Tag Archives: exports

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.

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The Finnish economy in 2014 – an overview

This post is in a way an update of this post, but with a different focus and hopefully a bit more structured approach. The post is timely, in that the interim budget negotiations are about to start and various politicians have started marking their positions. I apologize that most links are in Finnish only.

By way of an introduction, I wish to refer to a currently ongoing debate, in which the Finnish mainstream economists argue that Finland has clearly structural problems, and that therefor (logically) the welfare state should be reduced. Nonetheless, professor Pertti Haaparanta has convincingly argued that the problems of the Finnish economy are not structural, or “at least misleading: business cycle problems that are not corrected create structural problems.” He refers among other things to hysteresis. One particular  good argument is what he writes (my translation):

Also Sweden has suffered more [from the crisis] than OECD countries on average, although less than Finland. This is in itself already sufficient reason to doubt the claim that Finland has big structural problems regarding the labour supply, that Sweden is claimed to have solved.

This claim is especially suspicious because the decline of potential production was timed in all countries at the start of the financial crises, which everywhere led to a decline of private and unfortunately also almost everywhere of public demand. How can this be, if Finland has some particular structural problem? And even though the crisis might have revealed some particular structural problem of the Finnish economy – as has been claimed – without the crisis it wouldn’t have been noticed, so…??

The current economic debate in Finland is thus clearly ideological (as it is almost anywhere). This being said, the state of the Finnish economy is quite horrid. First I show the development of GDP since 2000 (figure source: Tilastokeskus). It shows both the old and new methodologies of counting GDP.

GDP (volume change). Blue is EKT95 and Red is the new EKT2010

GDP (volume change). Blue is EKT95 and Red is the new EKT2010 (Source: Tilastokeskus)

This does not look good. And with the Ukraine crisis and the related economic sanctions, it may press Finnish GDP further down, as Russia is still an important trade partner for Finland, especially regarding energy resources:

Source: ULJAS/Tulli.fi

Source: ULJAS/Tulli.fi

The core of the ECB strategy is combating inflation. We know that it is not really succeeding at achieving its near-2% goal, but how is inflation developing in Finland? Well, since mid-2011 there has been a strong downward trend:

CPI (Blue) and HICP (Red) Source: Tilastokeskus

CPI (Blue) and HICP (Red) Source: Tilastokeskus

The question is always, what causes this drop in prices. On the one hand, Statistics Finland reports that industrial producer prices have declined (especially in export sectors, broadly since 2011) but on the other hand service sector producer prices have risen continuously since 2010. One the biggest factors in price increase is rents (both so-called social rental levels and private sector, but real estate has declined in value – more about housing etc below.)

Unemployment is high in Finland. Although the problems in Finland are not likely structural, Finland does have a fairly high level of structural unemployment, which dates back to the economic crisis in the 1990s. But this is how the unemployment level has developed (Source: Tilastokeskus):

Unemployment rate (Green) and Trend (Blue)

Unemployment rate (Green) and Trend (Blue) (Source: Tilastokeskus)

 

Obvi0usly, in this figure nothing like a recovery can be observed. With the ongoing structural changes in the Finnish forest industries and the implosion of Nokia it is not quite likely that this trend is coming down soon. The Finnish ministry of Employment and the Economy has its own methodologies and statistics, and focuses on people who actually look for work. The picture can’t be copied here but I suggest to take a look. Line (1) shows unemployed people looking for work and line (2) shows the number of open positions (through mediation of the Employment Office). In my view, this is a quite depressing figure.

I have previously argued, that Finland did fairly well as long as domestic demand kept up. How has this developed in the meantime? OECD.Stat gives this development:

Domestic Demand (P3-P5). Source: OECD.Stat

Domestic Demand (P3-P5). Source: OECD.Stat

 

 

 

 

 

This graph shows that at least using this measure domestic demand is perhaps slowly decling or has been at most flat since 2011. This may be somewhat explained by the Finnish system of unemployment benefits – the labour unions manage the unemployment funds, and union members get up to 500 days a certain percentage of their last salary. Thus, unemployment does not immediately mean a crisis in household expenditures. But on the other hand, under current circumstances it is not likely that domestic demand would soon increase. Most likely the growth of domestic demand from 2009 to 2011 was due to availability of credit at low interest rates. This may be reflected in increases in private indebtedness as well (see below).

One issue which has been current in economics blogs is that international capital is searching either safe havens or yield. Finland has been for many years on top of various innovation- and competitiveness indexes, but is that reflected in Foreign Direct Investment? This table from the Bank of Finland gives us the following graph:

Foreign Direct Investment in Finland, EUR million

Foreign Direct Investment in Finland, EUR million

 

 

 

 

 

 

 

 

From this graph it would seem that Finland has only recently become less interesting as a country to invest. By far most FDI comes from Europe, with Sweden and the Netherlands the biggest investors from Europe. Investment is needed to create new jobs, so this would seem to be a fairly positive situation, as Finland has a highly educated workforce, good infrastructure etc.

