Tag Archives: Unit Labour Costs

Bill Mitchell on the dishonest ‘analysis’ of the almost-Troika

On his blog. Here, I’d like to share the conclusion (my bold). The whole text is quite dense and in places technical, but worth a read, especially now when in Finland all the major political parties compete over how large budget cuts they intend to make after the elections.

The reason that unemployment rose so sharply in the Euro countries between 2008 and 2014 has nothing much to do so-called trade imbalances or differential ULCs.

Those imbalances (as they call them) and different ULCs are not new. What happened in 2008 was a major aggregate spending collapse which was then reinforced by the imposition of austerity.

If I graphed the change in fiscal position (as measured by the differential austerity imposed) and the change in the unemployment rate I would get a very strong positive relationship (more austerity, higher the rise in unemployment rates) which would have some meaning.

That should be the starting point for the European Council – but then that would require them to ask questions about their patently dysfunctional fiscal rules.

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IMPORTANT! “Labour Costs: Who is the Outlier?”

http://fsaraceno.wordpress.com/2014/09/11/labour-costs-who-is-the-outlier

This a very important post which makes the point (yet again) that the whole disaster of the Eurocrisis would have been far less extreme than it is if Germany had played by the rules.

UPM’s cash flow and the simplification of business

To begin with a longish quote (Jussi Pesonen, UPM-Kymmene’s CEO):

“UPM’s business environment in the third quarter of 2012 was impacted by the decelerating global economy. Despite these circumstances, I am pleased that our cash flow continued to be strong and we were able to decrease our net debt and further strengthen our balance sheet. Performance in our growth businesses remained good, but Paper, Plywood and Timber continued to suffer from weak profitability. […]

Energy, Label and Asian Paper businesses maintained strong profitability during the third quarter. Ample hydropower boosted Energy’s performance and Label experienced positive cost development. Pulp profitability was affected by temporary process disruptions at the Pietarsaari mill.

Although both deliveries and prices in Paper were in line with expectations, we were not able to adjust Paper’s cost level enough to improve profitability in the current operating environment. The development of the logistics and energy costs in particular was disappointing. […]

We will use our full toolkit to get Paper’s performance on the right track. Our main focus in the Paper business is to improve margins to maximise cash flow. We have already started to review our costs, margins and structures to make the necessary turnaround in Paper and we have informed our publication paper customers of price increases. We will also investigate consolidation opportunities, and carry out restructuring and capacity closures when needed.(my emphasis)

So, in short: paper and UPM’s traditional saw-mill businesses are weak in profitability. Is this surprising? The CEO does not mention specific markets but the mention of ‘Paper’ versus ‘Asian Paper’ may indicate that he refers to the European and/or North American markets. Well – METLA estimated that the European paper markets will be weak for a long time still, as I mentioned here.

UPM is yet again going to review costs, margins and structures. Most likely this will at some point mean that there will be co-decision procedures in those places that have weaker-than-average profitability and/or higher costs in some way. Also restructuring and capacity closures are mentioned. It is sad that CEOs don’t actually tell what this entails, although everybody understands. Restructuring means that less people have to do the same work – roughly speaking.
But the point is that over the years there have been many investments abroad to the detriment of the domestic paper industry. Thus, the units most likely on the chopping board are again in Finland, especially in combination with a relatively weak employment protection. Given the geographical/regional concentration of paper industry firms, the Finnish paper industry firms should really do a lot more to get their former employees to a new job, especially since the industry has destroyed so many jobs already.

All the talk about cost examination etc. is self-defeating in the same way economic austerity is: in the process much is destroyed – skilled workers lose their job, skilled workers get a heavier burden at work.

The two other points of the press release are not surprising: Asian paper is doing well, labels also. Energy is doing well – no surprise. Before we know it, UPM is the new E.On in Finland.
Oh, and on a not totally unrelated issue: we have informed our publication paper customers of price increases.What did you say, it is the market that determines prices? Yeah, right. Increasing prices in a weak market is a sure way to lose customers and through that profitability (and indirectly, productivity). Customers have a wide range of options to select alternative suppliers, triggering yet another wave of restructurings.

What should be done?

