Category Archives: Economy

Thinking about labour market flexibility

(This is just a sketch of some issues that are on my mind now, rambling style. Bear with me.)

In Finland and many European countries, there have been discussions about labour market flexibily, especially in the context of the current Eurocrisis and how to get out of it. One of the arguments is that there are structural issues in the labour market which makes unemployment worse. The solution is then to make the labour market more flexible.

What does this mean? Usually economist refer to collective agreements, minimum wages and social benefits as factors which make the labour market “rigid”. These barriers to true flexibility exist in the context of economic models of labour supply and demand, where collective agreements etc ensure that the market doesn’t clear, i.e. that there remain people unemployed. Others have written about how unrealistic and unhelpful these models are, which I will thus not repeat here.

Rather, my concern is how far economics as a science is from the reality of real humans. Regardless of attempts of modelling labour markets in more detail, not even search theory in microeconomics does not really get at what work is, why people work and what choices they make there. Economics is to a large extent an a-historical science, which is its weak point in contributing to understanding of society. Some people do actually move all over the place to find the next job, but not everybody can, nor does everybody want that, because of their social roots in the community they live in. (it may also work the other way around: that after working somewhere for a long time you discover that you have rooted there, through social networks, even though you came for the work in the first place).

The point is that, as Lars Syll like to point out, reality is actually uncertain, not uncertain as defined by stochastic processes. Therefore, is really matters what people actually do (and feel and think) and what is their history – and how they move in or between networks (see also Richard Sennett’s The Corrosion of Character). If you take into account all the various characteristics and histories of people, then it is clear that economic modelling of the labour market doesn’t make any sense at all – it is a crude reduction of some aspects. These aspects do have relevance! If we talk about wages and labour shortages, we also talk about entrepreneurs that operate in competitve markets and may not find the suitable person they need.

But: then we are actually not talking about economics (or economic modelling of the labour market), but about legal issues. Crudely put, labour markets are essentially just a bunch of unwritten labour contracts. After all – what is it that binds the employer to paying the employee wage X? Right, the contract. In many European countries some minimum terms for these contracts are laid down in collective agreements (which are agreements between employers’ federations and labour unions, usually).

So, people who work have a contract (either permanent or fixed-term) with specific terms for the job. The unemployed are the ones without contract. Is it really so, that to make the labour market flexible, labour contracts (and the agreements/laws they’re based on) must be weakened? In a legal sense, labour contracts are contract like any, but the problem of course with our current complicated work is that it is rather difficult to ascertain whether or not the employee has worked in accordance to the contract – this is an issue which involves trust, because it is not possible to write everything an employee must do in the context of the labour contract. The French do try, but this doesn’t exactly make labour relations more smooth. Furthermore, it leads to a process about interpretation and contestation, which already could be seen in the early part of the last century in e.g. GM or Ford factories.

When politicians talk about making the labour market more flexible, do they talk about the labour contract? ( of course wages may be a good starting point for the negotiation of a labour contract). Not very often – they usually talk about measures that actually suspend the normal contractual force of labour contracts, e.g. extended trial periods, wageless work, longer working hours. In other words, they talk a lot about time, or rather time that should not be convered by standard contractual relations (and their rights and duties). All of this is not exactly new: the idea that labour is not a commodity that can actually be sold is straight from Marx of course. Also the idea of labour markets as a collection of potential labour contracts should also not be new – even for a single job opening the situation doesn’t simply recall much of a market situation – because it has to be contractually agreed what the deal is. The content of the transaction is something that continues to be defined (and often negotiated) throughout the duration of the contract.

My point simply is: when talking about labour market flexibility, there are many things economists cannot account for in their models. Rootedness in communities is perhaps the field of sociologists, but since for work the labour contract is extremely important it would be nice to see more labour lawyers talk about the possibilities of flexibilization. Otherwise we may see that flexibilization is just another way of talking about lowering wages – because companies are always free to pay more.

“Fixit” is unlikely to happen

Every once in a while there are opinion piees that state that Finland would be much better off outside the Eurozone. This is most likely true, most importantly because of the freedom a currency sovereign has. Finland probably shouldn’t have joined the Euro – although it is rather difficult to do a counterfactual analysis here. The example of Sweden is often pointed to as proof for the wrong decision of Finland to join the Euro (which was probably more based on (geo)politics than on economics). But there are significant differences nonetheless (which I will not discuss here in too much detail – this is just a thinkpiece on why Fixit is not going to happen).

To start with the obvious: suppose that Finland somehow manages to break loose of the Euro – what could we expect? Will the new currency appreciate or depreciate? There is no way to say. At some point I would have been fairly certain the currency would have greatly appreciated, but that was before the eurocrisis hit Finland hard. At present, I’d say it depends. In any case a devaluation of the new currency is also not necessary good for Finnish consumption. The final effect of a floating currency depends in particular on European and world demand for Finnish products. This leads to the second bit.

