About Finnish unit labour costs

For a text that I am writing, I have been digging around in OECD.Stat, since there are lots of interesting statistics on unit labour costs (ULC). The text, in part, analyses the sectoral changes in ULC in Finland.

The OECD.Stat and Eurostat definition are the same (and actually the statistics come from/through Eurostat to OECD.Stat according to the information.) To remind:

Unit labour costs (ULCs) measure the average cost of labour per unit of output. They are calculated as the ratio of total labour costs to real output.

In other words, as Knibbe (2015) states: “It is a crude approximation for the share of GDP going to workers.” It important to note that in this ratio, “the variables used in the numerator (compensation, employees) relate to employed labour only while those in the denominator (GDP, employment) refer to all labour, including self-employed.

The OECD offers deconstructed data, where the components (in the employment based ULC) are separated. For Finland, it looks like this:

Source: OECD.Stat

Source: OECD.Stat

It is clear that Finnish ULC dropped because of the sudden drop in GDP from 2007-2008, NOT because of outrageous wage increase in 2007-2009. In fact, those alleged big wage increases are not really visible here – until 2012 the graph shows a quite steady increase in labour compensation per employed persion; it is possible to say that the average rate of growth has not changes very dramatically. GDP, on the other hand, has changed dramatically, and although the labour compensation has flattened since 2012, the GDP has declined more/flattened more.

That is the nearly 4 year stagnation that we have experienced in Finland. ULC has obviously declined as matter of statistical fact, but from the graph it is quite clear to see how much labour compensation would have to change to restore ULC to the pre-2007 level. And although I do not have the means to simulate this, such a decline in labour compensation would almost certainly have a very negative impact on the GDP (as I have argued before, the Finnish economy was kept afloat through domestic demand. Not anymore!).

So I do understand the worries of Finnish business life about “competitiveness”. For individual firms the combination of stagnant economy and rising labour compensation is toxic. But the point is simply that ULC is in no way a suitable measure of competitiveness! And, beyond that, there is an argument to made (as Knibbe (2013) does, that ULC should increase, given the ECB’s inflation target. – iIn particular given that in Finland producer prices have been sliding since 2012 and that there are not many upwards pressure on the Finnish CPI .

Where politicians talk about structural reform (and mean wage decreases) I think Finland needs structural reform of its industrial base. Looking for new markets. Innovating. Moving into selling more high-value added products. Of course, in a developed country like Finland it is clear that the domestic market has a large impact on GDP, more so than exports, but it certainly doesn’t hurt to use Finland’s high-tech potential more! In any case it should be long due that politicians acknowledge that wages are not the issue here (or only a minor issue). The big issue is still European and world demand. In recent days there have been commentators speaking about Finland missing the last legs of the growth cycle. They may be right, but also then Finland has to reconsider deep and hard what it sells, and especially HOW.

One response to “About Finnish unit labour costs

  1. Exactly. Since the lack of “competitiveness” is due to the fact that demand for electronics and paper industry products is low (overall in the worlds but especially in Finland since 80% of its export is based on production) and NOT solely on “lazy” people or inflexible wages.

    The only solution is innovative products and services to new market areas. Finland cannot compete worldwide by being the slave workforce of multinational companies or if the only tax income is based on services for the elderly. And now the government is cutting directly from those universities that could bring newer innovations into newer markets (Aalto).

    One of the biggest mistakes ever is to cut off trade relationships with Russia. No mater what happens in politics economics should be kept out of the picture. At least a hefty compensation from the EU for the huge impact on the Finnish economy is due.

    But perhaps the biggest problem that this Government has done is to treat refugees and migrants. NO other country in the world has ever turned a refugee influx into a prospering economy without slave labor. It has always involved migrants and even then its hard. Finland has 500 000 unemployed and the moment so why not add 100 000 – 300 000 (with family reunification) to the queue? And on top of that why not restrict the building of cheaper rent apartments? The situation is exactly the same as Sweden 10 years ago. And what happened there – 52 no-go areas. How has that improved the economy?

    I have to admit I have never met a government so self-centered and loathing innovations and education. So arrogant as to think people CHOSE to be unemployed or that criticizing the misuse of the asylum-system is a form of racism? I guess that what money gets you. I sympathize with the government – the previous governments made huge mistakes and it is good they try to fix them. But the approach is so bad and amateurish it is nearly tragicomic. And to put the immigrant crisis as a secondary priority is just ridiculous.

    Just my two cents.

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