Tag Archives: Inflation

Once more: inflation in Finland, labour market relations and wage moderation

Yesterday a new press release regarding inflation in Finland was released. It turns out that in December the consumer price index dropped by half a percentage point to 0,5% from 1% in November. The average 2014 inflation for Finland was 1%.

According to the press release, again rent increases as well as tobacco products and day care (!) had the biggest influence on the increase in prices. The biggest influences towards a decrease in the CPI are products related to oil, mobile phones and second hand cars. In other words, it seems that products that are more completely under the influence of “market forces” get cheaper while those that exist in (at best) pseudo-markets get more expensive. As I wrote in the post behind the link, in the case of rent increases this is hard to explain. I have heard the argument, that in the case of the community-funded rent dwellings, the rent increases result from the loans that only now have been started to be paid back. In theory this can be verified – on a community basis, it can be checked whether or not they have started experiencing repayments on these loans. I will try to look into this, if I have time.

The point is, though, that since 2011 inflation in Finland has been steadily decreasing. In 2007-2009 Finland experienced fairly large wage increases, which mainly resulted from the fact that collective bargaining happened on the sectoral level and during those negotiation rounds everything seemed fine with the economy. When the Lehman crash came, and the start of the Eurocrisis, Finland was stuck with “too high wages” (in relation to Germany). Ever since, the focus in labour market relations has been on wage moderation. Recently, the Chairman of the Confederation of Finnish Industries Jyrki Häkämies stated that there is no room for wage increases for at least 10 years (!). The employers’ representatives continue to preach the message that Finnish labour is too expensive and that Finnish industries simply don’t manage to compete in Europe or the global market. In this context the employers’ federation is really pressing for wage moderation.

I think this is misguided. First, although Finnish industries are a major source of export incomes, slide 38 in this presentation shows that industry accounts for at most 25% of GDP, and slide 4 shows that 50% of exports comes from the Finnish technology industries (see slide 3 for an explanation of this sector.) Apart from the electronics sector, which is obviously related to mobile phones etc, most Finnish exports are actually investment goods and other half-products. By that I mean that Finnish industries produce parts and machines that companies in other countries use to make the final products. Examples abound, from the paper machines of METSO and the forestry machinery of Ponsse to the dairy packaging machines of ELECSTER.  Not to mention world leaders such as Konecranes and elevator/escalator producer KONE and the advanced car production facility at Uusikaupunki (Valmet Automotive).This simply means that Finnish export industry is very dependent on investment elsewhere in Europe and the world. While there is some evidence that the decline in the Euro and oil price has some effect on Finnish exports in terms of new orders, it already should be clear that price of products is only one factor in Finnish industry’s success. Surely KONE is not the cheapest elevator company, but rather builds innovative elevators at high quality with the inclusion of good after-sales services (i.e. maintenance etc.) The same is likely true for all big names, like METSO and Ponsse. You don’t get there on price. Finland is no low-wage country nor should it aim to be. The fact that Finland doesn’t export enough is not quite as related with the wages paid in industry as ‘they’ want you to think – it is a demand issue. European demand for manufacturing (half-) products is very weak. Simple.


According to the data from Statistics Finland, salaries/wages account for 60% of Finnish GDP. As Storm and Naastepad (2012) show, referenced here, Finland (among 8 other countries) is a strongly wage-led country. This means that demand both domestically and over-all is strongly correlated with wage developments. As this is a Post-Keynesian appreach, the emphasis on consumption and demand issues is clear. This report from the European Commission shows the importance of domestic demand for Finnish growth, which I also pointed out here. This is not hard to understand, because services account for more than 70% of Finnish GDP, and as the current account balance is close to zero, domestic demand, which is strongly related with wage growth, drives economic growth.


But Finland has voluntarily chosen the austerity road and declared war on public debt (although I would focus on private debt). As a result, many people in the public sector have lost their job (perhaps temporarily, in the case of lay-offs). But the combination with a lack of demand in Europe is quite devastating for the Finnish economy – slide 26 of the presentation above shows that since 2008, 48.000 people have lost their jobs in the technology industry sector alone. No wonder the unemployment rate is going up still. In this context – lack of demand and growth more driven by wages (i.e. essentially consumption) than corporate profits, aiming/pressing for long term wage moderation/zero growth is a recipe for economic decline (remember – domestic demand has been the major driver of economic growth in Finland, not exports). The focus on zero wage growth, in an environment with decreases in prices (but increases in rents) is a recipe for major problems with major indebtedness.  I think it is irresponsible of certain economists in Finland that they think a decrease in prices might spur economic growth if people start consuming more. This implies that a) people can afford to consume more and b) that the decrease in prices actually stops. Regarding a) I think this is self-contradictory given the level of private debt – people probably prioritize paying down debt in the face of possible deflation (in addition to the threat of unemployment). Regarding b) there is no sign that decrease in price levels is going to stop. As seen in Japan, this means there is a significant effect on both investment and consumption. In the very short run, there might be some consumption effect, but I wouldn’t count on it. Although it is just data regarding one year, maybe November’s sales statistics (in relation to the same month a year ago) do not show much 0f an increase in consumption with a decline in prices.