So, on these macro-level variables, Finland is not doing very well in terms of GDP and Unemployment but FDI and domestic demand seem to hold up fairly well. The big question is of course, how the Russian sanctions and possible counter-sanctions are going to affect the Finnish economy. In the post that I referred to above it can be read that the trade balance of Finland is well, nearly in balance. This is perhaps a function of increasing imports and declining exports – after all, the whole labour market debate is centered around the primacy of Finland as an export-oriented economy.

To return to domestic demand, it is instructive to show this graph (through Revalvaatio.org):

Indebtedness of households. Mortgages (light blue), Consumption credit (red), other loans (dark blue), interest costs (yellow)

Indebtedness of households. Mortgages (light blue), Consumption credit (red), other loans (dark blue), interest costs (yellow)

 

 

 

 

 

 

 

 

 

 

Here we can see that consumption credit has expanded somewhat, but the main driver of Finnish private indebtedness is the mortgage. Elsewhere I have argued (in Finnish) that it is possible that Finland has seen a real estate bubble, which by now has burst – there are many indications for this, as in the country side prices are declining rapidly and houses stand for sale quite long. Another indicator is that even though housing prices are down, rents are up, which may be a way of recuperating (future) losses. Either way, Finland’s household sector debt is quite high and their financial assets are seen to be contracting. This is not yet a problem, but with rising unemployment and declining housing prices it could become a problem, since if you are unemployed somewhere and are unable to sell your house, you are literally stuck because it is often necessary to move near a job. And since the places with Nokia -related industry are not doing well, this is likely to become a problem.

On the other hand, public debt is still relatively modest. The expectation is that it will cross the 60% -limit next year but it is still nothing to panic about.

Private sector debt is high, but this is not necessarily a problem either. The problem is that Finnish companies are faced with reduced aggregate demand and therefore don’t invest, or worse make many people redundant. This realization means that the current trend in labour market relations, extreme wage moderation, is misguided. It is true that Finnish labour costs are higher than Germany’s. But Finland can never become a low-wage-high-productivity-export-led economy like Germany. This is an issue which demands another post, but Finland really should focus on the domestic demand and high quality export goods and services (which it does, with examples of KONE or METSO or Pöyry).

All in all, the big risk for Finland lies in the combination of a big correction in the housing market prices, a continuing economic crisis with consequences in unemployment and finally as a result of both AND the Ukraine situation a crash in domestic demand. But Finland is certainly no Greece or Spain – the economic fundamentals, innovation and capacity to attract investment seem to be all right. This crisis can be prolonged with the wrong policies (another blast from the past regarding the 1990s crisis and its prelude), and there should be more focus on the issues which are in my view more relevant for the future of the Finnish economy. As I have written somewhere sometime last year, a good start would be for the unions to demand higher wages, before Finnish households become trapped with deflation. Wage moderation may appeal to a moral sense of ‘we all have to suffer’ but it is not exactly good for domestic demand.

 

 

 

 

Finnish competitiveness, trade balance and wrong-headed economic policies

[For more on Finland’s exports, see here. The data is until 2012 but as I tell here in Finnish, the picture has not changed much except that machine exports to China started to decline around 2012)

It seems the rest of the world finally starts to acknowledge Finland’s problems. On the one hand, it is vital to see what the problems are, but it is just sad that Finland has ended up in this ‘trap’, as Bloomberg calls it.

Those ‘in the know’ – to which I include myself, have known about this situation for quite a long time. Indeed, while originally I started this blog to write in English about the Finnish paper industry and industrial relations, I quickly moved to the impact of the eurocrisis.

Unfortunately to say, in my view there is a much longer story to what Bloomberg writes and it does very much relate to the euro. Nokia and the Finnish paper industry are in a way ‘collateral damage’. There are potentially many ways to explain the ‘slide downwards’ and especially on the centre-right and in business circles many blame high wage costs (and/or unit labour costs). These do have impact of course, but only (and especially!) in relation to Germany’s policies during the period 2000-2007, broadly. Another issue, which is entirely hidden from the discourse is the relevance of profit margins. In perfect competition (which especially in Finland does not exist) (marginal) profit tends to zero. But in the context of an economy with a relatively small number of big players – e.g. the paper industry but domestically also supermarket/retail chains – where the companies are on the stock exchange, the profit margin matters a lot and very roughly speaking one way to keep the profit margin steady is to cut other costs.

