The speech of Erkki Hellsten, Director of TT Labour market in Finland, how it works

Finland is facing the same problem as many other European countries: the age structure of the population is getting older and already by the end of the decade Finland will be faced with a labour shortage.

According to the latest estimates, the Finnish population will begin to fall in about a quarter of a century. The political decision-makers have been aware of these related megatrends for a long time. The question is whether these phenomena are real problems and if so, what should be done to solve them?

Structure of Finnish employment

The changes in the Finnish employment structure after the Second World War have been similar to those in the other Western European countries. A little over 50 years ago, almost 40 per cent of the labour force was involved in primary pro-duction. Industry accounted for a little over 30% and services a mere 30%. But since then the situation has changed at accelerating speed. Today only 5% of the entire labour force works in primary production. Manufacturing and construc-tion employ about a quarter of the labour force, and almost 70% work for private or public services.

During the last decade, Finnish industry has changed very much. In the early 1990s, Finland fell into a deep economic crisis. Unemployment, which in 1990 was about 3.5 per cent, rose to a staggering 18 per cent in less than four years. Thanks to good growth in the latter part of the 1990s, the unemployment level improved relatively quickly, but in recent years it has stubbornly remained at about 9 per cent. Compared with the first fifteen EU member countries, the Fin-nish unemployment level is slightly above average. It is my understanding that the official unemployment levels of Finland and Greece are more or less the same.

If we view the employment rate, that is, the number of people employed com-pared with the population in working age, the situation is somewhat better in Finland. The employment rate in Finland is over 67%, while in the ‘old’ EU coun-tries it is slightly over 64% on average. The high employment rate in Finland is explained by the fact that women’s employment rate – only slightly lower than that of men – is exceptionally high compared with other EU countries.

Employment policy decisions made by Finnish governments

Employment has for obvious reasons been a key issue in Finnish economic pol-icy. The current government and the two governments before it set clear goals for reducing unemployment and raising the employment rate. The government that was established in 1995 set up an ambitious goal of halving unemployment during its term. Indeed, the situation was improved, but the goal was never reached. The next government, established in 1999, no longer set up an unem-ployment goal, but an employment goal. The goal was to achieve a 70% em-ployment rate in its four-year term. However, only a 67% employment rate was attained.

The current government, which is in the second year of its term, set a target of increasing overall employment during its term by 100,000 people. This is almost 4 per cent of Finland’s current labour supply. So what is the situation now? The number of people employed has actually fallen somewhat. Even the Minister of Labour said the target was almost impossible to reach. Yet the Prime Minister stated a few weeks ago that the target will not be changed. To achieve this tar-get, GDP growth should be more than 5% in Finland in the next 2 to 3 years. At the moment this seems unrealistic.

What can we learn from entering such objectives in government programmes? In my view, clear targets with exact figures should not be included in government programmes, because they provide the opposition with an excellent weapon.

The current Government Programme has set a 75% employment rate target by 2011. This can be considered extremely ambitious, because the average em-ployment rate target for 2010 in the Lisbon Strategy is 70 per cent.

Finnish labour market rules

Finland, like the other Nordic countries, is a country where most employees be-long to some trade union. A few years ago the figure was almost 80 per cent, but it has recently fallen to a little over 70 per cent. Yet the trade union movement is still very strong. Highly trained people now make up a higher percentage of the trade union movement than before. The employers, too, have become organised in public and private sector organisations.

In recent years, the ‘tripartite’ principle has been applied, meaning that the nego-tiations have been participated in by employee organisations, employer organi-sations and the government as an observer. The government’s aim has been to create solutions in which the entire labour market is covered as comprehensively as possible. Tax cuts have been and will continue to be used as an incentive to reach agreement, while at the same time veiled threats are made to raise taxes if incomes policy agreements that ensure competitiveness cannot be reached. At the moment the labour market policy atmosphere is heating up, because the cur-rent two-year contract will be ending in a few months. The government’s objec-tive is to have a comprehensive incomes policy agreement for three years if pos-sible. Time will tell whether the government will succeed in this.

The results achieved in previous years have been fairly good, so the tripartite principle can be considered pretty successful. Labour costs have been kept rather well in check, although they have risen in Finland at a slightly faster rate than the EU average. The employers' criticism of centralised contracts arises from the argument that market mechanisms are not allowed to operate freely enough. In practice, the contracts have been accepted pragmatically, however.

