Tag Archives: Edward Hugh

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.

Bill Black on Germany and the Eurozone economic policies

On Naked Capitalism.

For the sake of argument, while I think that Black is essentially correct, the issue actually goes deeper as Edward Hugh points out.


Edward Hugh – On The Trail Of Italian Debt

Edward Hugh – On The Trail Of Italian Debt

I had to read this post a couple of times but it seems that Europe in particular is in a very difficult position.

Worrisome if this analysis is correct!

A Simple Chart Illustrating Why Japan Style Deflation Is Now More Or Less Inevitable In Spain http://feedly.com/e/xZUifhy8

Larry Summers, Paul Krugman and Edward Hugh

This longidh post by Paul Krugman ties some knots between his own, Summers’ and Edward Hugh’s ideas of the importance of demographic change. Worth pondering!

“Secular Stagnation, Coalmines, Bubbles, and Larry Summers – NYTimes.com” http://feedly.com/k/17z5gMJ


The Czech Economy That Didn’t Bounce?

The Czech Economy That Didn’t Bounce?

Another excellent post by Edward Hugh. I hope one day to attain this level of sophistication of analysis! The post discusses the Czech republic at its core, but broadens the view to the Japanese economy and the fate of supposedly core countries Finland and the Netherlands, topped with the issue Hugh drives all the time: demographic change and the economy.

It’s Domestic Demand, Stupid!

There are many ways to communicate fairly difficult issues. The case against austerity is one; again and again the ‘families tighten their belt thus also the state must do so’-argument comes up. This argument has been defeated as many times. Here you can see a ‘layman’s argument against austerity’. But in my opinion this new post by ‘A Gloomy European Economist’ puts the argument much clearer. To quote from the main points of his graph:

What is this figure telling us? Many things, actually; but I’d like to point out just three:

  1. The first is that while the US have recovered and are now above their pre-crisis GDP level, the EMU is still more than 3% below its level of January 2008. We are not going to see the pre-crisis level of activity for at least 2 or 3 years, as the Commission just revised downwards its (negative) growth forecast for 2013 (not surprising, and bound to be further revised, as the readers of this blog may know).
  2. Domestic demand is down almost 6%, mostly because of investment (-19.1%).It makes no sense claiming otherwise: this is a Keynesian (sorry for the bad word; should I rate this post R?) aggregate demand deficiency crisis. On the contrary, in the US, robust consumption growth has compensated for the equally dramatic drop of investment, and as a result domestic demand is also above its pre-crisis level. As a sidenote, the dramatic decrease of investment makes one wonder what will be left of the EMU capacity to produce, once aggregate demand resumes.(my bold)
  3. The only two engines of growth, today are public consumption (!) and exports, both at around +4% with respect to the pre-crisis peak ; they compensate, unfortunately only partially, the dramatic drop in domestic private demand. Further reducing government spending, as will most probably keep happening, will lay the burden of recovery only on the external component. It is worth repeating that this small-country-syndrome, in the second largest economic bloc of the world, can only spell disaster. It is impossible to conceive a long-term reliance of our prosperity on demand coming from the rest of the world, as proponents of the “Berlin view” would like us to believe.

If you look at the picture, then indeed public consumption and exports keep the Euro area somewhat afloat. But with the intense desire to slash government spending, this might not last. I think this picture shows very succinctly why we need a Keynesian and/or MMT view of the economy very badly – if everybody cuts expenditure at the same time, how is the economy supposed to grow, or – more specifically – where is demand coming from? Mars?

While this post is very important in showing the core problem, I personally would like to see a bit more country-specific information. It is well-known that Germany has a great domestic demand-deficit, but what about Finland, the Netherlands, Austria? A recent post by Ambrose Pritchard-Evans, and earlier ones by me (referring to yet other posts) indicate that domestic demand is being killed in the Netherlands at least through austerity, private indebtedness and a stuck and plunging housing market, but as I showed here, Finnish domestic demand (at least retail) has kept up fairly well. I haven’t recently checked the numbers, but food price inflation in Finland seems to be rather high, so domestic demand may have reached its peak already.

(in general it would be nice to have a better idea of how to get key data out of Eurostat – there is so much stuff there!)

Mr. Gloomy Economist also points to the need for wage increases; at least for Germany, this is acknowledged by serious economists (i.e. from the IMK of the Hans-Böckler-Stiftung). This is a subject which I have great interest in, as it relates strongly to industrial relations and the relevance of labour unions. As I pointed out here (sorry, in Finnish), Olli Rehn warns Finland of overindebtedness (of the state, of course) and states Finland needs wage restraint. Well, as the graph shows, the index of real wage earnings has grown approximately by 2% per year, which is consistent with the inflation of the ECB target (if I understand Andrew Watt correctly).

So, in this light I eagerly await what the employers’ and employees’ federations in Finland are serving as opening bids in the run-up to the Finnish collective agreement/centralized incomes agreement -negotiations this Autumn. I expect lots of disagreement, at least.