So if we accept this basic mathematical fact, it follows that in a ‘quarterly report economy’ companies would aim for quick profits in whatever way rather than for long term investment, at least domestically. And in this context, there is also a big difference between investing in Europe or domestically (which may be less profitable, given weak demand) and elsewhere in the world.

(There are of course many exceptions to this view – think of UPM-Kymmene, which greatly expands a pulp mill. But as Statistics Finland reported private investments have decreased, and in the pulp and paper industry the domestic investment has declined for a long time already, to quite a large extent to be replaced by foreign investments (which is true for many big Finnish firms). )

The main evidence I see in this regard, is the declining current account surplus. Here, at the site of the Bank of Finland you can see the development of the current account (and trade) balance for Finland since 1998. Earlier, I made a graph based on Eurostat data of the same development – although only goods – but with (probably) a different methodology. It looks like this:

Finland Goods Exports Balance

In the story which attributes a large part of the Eurocrisis to the imbalances within Europe, this is a good development, as it restores a bit of balance. But in the end Finland is a small player in this – the Netherlands and Germany are much more relevant.

But to return to the argument – the Finnish current account balance, and in particular the trade balance has weakened. The question is: why? Finland, in my view, has initially gained a lot through the favourable dollar/euro exchange rate, in which phase many Finnish companies (in particular the forest industry companies) could make investments abroad at a favourable moment. I have written about this in my dissertation regarding the paper industry. There it was simply a continuation of the fact that the domestic markets were ‘ready’ – no more consolidation could happen without the competition authorities interfering. Although this process had already started in the 1990s, nonetheless domestic investment declined even more now.

From 2003 onwards however, the exchange rate has been more unfavourable for Finland (and other euro-countries). Finland’s main trading partners are Russia, Sweden, Germany and China, all of with which Finland has had a trade deficit in 2012. Finland does have a trade surplus with the USA and the UK – regardless of the exchange rate. It is a topic for further research to find out what is imported from where, but Russia is at least mostly responsible for oil/gas and timber for the paper industry. Sweden also accounts for a lot of raw materials, including chemicals, and China exports many things to Finland (and the rest of the world). But on balance, still, Finland imports more than it exports. This is a graph with the major trade partners (excl. China):

Data by ULJAS/Finnish Customs

Data by ULJAS/Finnish Customs

The hard-to-see yellow line indicates Russia. My quick-and-dirty take on the “Finland’s wage costs are higher than Germany’s” is this: even though Finland’s unit labour costs have increases relative to Germany’s, and also Finland’s relative exchange rate within the eurozone has gone worse, this has not significantly affected trade with Germany. Basically, from 2003 onwards Finland has had a fairly stable trade deficit with Germany. But the deficit with Russia has worsened much more, while the trade balance with the USA and UK may have improved.

So what is really happening here? Why the obsession with Finnish wage costs? Finland always presents itself as competing with Germany on high-quality goods. But it can’t be (entirely) the issue of labour costs, because that picture looks like this:

RULC

Yes, Finnish unit labour costs have risen faster than Germany’s since 2007, but regardless of this, the trade balance with Germany has not significantly weakened. The trade balance with Russia nonetheless DID start to weaken around this time. So my take is that the whole competitiveness debate (at least in Finland) is based on completely the wrong indicators: the weakened trade balance doesn’t have to do with Finland becoming less competitive relative to Germany but has a lot to do with trade with Russia. And the following graph shows why. It shows the value (in euros) of imports of various categories of products (in the CN-nomenclature used by the EU).

Source: ULJAS/Tulli.fi

Source: ULJAS/Tulli.fi

So where does the worsened trade balance with Russia come from? Simple – a huge increase in the (euro) value of mineral fuels.

In terms of the Bloomberg story, where does that leave us? Unfortunately, in the light of the data presented here the conclusion must be that the Finnish government and the labour market organisations (very much including the unions) are looking at the wrong solution for the wrong problem. Aiming for wage moderation is simply not going to help with this problem of rising Russian energy prices. There may be a difference in relative labour costs between Finland and Germany, but as the graphs above show, it is unlikely that even similar labour costs would improve the trade balance with Germany.

So all that talk about improving competitiveness and getting exports going again: fine, but it doesn’t relate to the major problem Finland seems to have – which is a large fuel bill. And to me it sounds rather unreasonable to try to solve this problem by taking on wages – as these affect domestic demand also. And I have shown earlier, it seems that for a fairly long time, domestic demand has kept Finland floating.

The question of increasing investment is important, but it does not necessarily relate to the current crisis, especially Finland is still seen as one of the most innovative countries, thanks to its infrastructure, highly educated work-force and IT-qualities. If we combine these issues with the problem then now would be a very good time for Finland to make a transition to the Green economy/Green technology – something which is already happening in the pulp and paper industries.