There is no statutory minimum wage in Finland. Nevertheless, agreements be-tween the labour market organisations determine the minimum wages for each sector that must be followed by law. The Finnish labour market system has been operating quite well, judging from the fact that during the last decade industrial strikes in particular have been rather rare and the number of days lost in strikes is much lower than in the 1980s. However, certain occupational groups in the public sector have been more inclined to go on strike.

Employers’ view on improving the labour market

To enhance market mechanisms, pay formation should be moderate and based on firms’ profitability and results. Performance-based pay and local agreements should be applied more than is currently done. To make working more attractive, severe taxation of labour should be cut in all income brackets.

In the employers’ view, the unemployment benefit scheme should be changed. Finnish unemployment benefits are not particularly high, but earnings-related unemployment benefits should be staggered and lowered if unemployment lasts for a long period. This would make unemployed people more willing to accept work that was offered to them. Companies also consider it unfair that they have to provide funds for social welfare that is unrelated to the work relationship.

Companies are not very satisfied with the Finnish labour administration. They think co-operation between the labour administration and companies should be increased, especially with regard to training the unemployed. They also think there should be more apprenticeships.

It should be stressed that employer organisations have systematically opposed the granting of employment subsidies to companies free. In the organisations’ view, subsidies should be linked to some obligation, such as training. Otherwise the market mechanism will not function properly.

Where to now?

Will the next decade find solutions for the imminent labour shortage that will en-sure at least a moderate rate of growth for the national economy? The answer is that in theory they will be found, but the reality may be something quite different. Here I propose five ideas that all support each other.

1. If Finland continues in the same way, economic growth in the next fifteen years may be only two per cent. The key issue in speeding up growth is to make productivity grow more quickly especially in private and public services. The overall productivity of Finnish manufacturing industry has improved a lot during the last decade, and the average productivity per working hour in this sector is actually higher than in the United States. However, there is plenty of slack in many private services, because they are only now beginning to be affected by in-ternational competition. And there is plenty of room for improvement regarding public services, too. As we all know, the productivity of public services is difficult to measure, but Finnish statistical estimates have shown that the productivity of public services may even have fallen. In other words, there is much room for im-provement.

2. Raising the employment rate from the current level. I do not think the govern-ment’s target of raising the employment rate to 75 per cent by 2011 is possible. In fact, it would be a good achievement if the employment rate were to rise to 75% by 2020. Even so, it would require that the labour market operated more ef-ficiently.

3. The average working career in Finland is 35 years. People are entering the la-bour market later and retiring before they turn 60. The Finnish employee pen-sion system will be changed from the beginning of 2005 to encourage more peo-ple to continue working after they have turned 60. Financial sanctions will also be increased for a short working career. Extending the working career by about four years should be set as a long-term objective. Starting work one year earlier and going on for three years longer would mean a considerable increase in work in-put.

4. A gradual extension of the annual working time would be crucial, considering the way working times have developed during the last century. Longer working hours will probably have to be given serious consideration already in the early 2010s. In Finnish manufacturing industry, for example, the annual working time is only 1,550 hours. About a century ago it was almost 3,000 hours. Increasing the annual working time by ten per cent would also boost the economy. Extending working hours has been opposed on grounds of work exhaustion, although many believe that it is overactive leisure time that is at the root of the problem.

5. Finland should begin to attract more immigrant workers in the near future. In this context, restrictions on the mobility of work force in connection with the EU expansion this year will be unnecessary. A remote country such as Finland is unlikely to receive a lot of workers from new EU member countries. Time will tell whether new solutions must be considered.

The combined effect of these five factors could double Finland’s two-percent growth potential in a few years’ time, despite a declining labour force. But to what extent such a positive trend can be achieved is naturally not known. What Finland needs is the full support of other economic policy measures and a good entrepreneurship. But what is certain is that, unless major changes take place in the labour market in the coming years and decades, in terms of policies and practical measures, the services of the Finnish welfare society are under serious threat.

In such a situation it is important to stress that the EU’s common objectives to implement the Lisbon Strategy is very important to each EU country, Finland in-cluded. We are becoming more and more dependent on each other, whether we are dealing with positive or negative issues.