Also Wall Street Journal exaggerates

Eräs asiakkaistani sai kyselyn rapakon takaa johtuen Wall Street Journalin artikkelista Suomen talouden ongelmista. Asiakkaan luvalla julkaisen osan heidän puolesta laatimastani vastauksestani.

“In con­trast, Fin­land’s econ­omy to­day more closely re­sem­bles that of France than Swe­den. Its pub­lic spend­ing and tax rev­enues ac­count for an eye-wa­ter­ing 59% and 56% of GDP re­spec­tively, higher even than France’s. Its la­bor mar­ket is one of the most rigid in the world, ranked 103rd out of 144 coun­tries for la­bor flex­i­bil­ity in 2015 by the World Eco­nomic Fo­rum. That ex­plains why la­bor costs con­tin­ued to soar even as the econ­omy dived and pro­duc­tiv­ity tanked; Finnish unit la­bor costs are now 20% higher than those of Ger­many. And thanks to Fin­land’s highly gen­er­ous ben­e­fits sys­tem, the pro­por­tion of the work­ing-age pop­ula­tion that is eco­nom­i­cally ac­tive is five per­cent­age points be­low that in Swe­den—a se­ri­ous prob­lem for a coun­try whose work­force is al­ready shrink­ing as a re­sult of hav­ing the worst de­mo­graphic pro­file in the EU.”

Wall Street Journal: Finland´s problem isn’t the euro

The Wall Street Journal correctly highlights the key weaknesses of the Finnish economy, the inflexible labour market, high level of public expenditure and an aging population. However, the figures cited exaggerate the problem.

Unit labour costs not 20 % higher than German

The figure that unit labour costs are 20 % higher than in Germany is very often quoted in Finland, bur is based on a misinterpretation. The source for this figure is a comparison of unit labour cost indices. This index has risen 20 % more in Finland than in Germany since the year 2000. However, in 2000 Finnish labour costs were substantially lower than in Germany as they had been depressed by the deep slump in the Finnish economy and the consequent devaluation of the markka in the early 90s. From the mere fact that labour costs have been rising faster it would be wrong to conclude that they are that much higher right now.

Anecdotal evidence that Finnish workers can be competitive with German can be found. e.g., from the announcement in the past week that Mercedes will expand the production of its cars in Finland in 2017 by outsourcing production of a second model, an SUV, to Valmet Automotive.

Labour markets in Finland are indeed inflexible, with most workers covered by collective bargain agreements. This makes wage adjustments slow.

That being said wages are not completely unresponsive to economic conditions. Wage increases have since 2010 been no higher than in Germany, and during the past two years increasingly slower. The reason why unit labour costs still rose faster 2011-2012 is precisely the decline in productivity due above all to the collapse in mobile phone production. The production of mobile phones had an extremely high labour productivity, so when it dropped to zero this had a severe negative impact on average productivity – and correspondingly boosted unit labour costs.

The government is now aiming to achieve an actual decrease in labour costs of 5 %, through some combination of cuts in employer taxes and actual wage cuts.  The unions are reluctant to accept any wage cuts, so it remains highly uncertain to what extent the government will succeed. Thus the competitiveness of Finnish industry relative to Germany is likely to continue to improve only slowly – but still improve as the unions broadly accept that there is no room for wage increases right now.

Taxes not 56 % of GDP

It also true that a major challenge is the sharp rise of public expenditure in relation to GDP in recent years.  As GDP has fallen public expenditures have risen, both as a result of the economic downturn (through, e.g., larger payments for unemployment benefits) and due to an aging population (triggering rising pension payments).

However tax revenue is not 56 % of GDP as stated in the article. It has indeed risen, but stands at only 44 % of GDP.  The 56 % refers to total revenue, but this includes also non-tax revenue such as fees for provided services. For example public day-care is heavily subsidised, but users still pay a substantial monthly fee which decreases the tax burden.  There is also some account of double counting as there are substantial payments between different government entities (e.g., the state, municipalities and different regional authorities) that are not fully netted out in the gross expenditure and revenue figures.

Workforce not shrinking

The statement about hav­ing the worst de­mo­graphic pro­file in the EU is also highly questionable. It is true that Finland had one of the most intensive baby booms after the war, and the working-age population has been shrinking rapidly in the past five years as the baby boomers have turned 65. However, as most baby boomers have now reached retirement age, the decline in the working age population is set to slow.  Using other measures the Finnish demography does not look as challenging, the fertility rate is not exceptionally low, and increasing migration has helped keep the population steadily growing.

The claim that the workforce is shrinking is also factually incorrect. The labour force has held fairly stable in spite of a falling working-age population. This reflects to a substantial extent a successful effort to boost the actual pension age through, e.g., tightening generous schemes for early retirement. The success is particularly impressive as it has taken place at a time of a deep economic slump, which typically tends to lower participation in the labour force.