Finland: Competitiveness, wage moderation and the Eurocrisis

Currently I am reading this, and it strings together a lot of issues I have been thinking about lately.

A quote (p. 16): “In economies with an export share of GDP far below 50% wage moderation strategies are counterproductive if there is no perspective of achieving a huge current-account surplus over an extended period of time and of raising export share beyond the 50% without retaliation from trading partners.”

Finland’s export share of GDP since 1992:

Finland got close to 50% between 2006-2008, but otherwise not. And there is certainly no perspective of achieving a huge current account surplus (not with Finnish Unit Labour Costs higher than in Germany at least!). Just to point it out, this means the relevance of the domestic sector for GDP growth is greater than that of the export sectors.

So, also for Finland, it would seem that (p.16) “Under normal circumstances, it would therefore be impossible to successfully emulate the strategy followed by Germany during the first ten years of EMU [i.e. wage compression].”

Finland: focus on bolstering domestic demand rathar than international competitiveness

Thanks to this strategic analysis of Greece, I have learnt to use a new (for me) statistics database – OECD.Stat and more specifically the STAN database. I started wondering how the same graphs look for Finland that Papadimitriou et al produce for Greece. Obviously, the data is only until 2012 (or 2009), and according to all kinds of sources the Finnish economy has definitely soured.

First, here is the GDP development since 2000. I used the output approach; I do not know exactly what are the positive and negative aspects of the other two approaches. (I apologize for the picture quality)

Source: OECD.Stat

Source: OECD.Stat

As you can see, there is a decline in GDP in 2008-2009, just like in most parts of the Western world. And also here, GDP continued growing, but at a lower level than before 2008, suggesting that also in Finland there is an output gap.

So, very roughly, what do exports, imports and domestic demand look like in this context? In this post I showed that the trade balance worsened, which can also be seen here. In addition, I showed that domest demand as approximated by retail development showed resilience, and in fact, it seems quite clear from the graph below (disregarding any finesse) that domestic demand is what has kept the Finnish economy afloat:

Source: OECD

Source: OECD

Although the quality of the graph leaves to be desired, the worsening trade balance can be observed. Also of note is the slow growth and small size of service exports. But perhaps most significantly, next to the possible flattening of imports and exports, is the growth of domestic demand, which in absolute value terms and in growth rate is much bigger than exports and imports. It is thus not wrong to say that thus far, growth of domestic demand has kept the Finnish economy afloat. Furthermore, leaving out a host of issues, the focus on international competitiveness is partly misguided, because it seems that this is not where GDP growth comes from (because the trade balance is well, nearly in balance.)

But what is the export of Finland? There is/was Nokia, there are successful companies like Kone and METSO (at least regarding the mining machinery division), chemical companies, smaller companies like Fiskars (of the scissors and knives). The OECD STAN database has a separation of export of goods by technological content. You can see this for Finland below. Compared to the study on Greece, I left out agriculture and ICT manufactures; the latter is included in the high-tech exports, as far as I could see from the database.

Source: OECD

Source: OECD

So even though Nokia and other ICT manufacture has always been seen as a major factor in Finnish exports, in terms of value this did not show. The category with the highest growth until 2008 was the Medium-high tech manufacture, as well as the medium-low technology manufacture. Companies like Kone and METSO as well as chemical industry fit the bill for medium-high technology manufacture (all these categories are based on R&D intensity).

The decline in low technology manufacture is perhaps best expressed by the decline of the traditional pulp and paper industry in Finland. It is a shame the dataset ends in 2009 (due to changes in categorization valid from 2010).

What does this look like for imports?

Source: OECD

Source: OECD

Most of Finland’s imports were in the category medium-high technology manufactures. This category also has seen the sharpest drop. The other import categories are surprisingly close to each other in terms of value. So the bottom line regarding the trade balance might be: both imports and exports fell starting 2008, but most of the decline seems to relate to the medium-high technology manufacture.

As a final statement I would like to say that from these statements it really seems that the focus on international competitiveness is a bit overblown. Yes, exports are important and there are very many top quality manufacturers in Finland. But in the current situation, with European and global demand weak (and perhaps getting weaker again), it seems that it is more important to bolster domestic demand. This means more than wage moderation – because demand isn’t going to come back with that.

So my personal advice for the current labour market negotiations is: focus on domestic demand and purchasing power, not primarily on international competitiveness. There are many more people working in non-export sectors than in the export-sectors and it is high time taking their purchasing power into account; however illogical that may seem to those steeped in neoliberal competitive markets-thought.