which is the most recent Statistics Finland has, it can be quite clearly seen that real wage developments are not something to write home about.
If employers really go for the zere-wage-growth strategy (nominal!), or even wage reduction, then with the (again) increasing inflation in Finland, employees will soon (again) face wage deflation. With the recent news by the Bank of Finland, of forecasting faltering internal demand, i.e. consumer spending, it is clear that aiming for lower wages will harm the Finnish economy more than it helps exports – especially since Finland’s main export sectors (metals and wood/wood-products) do have competitive advantages regardless of supposedly high unit labour costs (according to the EU report, that is). As I say in Finnish here, the Finnish labour union federations can do a lot worse than opening wage negatiotations with a goal between 2 and 4 percent wage increases, and that is just taking into account expected inflation.
The bottom line: the Country Specific Recommendations for Finland seem to some extent very political in their intended effect on Finland’s industrial relations system, something which Thorsten Schulten also has written about in the context of the Troika.
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