In reaction to this news item (‘the Confederation of Finnish Industries demands that all possible flexibility is taken into use’) – the point is that this confederation wants to do everything allowed by the framework agreement to increase competitiveness and (labour) productivity.
First, the quest for increased productivity is usually a codeword for redundancies or other reorganizations to reduce personnel or use it flexibly. The point is to save on personnel costs. Why? Labour productivity is Total Production/Personnel (or Personnel Hours, sometimes). Which means that labour productivity increases if you decrease personnel and somehow get the employees to do the same production with less people. Therefore, unfortunately, this call for flexibility and increased productivity usually goes hand in hand with increased pressure on employees, stress, absenteeism etc. The report of the Occupational Health Institute on the Finnish paper industry is instructive in this respect.
Still, the employers are paying the wages of the employees, and if the Finnish industry is going under, then it doesn’t bode well for employees either. Like I pointed out in this post and this post, there are two issues that are worrying for the Finnish (export) industry: an increase of Real Unit Labor Costs in comparison to Germany and a worsening trade balance (although the latter is possibly a result of the former in combination with weakening demand in Germany and elsewhere). Also the apparently increasing inflation in Finland is a fairly bad sign (at least regarding exports).
So, as far as I can see, for the good of the Finnish economy and its employees, something has to be done.  Like I said in the previous posts, it seems that domestic demand is holding up fairly well for now, although apparently consumer confidence is currently extremely low if not zero. But the more important issue is the condition of the export industry, since this is where Finland, like all small open economies, earns its money.

In my opinion, there are two border conditions for a new central agreement. First, wages are extremely sticky downwards, which is an empirically well-established element of Keynesian macro–economics (see e.g. this post by Paul Krugman on recent research). Note that this refers mainly to nominal wage rigidity. As the Finnish experience of the 1990s crisis has shown, wages may be sticky but a so-called ‘zero line’ is nonetheless (temporarily) effective in cutting real wages, at least if inflation estimates are more or less correct. Second, for Finland there is no use trying to compete in manufacturing with lower-wage countries. Finnish unit labour costs are simply relatively high, for a multitude of reasons, and simply trying to cut wages is not enough. Furthermore, Finland is where it is, so that there is always the extra burden of transport costs.

Here, I don’t want to discuss the potential of leaving the euro, because the only condition for when that is rational is when Finnish inflation is so high, that the negative effects on the exchange rate from leaving the euro are compensated by this. But since this is akin to throwing Finland’s financial credibility (AAA status etc) away, this is a completely insane idea. Only if Finland could credibly devalue against whatever currency Germany uses, without endangering the national economy, this might make sense but is extremely risky. If anything, currently Finland’s and Germany’s membership in the euro most likely represses their potential exchange rate against dollar and yen.

So, given these restraints, what can be done? Finnish companies in the export sectors can only compete on superior quality and the best service there is. These things do not reduce unit labour costs, but they make the price difference worth it. As for improving labour productivity, squeezing more work in less time is a kind of old-fashioned method. Re-organizing production processes, so that employees’ individual input can increase might be more effective and the trust endowed on employees might also reduce absenteeism and make for better well-being at work.

The truth is of course that Finland is a kind of post-national country when it comes to the value chains of the products Finnish companies sell. Pekka Yli-Anttila of ETLA had this presentation at some point, in promotion of a very good study of the value-added in the Finnish economy. The main point that he stressed, was that Finland shouldn’t be doing is the actual production of goods (like phones) – that should be done in lower-wage countries. For the Finnish economy this would leave design, R&D, sales, maintenance and branding.

To my idea, this very realistic scenario raises some very hard questions about the current system of industrial relations, the Finnish welfare-system and programs for re-schooling. If the ideas of Yli-Anttila are to be taken seriously, this would necessitate a great change away from the dominance of SAK and TEAM (as openers for collective agreement negotiations) and a very broad policy to move employees away from manufacturing to other sectors (or to other jobs within manufacturing that do not involve ‘making’ stuff).

In fact, the required changes do to some extent tie in with labour market shortages in some sectors, due to changing demographics. But simply said, I do not believe current politicians (of any party) have either the vision or the courage to promote the (admittedly radical) policies that are needed to keep Finland’s social, environmental and economic welfare intact. Now is the time – not to cut wages to keep manufacturing alive a bit longer,but to ensure that employees can get out before it is too late (I am not suggesting ALL manufacturing should disappear from Finland, I only suggest that a realistic view should be taken to industries in difficulties on the world market).

The Eurocrisis and Finnish industrial relations

In all the turbulence of the Eurocrisis, it is useful to ponder what effects this crisis might have on the Finnish system of industrial relations. As these things go, there is a lot of speculation and a fair amount of educated guesses based on data (such as what I wrote here). But there are at least two central issues that determine the possible influence of the Eurocrisis on Finnish industrial relations.