Suppose Finland is outside the Euro, what would change for the Finnish economy? I’d say: not much. At least, in the sense that a floating currency is not going to help with a quite undiverse industrial base, of which the traditional paper industry is not going to save the day due to ongoing decreases in paper demand. Pulp and cardboard may be growing product categories within a floating currency regime, but that really depends on world demand for boxes, for instance, from China. The biofuel industry could be a potential big player. Regarding the metal industry – this is also very dependent on outside demand, since it produces mainly investment goods. This means that economies elswhere have to run well to provide a boost to this sector. Given the mismanagement of the Euro-area, and almost-growth, this is not a likely driver of growth. Finland has of course a great reserve of IT experts and many smaller and bigger firms are using those – but Finland should be wary of putting all eggs in one basket. I’d say, that for all reasonable purposes, export-led growth is not a very likely possibility even if Finland managed to get out of the Euro. (maybe a dairy-led export boom to Russia?!)

The core problem – also in the context of domestic consumption – is that Finland does not produce all that many consumer products (unlike Sweden). Liberalization has made domestic electronics producers uncompetitive, so in case of devaluation, there is no easy import substitution anymore. This, by the way, is very similar to the Greek problem.

But the biggest problem is simply the technical side of getting out of the Euro. The episode with Greece has shown that the ECB is playing hardball, and probably it simply is not possible to get out of the Euro in a controlled way. If you think about the introduction of the Euro, then it should be clear why Fixit is not going to happen (even with the great Finnish engineering capacities): it took at least three years to convert all systems to use euros, and it was an open and transparent system in the sense that everybody knew when the euro would be introduced. With a Fixit, or Grexit, or whatever kind of exit, the date of introduction of the new currency will not be known and I suppose that even in Finland such a big process could not be pulled off quickly, smoothly and secretly. In that sense, outside forces could enact the breaking up of the whole Euro-area, but a single country won’t/can’t exit.

Concludingly, I’d say that the chance of Finland exiting the Euro is about the same as Germany giving up its fetish for balanced budgets. Not zero, but extremely low.



“Suomen malli” työmarkkinoihin – miksi?

Kiireinen päivä tänään, joten hyvin pelkistetty jotain ehdotetusta “Suomen mallista”. Se on ilmeisesti sellainen, että “että jatkossa vientiliitot määrittäisivät palkankorotusten ylätason.”


  • Koska Suomen kilpailukyvyn tulee parantaa.
    • Ajatusvirheet:
      • Suomi on vientivetoinen talous – ei pidä paikkansa, katso tässä. Jos Suomi olisi oikeasti vientivetoinen talous, viennin arvonlisäys olisi isompi kuin kotimaisen sektorin.
      • Suomen kilpailukyky (hintakilpailukyky) riippuu jotenkin kotimaisen sektorin palkoista. En edes ymmärrä mikä mekanismi tässä pitää olla, koska jos mitään, kotimaisen sektorin arvoketjussa on tuontia. Jos suomalainen teollisuusfirma myy jotain Suomessa, vaikka lähikaupan kautta, se ei ole vienti. Kysynnän määräytyy siten kotimaisen tulotason kautta.
      • Ab Suomi Oy. “Suomi” ansaitsee rahaa myymällä tavaroita ulkomaille. Vain sen kautta tulisi rahaa Suomeen. “Emme voi rikastua toistemme paitojen pesemällä.” Tämä ajatus sivuuttaa kokonaan miten raha luodaan fiat currency -järjestelmässä.
      • Tämä Suomen malli sivuuttaa myös se, että nimenomaan teollisuudelle palkkakustannukset ovat pienempiä huolia. Eilinen synkkä viesti viennistä osoittaa vaan yhtä asiaa: jos muualla markkinat kasvavat, mutta vienti sakkaa – me tehdään väärät tavarat. Ei palkkamaltti auttaa siihen yhtään. Kotimainen sektori riippuu taas kotimaisesta kysynnästä, ja sitä saa vaan kasvaamaan palkkojen kautta.
  • Seuraukset:
    • Mielestäni Suomen mallissa unohdetaan (jälleen) tyystin että Suomi on eurossa. Katso tästä linkistä kaava. Ei teollisuusalojen palkkamaltilla voi radikaalisti muuttaa tuota kaavaa – että reaalinen effektiivinen valuuttakurssi muuttaisi olennaisesti positiivisempaa.
    • Jos maailmassa menee hyvin, ja teollisuuden aloille menee hyvin, tulee kotimaisille sektoreillekin isompia palkankorotuksia. Mutta jos maailmassa menee huonosti tai Suomen teollisuus ei pysty diversifioimaan tuotteensa (tai ylipäätään myydä mitä maailmalla halutaan), sitten “Suomen malli” kyykyttää kotimaiset sektorit. Ja kuten olen jo kauan sitten sanonut, Suomen talous joksikin pärjäsi niin kauan kuin kotimainen kysyntä riitti 2008 jälkeen (See some data here). Suomen malli toimii negatiivisena paineena siihen.
    • Jatkona siihen – tämä tulee tietenkin suoraan negatiivisena asiana naisvaltaisille aloille. Eli tässä on selvästi myös tasa-arvonäkökulma.
  • Eli: mielestäni olisi tosi huono idea toteuttaa “Suomen malli”, koska kaikkien EMU-sääntöjen ja Euron lisäksi tämä lisäisi jälleen uusi joustomattomuus jolla on hyvin todennäköisesti vain mahdollisuudet positiviisiseen suuntaan ja todelliset vaikutukset negatiiviseen suuntaan.
    Mielestäni olisi oikeasti aikaa Suomen työmarkkinamallin uudelleenkeksimiseen. Korporatismi on ihan fine sinänsä, mutta mielestäni tällä hetkellä yritys päästää sopuun ei edes (lopun lopussa) hyödynnä vientialan liittoja.

