Currently, Finland has two highly charged political processes going on. The first is concerned with the government’s budget for next year and the second is the negotiation of a centralized incomes agreement, which is a framework collective agreement specifying certain limits to e.g. wage increases. Both of these discussions take place in the context of a worsening economic situation in Finland, which in itself is very much related to the Eurocrisis. The core discussion revolves around international competitiveness and the need for wage moderation (which I do not agree with). In this context, it is useful to reflect on the role of inflation in all this, and how it may hurt the official policy goals that it is not anymore the Bank of Finland that sets interest rates.
The latest press release by Statistics Finland on wages and salary earnings can be found here. The statistics behind it (in Finnish) can be found here. The core message is that nominal wage increases are up by 2.1% compared to the same period in 2012. The graph in the press release nonetheless shows a downward trend in nominal wages.
Statistics Finland is not concerned with policy advice, but this data is in time for the collective bargaining negotiations that are going on rights now – the parties to these negotiations (state, employers, labour unions) aim to find a solution for a centralized agreement that supports the Finnish economy. One issue that participants seem to agree on is the need for wage moderation.
As can be seen from the graph in the press release, the index of real earnings, i.e. the nominal earnings index corrected for inflation, has been negative for some time for most of 2011 and is only slightly up, but fairly flat. Inflation has been quite a bit higher in Finland in 2011 and 2012 than the 2% aimed for by the ECB (see here, p. 7) but currently around 1,6%.
The issue of wage moderation is a difficult one. The labour market parties can agree that they aim for moderate increases, but nonetheless reject the zero-growth option. In that case they have to estimate the expected inflation right, because with low nominal and higher inflation you still get a decline in wages (and purchasing power) and the other way around you don’t have moderation although a higher real wage growth might be good for the Finnish domestic demand.
Considering inflation in Finland has varied quite much since 2008, and taking into account that the ECB core interest rate is already near zero, it is difficult to construct a centralized agreement that will provide steady moderate wage growth over a period of three years (the proposed duration of the centralized agreement). This dynamic can be seen in the press release for the years 2008 and 2009: nominal wage increases were significant but also inflation was over 4%, so in 2008 real wages were subdued, while in 2009 inflation went to zero, which boosted real wages.
Obviously, there are many other problems the labour market partners consider in the current negotiations, but regarding the role of inflation in the actual real wage increases, it remains problematic that interest rates are set in Frankfurt rather than Helsinki – the consequence of the ‘one-size-fits-all’-monetary policy in the EU. So regardless of what compromise the labour market partners reach, it still may be thwarted by forces not anymore under control by the Finnish state.