  1. Finland is a small, open economy
  2. Germany remains the main export market for Finland

It should be no secret anymore that even the German economy is starting to sputter as a result of the Eurocrisis (see here). This is not a big surprise, as German economic growth has been for a long time based on the gigantic trade surplus with the rest of Europe, which was made possible by the ECB’s monetary policy. On this issue, even German media are catching on, finally, such as in the August edition of Cicero. The dramatic decline in growth (i.e. simply shrinkin economies) in Greece, Spain and Italy also mean that Germany can export less to those countries. Many have critized Germany for a weakness of domestic demand, and this in combination with disaster in the periphery of the Eurozone most likely means that Germany is also going to import less.

As Finland is a small open economy, changes in its export-markets can have dramatic effects. In this post I already showed the weakening trade balance for Finland. With a not at all unimaginable decline in German demand for Finnish products, it is likely that sooner rather than later this trade balance will turn into a deficit, i.e. that Finland imports more than it exports.

A decline in exports will predominantly affect the manufacturing sector, but also the IT sector comes to mind. But to focus on the manufacturing sector for the moment – although this sector does not anymore represent the largest share of workers in the economy, it is still very important in Finnish industrial relations (although this may be changing as well). Accordingin to Pohjala (2009) the greatest increases in labour productivity (as part of overall labour productivity changes) happened in the forest industries and electro-technical (and other) industries. Significant has also been the relative contribution of distribution services in overall productivity growth. Other services don’t contribut much or have shown a decrease in productivity in the period 2000-2007. Here, it may be seen that there is a large difference between manufacturing and services, where the latter are mostly consumed domestically and the former mostly consumed abroad (yes, this is a great simplification).

Edward Hugh presents a new or altered concept of international competitiveness of countries here,  which means that countries are internationally competitive if they have a large enough export sector to drive economic growth. Given the trade balance of Finland and the unit cost and productivity data, it is maybe possible to assess this issue, which will be of vital importance for Finland’s future, including its welfare state. To do this, below some charts based on Eurostat data are presented. The combination to achieve in terms of these measures is (according to Hugh) a stable Relative Labour Unit Cost curve and an increasing (labour) productivity curve. Although Hugh states that countries with a high median population age tend to be export-dependent, the Finnish median age is not presented because I could not easily find this data from Eurostat, but it can be assumed that Finland, like other European countries is experiencing a grey wave, which would mean a rising median age. In the reason presented in the alternative definition of international competitiveness, export-dependency is a fairly dangerous situation for a country that has an aging population (the reasoning being that an aging population has less demand for credit and therefor ‘hurts’ domestic demand).

Labour Productivity for Germany and Finland:

It is clear that after the 1990s economic crisis Finland could catch up quickly, and this is shown in the steeper curve for Finland. For the period since 2007 it is not clear, both Germany and Finland seem to have a similar rise in productivity as before. But Finnish productivity dropped a lot more than German.

The curves for the Real Unit Labour Curves look a bit similar, and in any case the way Hugh indicates they would preferably look: since 1995 largely stable or even falling. The jump in unit labour costs in Finland since 2007 is worrying though, since this has the potential to suddenly make the Finnish economy less competitive. In any case, the fact that the Finnish values have so clearly risen over the German values (the country’s main export market) is case for concern, as it makes Finnish products more expensive.

So, what does this all mean for Finnish industrial relations? For the export-sector, not much good. As can be seen from the trade balance figure in the older post, Finland’s export position is sputtering. This may in part be because of general lack of demand, but no doubt the rapid rise of unit labour costs and therefore the cost of Finnish products abroad. My best guess, for the moment, is that in coming negotiations the employer federations will be strongly against any kind of centralized agreement (whether or not they call it that or not, like the one recently concluded), because the needs for wage restraints (from the point of view of the employers) is much greater for export-oriented sectors than domestic (service) sectors. Thus, when the current ‘frame agreement’ expires and there are new negotiations, and if the Finnish trade balance has indeed gone negative, don’t expect similar results this time around, because in the Finnish economy there are different interests and it might be the employers who disagree more with one another over wage issues than employers and labour unions, in particular when keeping in mind the relatively high inflation in Finland.

But it all depends on what happens with the Euro. I haven’t even started considering the potential fall-out from the crisis to Finnish banks and from there to companies.