18 Signs Economists Haven’t the Foggiest

Source: 18 Signs Economists Haven’t the Foggiest

Tämä on erittäin hyödyllinen artikkeli, nimenomaan jos lukee säännöllisesti Helsingin Sanomat ja lukee mitä ekonomistit siellä kommenteissa väittää. Pidä lista mukana, tee siitä vaikka bingo!

Finnish Unit Labour Cost obsession

As my previous post shows, I have been thinking about Finland’s obsession with unit labour costs (ULC) again, for a change. This is in many ways a crucial topic, as many people in the strong labour movement, at least regarding the export industries, seem to fairly uncritically regard this particular statistic. My thinking has been shaped by what Bill Mitchell has written in blogs and his latest book, as well as Merijn Knibbe’s article on the topic. The core of those writings is that unit labour costs are a highly unsuitable way of measuring “competitiveness”.

This really shows in the Finnish public debate. We have for years heard how Finnish competitiveness has suffered (since 2008), especially due to too high wage increases in 2007-2009 and how this shows in graphs of the ULC. This is especially a dominant theme in the export industries.

In the previous post I mentioned that I have been digging around in the OECD.Stat -collection. I now found something that I think is particularly useful in showing the utter folly of the whole ULC mantra – ULC for the manufacturing industry and the volume index of the manufacturing part of GDP (output approach.) I put these together, and:

ULC and manufacturing part of GDP (volume index, output approach). All data OECD.Stat

ULC and manufacturing part of GDP (volume index, output approach). All data OECD.Stat

Lo and behold! They are almost exactly their mirror image! This should be obvious to anybody who understands what ULC is (i.e. a ratio). As is very clear to see, as long as the manufacturing sector was doing well (until 2007) ULC declined. Then came the crisis (Lehman, Eurocrisis) and exports suffered (in particular affecting the manufacturing sector). As is known by now, Finnish exports are not in any way booming (i.e. after 2012 not much change) and this also shows – ULC also shows little change.

What does this tell us? For one, that it is useless to go after a 5%-decline in ULC across the line, because for the manufacturing sector you would need serious growth to achieve that. (for the rest of the fallacy of this policy idea I suggest to read Bill Mitchell’s blog post).  Furthermore, I hope it is now finally clear that ULC is ratio that is rather heavily affected by changes in GDP, which for Finland is quite dependent on demand in Europe and the world and on the other hand on domestic demand.

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.

[päivitetty] Suomen Itärajasta (taas)

Äsken tuli YLEn sivuille tämän uutisen, Puolustusministeri Jussi Niinistö: Turvapaikanhakijoiden tulo itärajalta on Suomen vakavin haaste.

Varmaan näin on, monista syistä, mutta kuten jo aiemmin kirjoitin, suurin haaste liittyy just ulkopolitiikkaan ja miten EUn/NATOn suhtautuminen Venäjään vaikeuttaa Suomen ja Venäjän keskenäistä aiheen käsittelemistä.

Suurin kysymykseni on edelleen: miten tämä muuttuu Suomen Venäjä-politiikkaa ja mihin suuntaan? Ovatko puolustusministeri ja ulkoministeri asialla?

Lisäyksenä: edelleen paheksun fraasin “laiton maahanmuutto”. Sen lisäksi, luvut voivat hyvin olla liioteltuja. Sen lisäksi, pelkkä Venäjä-politiikka ei riittää, sillä turvanpaikkahakijat tulevat varmaan suurin osin Turkin kautta. Suomen ulkoministeri voi miettiä, oliko oikeasti niin viisasta ilman kritiikkiä antaa Turkille paljon rahaa. [en tunne Suomen Turkki-politiikkaa].

Päivitys: kuin käskystä, YLEn uutisiin ilmestyi tämä artikkkeli, Turkki uhkaa lähettää pakolaisia EU-maihin. Tätä siis saa kun EUn “pakolaispolitiikka” perustuu wishful thinkingiin.