Tag Archives: collective bargaining

Finland’s secular stagnation – a small aside

Edward Hugh wrote a very insightful piece on the state of the Finnish economy, especially seen from the secular stagnation perspective. In my opinion it is a very convincing piece and leads one to seriously question current economic policies (which is also possible on other basis, but this has a longer scope fundament).

There is, however, one tiny section of the text where  I feel I have to add something. The text is:

In 2007, when the countries export-led technology industry was booming workers representatives hammered out an 8.5 percent wage increase that was implemented over two years. That deal led to an upward spiral where other industries and then the public sector pushed for ever higher compensation.

This sounds very ominous and ‘profligate’, a typical example of ‘why labour unions are bad for business’ etc.

But this is just the kind of factual reporting that needs footnotes, because otherwise the wrong lessons are learnt from it. So, here we go:

1. 2007 was the end of the final centralized incomes policy

What does that mean? Finland has a long tradition of centralized incomes agreements, which not only include wage increases but also a variety of tax issues, social security reforms and other policies (usually) meant to support the private sector. In 2007, the last centralized incomes agreement ended (its duration was 2005-2007) and the employers’ federations strongly voiced their opinion about this instrument: the TUPO was now dead, it was not of this time anymore. So, following 2007, Finland went on to have sectoral collective bargaining for the period 2008-2011. The first sectoral agreement period was 2008-2009 and in this period there was indeed the ‘spiral’ which Hugh refers to. This was to be expected though, because the empirical literature is quite clear on the fact that in sectoral bargaining the wage increases tend to be higher than at either a centralized or completely decentralized level (the Calmfors-Driffil hypothesis). I’d like to stress though, that it was the employers who wanted to move away from centralized bargaining.

The problem with all this was that the Eurocrisis hit. So, with any agreement, the wage increases would have been to high, but with a sectoral agreement even more so. Finland doesn’t have much in the vein of opening clauses in collective agreements (like Germany) so any adaptation to the detoriorating economic situation has primarily happened through lay-offs and redundancies – in the private sector, but through Finland’s voluntary austerity also very much in municipalities.

In 2009, there was a so-called social agreement, which deals with improvement in unemployment protection policies, in particular regarding temp agency work. Another aspect of this agreement was the improvement of income-dependent pensions.

More important, in 2009 there was an attempt to intr0duce a so-called wage anchor. The employers’ side set this at a maximum wage increase of 0,5% but in practice the average increase in all agreements was approximately 1%. It must be noted that some of the negotiations of wages in 2009 were the actual negotiations for the second or third year of some 2-3 year agreements. The wage anchor came from the ‘opener’ of the negotiations, the metal industry, which agreed on an general wage increase of 1% (and 0,5% individual wage increase).

After the negotiations and agreements of 2009-2010 it started to become clear that the eurocrisis hit Finland particularly hard, with its unit labour costs rapidly exceeding the German levels. So, although the employers had sworn that there would never be a centralized incomes agreement again, they negotiated – after quite some prodding from the state – the so-called Framework agreement. In this agreement it was agreed that in 2 years, the wages would increase by 2,4% and 1,9% respectively. Furthermore, the agreement dealt with a host of qualitative labour market questions (training, unemployment benefit changes for temp workers) and tax incentives (incomes tax changes, corporate tax reduction).

In 2013 the so-called Growth and Employment Agreement was concluded. This agreement focuses nearly entirely on (wage) competitiveness and thus features, over 2 years, a wage increase of 20 euros in the first year and 0,4% 12 months after that. In the present, there are discussions whether to renegotiate the agreement or keep the provision that the agreement would be valid until the beginning of 2017. This is mandated by the agreement, which states that in June 2015 the economic situation has to be evaluated to negotiate a new wage agreement for the second phase of the Growth and Employment Agreement.

So, while it is true that in the period 2007-2009 various sectors demanded high(er) wage increases that the sector that concluded agreements just before (the ‘spiral’) this did not exactly happen anymore after 2009. Although there was much discontent about the unilateral adoption of this wage anchor, which did not completely succeed either but not nonetheless introduced a significant wage moderation already. Also, it must not be forgotten that wage differences in Finland between services and industries are not trivial.

All-in-all, Hugh’s article is a very acute description of the state of the Finnish economy at the moment, but the recent developments in labour market relations are a bit more complicated than it seems.

Updated: Aiming for wage moderation in Finland: some thoughts

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.

Source: Statistics Finland

Source: Statistics Finland

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.


Trade Union Responses To The Attack Of The EU Against Wages

Trade Union Responses To The Attack Of The EU Against Wages


Wages, and thus trade unions, are being violently attacked by European authorities. Until now, wages have remained an exclusively national issue as a negotiated right at the very core of the trade unions’ identity. It had been excluded from the EU’s competences since the Maastricht Treaty. Yet, for approximatly two years, with the implementation of the new ‘European economic governance’ (Pact for the Euro, Six-Pack,..), the economic actors of the EU have kidnapped wages. The ECB, DG ECFIN and the ECOFIN Council transformed it into a statistic figure of ‘Unit labour cost (ULC)’, measured as an indicator that should be contained in order to improve competitiveness. A threshold of wage increases should be respected to avoid a financial penalty. So, from a negotiated right at national level, wages have become a European market price!