Vol. 12, No. 2
Finnish unemployment: introduction and conclusions (pp. 59–61)
Finnish unemployment: a view from outside (pp. 62–81)
Wage formation in Finland 1960–1994 (pp. 82–91)
In this study we examine wage formation in Finland. One distinctive feature of the study is the long investigation period that spans the thirty-five-year period from 1961 to 1994, and thus includes the turbulent years of the early 1990s. The results imply that productivity growth is the main determinant of wage growth. In addition, real wage growth is affected by unemployment, union power, replacement rate, import prices and various taxes. One conclusion of this study is that all previous results – as well as those reported in this paper – how different taxes influence real labour costs in the long-run must be treated with considerable care. Although our results reject the idea that all taxes are borne by labour in the long run, we cannot be sure that the opposite is true. It is, however, tempting to argue that in a world of imperfectly functioning markets and imprecise information various taxes lead to higher labour costs and, consequently, that the structure of taxation matters to wages and thus to unemployment at least at the medium term.
Jaakko Kiander and Jaakko Pehkonen:
Finnish unemployment: observations and conjectures (pp. 94–108)
In this study we analyze the factors behind the Finnish unemployment shock of the 1990s. The analysis is based on labour demand, wage-setting and current account equations that form a structural labour market model. The results of this model are compared to those obtained from a reduced form unemployment equation. We find that the both approaches yield relatively similar results. The main factor causing the dramatic increase in Finnish unemployment in the early 1990s seem to have been the real interest rate shocks of the years 1989–92. In addition to interest rates, there are other explaining variables although they are of minor importance. They include domestic supply side factors such as increased tax wedge and replacement ratio, and variables related to the economy’s external constraint. These are the terms of trade and the economy’s foreign indebtedness.