So, once more, we have the economic orthodoxy in Finland: wage costs should be repressed because wages in Finland are too high and Finland is not competitive. This disregards the share of (export) industries in GDP (and broader, that Finland competes in other things than just price), the kind of products that are manufactured, the link with European demand, the effect on spendable income (and private debt) and last-but-not least, the effect of ever-smaller wage increases on inflation (i.e. a lack of inflation). Given that in Finnish collective bargaining the export sectors are prioritized (i.e. their economic state is taken into account the most), and both employers and labour unions operate in this discourse, it is unlikely that there will come a big change in how the labour market relations work – although the labour union federations obviously protest the idea of 10-plus years of wage stagnation. In Germany, the new low, low inflation is already taken into account in labour market relations. It seems that this is also the case in Finland.


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.





Closing the competitiveness gap through German inflation or periphery deflation

Mr Gloomy European Economist again has a very good post. As he states, it is a ‘completely unscientific simulation’ but I think it is useful in the same way Paul Krugman’s ‘quick and dirty’ charts help sort out some basic intuitions.

The core thing Mr. Saraceno does is to simulate how long it would take for the so-called periphery countries (in the Eurocrisis) to converge their price levels with that of Germany, which would mean they are at a level field again in terms of price competitiveness. First he calculates these terms with the assumption these countries have zero inflation from now on, and next he calculates what the average rate of deflation would need to be to reach the same price level as Germany by 2020.

Obviously the assumptions are not realistic, and the mechanism through which the German inflation would be achieved is left out for the moment – it would be easier to achieve the higher level of German inflation if Germany would aim to improve domestic demand rather than exports.

But assumptions aside, the conclusion from this ‘sketch’ is clear: price convergence MUST happen and it is not going to happen anytime soon.  One can wonder about the resilience of the eurosystem, like Paul Krugman does:

This need not lead to a breakup of the euro: Pessimists on that front, me very much included, misjudged the strength of European elites’ commitment to the project. But the euro might yet survive — and be a continuing disaster.

But even given this, 6-11 years of continuous deflation (not to mention the risk that Germany itself would slip into deflation) just is VERY long, especially in politics. And the more need for deflation, the more unemployment. Which is simply not politically tenable.

Finland at the moment does not have very low inflation, but it does have a large problem with unemployment – there is a huge gap between those seeking work and the number of vacancies: the number of those seeking work was (curve (1) in the document in the link, in January 2014) still rising and the number of open vacancies ( curve (2))has been fairly stable since 2008. Regardless of these numbers, the current Finnish government (of 6 parties, led by the National Coalition Party and the Social Democratic Party) still intends to do everything to increase the labour supply. It is no surprise that the (only two!) opposition parties in parliament, the ‘agrarian conservative’ Center Party and the True Finn party have been rising in polls (even though these concern the EP elections, not domestic elections; there the picture is slightly different).

But regardless of the polls, the political field in Finland is extremely in consensus about the need to ‘break’ the increasing public debt (not even 60% of GDP) and implement measures to increase the labour supply. The goverment has even asked for a ‘national consensus’ on this issue – the ‘need’ for reforms and budget cuts will one way or another lead to increases in the labour supply, which is not necessarily (sic) a good thing at the moment.

The interesting thing is that seen from the macro-economic imbalances picture (current account surpluses etc) Finland has reduced its surplus, which is ‘good’ in terms of convergence. But politics in Finland are absolutely hyper about this fact and want to restore the surplus. This is perhaps one very clear example that Finnish politicians don’t really understand the nature of the eurocrisis. Which thus also means they won’t find the proper solutions.

‘The view from Germany ‘ and a book recommendation

This post by Simon Wren-Lewis is excellent, and this one by Paul Krugman is a more abstract version of the same thing. The point is (again and again) that what Germany wants most of the rest of Europe to do is simply impossible in current circumstances.

As a companion to this I would recommend the book Austerity: the history of a dangerous idea, by Mark Blyth (Twitter: @MkBlyth). It is simply excellent, well written and should be obligatory reading for any serious parlementarian. Anyone telling you we need austerity has political motives to slash the welfare state.

European disinflation

“Macro Alert: Europe heads towards disinflation | Tradingfloor.com” http://www.tradingfloor.com/posts/macro-alert-europe-heads-towards-disinflation-82469679

This looks decidedly like a very big problem in the making.

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.


Yes, we are still close to deflation in Europe

Yes, we are still close to deflation in Europe

Germany around 1% in the core inflation, ditto Eurozone average, PIIGS are very close to 0%.

Well, core inflation for Finland and Austria seems to be close to 2% at least.