Once more: inflation in Finland, labour market relations and wage moderation

Yesterday a new press release regarding inflation in Finland was released. It turns out that in December the consumer price index dropped by half a percentage point to 0,5% from 1% in November. The average 2014 inflation for Finland was 1%.

According to the press release, again rent increases as well as tobacco products and day care (!) had the biggest influence on the increase in prices. The biggest influences towards a decrease in the CPI are products related to oil, mobile phones and second hand cars. In other words, it seems that products that are more completely under the influence of “market forces” get cheaper while those that exist in (at best) pseudo-markets get more expensive. As I wrote in the post behind the link, in the case of rent increases this is hard to explain. I have heard the argument, that in the case of the community-funded rent dwellings, the rent increases result from the loans that only now have been started to be paid back. In theory this can be verified – on a community basis, it can be checked whether or not they have started experiencing repayments on these loans. I will try to look into this, if I have time.

The point is, though, that since 2011 inflation in Finland has been steadily decreasing. In 2007-2009 Finland experienced fairly large wage increases, which mainly resulted from the fact that collective bargaining happened on the sectoral level and during those negotiation rounds everything seemed fine with the economy. When the Lehman crash came, and the start of the Eurocrisis, Finland was stuck with “too high wages” (in relation to Germany). Ever since, the focus in labour market relations has been on wage moderation. Recently, the Chairman of the Confederation of Finnish Industries Jyrki Häkämies stated that there is no room for wage increases for at least 10 years (!). The employers’ representatives continue to preach the message that Finnish labour is too expensive and that Finnish industries simply don’t manage to compete in Europe or the global market. In this context the employers’ federation is really pressing for wage moderation.

I think this is misguided. First, although Finnish industries are a major source of export incomes, slide 38 in this presentation shows that industry accounts for at most 25% of GDP, and slide 4 shows that 50% of exports comes from the Finnish technology industries (see slide 3 for an explanation of this sector.) Apart from the electronics sector, which is obviously related to mobile phones etc, most Finnish exports are actually investment goods and other half-products. By that I mean that Finnish industries produce parts and machines that companies in other countries use to make the final products. Examples abound, from the paper machines of METSO and the forestry machinery of Ponsse to the dairy packaging machines of ELECSTER.  Not to mention world leaders such as Konecranes and elevator/escalator producer KONE and the advanced car production facility at Uusikaupunki (Valmet Automotive).This simply means that Finnish export industry is very dependent on investment elsewhere in Europe and the world. While there is some evidence that the decline in the Euro and oil price has some effect on Finnish exports in terms of new orders, it already should be clear that price of products is only one factor in Finnish industry’s success. Surely KONE is not the cheapest elevator company, but rather builds innovative elevators at high quality with the inclusion of good after-sales services (i.e. maintenance etc.) The same is likely true for all big names, like METSO and Ponsse. You don’t get there on price. Finland is no low-wage country nor should it aim to be. The fact that Finland doesn’t export enough is not quite as related with the wages paid in industry as ‘they’ want you to think – it is a demand issue. European demand for manufacturing (half-) products is very weak. Simple.

 

According to the data from Statistics Finland, salaries/wages account for 60% of Finnish GDP. As Storm and Naastepad (2012) show, referenced here, Finland (among 8 other countries) is a strongly wage-led country. This means that demand both domestically and over-all is strongly correlated with wage developments. As this is a Post-Keynesian appreach, the emphasis on consumption and demand issues is clear. This report from the European Commission shows the importance of domestic demand for Finnish growth, which I also pointed out here. This is not hard to understand, because services account for more than 70% of Finnish GDP, and as the current account balance is close to zero, domestic demand, which is strongly related with wage growth, drives economic growth.

 

But Finland has voluntarily chosen the austerity road and declared war on public debt (although I would focus on private debt). As a result, many people in the public sector have lost their job (perhaps temporarily, in the case of lay-offs). But the combination with a lack of demand in Europe is quite devastating for the Finnish economy – slide 26 of the presentation above shows that since 2008, 48.000 people have lost their jobs in the technology industry sector alone. No wonder the unemployment rate is going up still. In this context – lack of demand and growth more driven by wages (i.e. essentially consumption) than corporate profits, aiming/pressing for long term wage moderation/zero growth is a recipe for economic decline (remember – domestic demand has been the major driver of economic growth in Finland, not exports). The focus on zero wage growth, in an environment with decreases in prices (but increases in rents) is a recipe for major problems with major indebtedness.  I think it is irresponsible of certain economists in Finland that they think a decrease in prices might spur economic growth if people start consuming more. This implies that a) people can afford to consume more and b) that the decrease in prices actually stops. Regarding a) I think this is self-contradictory given the level of private debt – people probably prioritize paying down debt in the face of possible deflation (in addition to the threat of unemployment). Regarding b) there is no sign that decrease in price levels is going to stop. As seen in Japan, this means there is a significant effect on both investment and consumption. In the very short run, there might be some consumption effect, but I wouldn’t count on it. Although it is just data regarding one year, maybe November’s sales statistics (in relation to the same month a year ago) do not show much 0f an increase in consumption with a decline in prices.

 

So, once more, we have the economic orthodoxy in Finland: wage costs should be repressed because wages in Finland are too high and Finland is not competitive. This disregards the share of (export) industries in GDP (and broader, that Finland competes in other things than just price), the kind of products that are manufactured, the link with European demand, the effect on spendable income (and private debt) and last-but-not least, the effect of ever-smaller wage increases on inflation (i.e. a lack of inflation). Given that in Finnish collective bargaining the export sectors are prioritized (i.e. their economic state is taken into account the most), and both employers and labour unions operate in this discourse, it is unlikely that there will come a big change in how the labour market relations work – although the labour union federations obviously protest the idea of 10-plus years of wage stagnation. In Germany, the new low, low inflation is already taken into account in labour market relations. It seems that this is also the case in Finland.

 

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