Vol. 29, No. 1

Jari Vainiomäki:

The development of wage dispersion and wage rigidity in Finland


This paper examines the development of wage dispersion and wage rigidity in Finland. We find that while labour market institutions remained stable they allowed for wage dispersion to increase both within and between firms. Different from many other countries the within firms increase has dominated during the last decade. Second, using the methods developed in the International Wage Flexibility Project (IWFP), we find that micro-level real wage rigidity has remained as high as in the 1980’s and 1990’s but nominal rigidity rose after the financial crisis of the late 2000’s. These rigidities together with low inflation have prevented real wage adjustment downwards particularly during the Great Recession. Finally, we find that the primary margin to adjust wage costs in firms is the adjustment of employment, rather than hourly wages, overtime or regular working hours, or turnover of employees. Furthermore, firm-level wages are very sticky in the face of firm-level employment shocks. Local wage cuts are delayed and muted when employment declines, compared to wage growth.

(JEL: J31.)

J. Atsu Amegashie and Michael Batu:

The Welfare State and International Remittances*


It is well known that a prudent agent will increase precautionary savings in response to greater uncertainty of future income. The welfare state, being an insurance or consumption-smoothing mechanism, reduces the negative welfare effect of future income uncertainty. Using a model of remittances and savings, we show that an immigrant will increase his remittances in response to a first-order risk decrease in future income. Using changes in the size and generosity of the welfare state as a measure of changes in future income risk, we empirically test the prediction of our model using panel data of remittance outflows from OECD countries. Our empirical analysis finds that there is a positive relationship between a more generous welfare state and remittance outflows.

(JEL: D13, E21, F22, F24, I38.)

Jyrki Ali-Yrkkö and Tero Kuusi:

Shield the US from Imports! – GDP impacts on Finland and other European Union member states


We analyze the value-added impacts of rising U.S. protectionism on Finland and other EU countries using a hypothetical extraction method. Our results show that for many countries, trade to the U.S. represents more than 10% of the value added from exports to all countries. We quantify the value added generated by Finland and other EU countries through Mexico and China to the U.S. For the EU, we find that Mexico has recently been a more important trade route to the U.S. than China has. Furthermore, we analyze the value-added impacts of recent tariff increases and find that their relative impacts are smaller for Finland than for the EU. For both, the direct, static impacts are less than 1% of the GDP, while the dynamic effects may be greater. Our results also suggest that despite highly integrated global value chains, the indirect impact channels of the tariff measures through countries like China are not important enough to affect the Finnish and EU value added by more than 0.1 percentage point of GDP.

(JEL: F13, F14, F23, L23.)

Harri Pönkä and Markku Stenborg:

Forecasting the state of the Finnish business cycle*


We employ probit models to study the predictability of recession periods in Finland using a set of commonly used variables based on previous literature. The findings point out that individual predictors, including the term spread and the real housing prices from the capital area, are useful predictors of recession periods. However, the best in-sample fit is found using combinations of variables. The pseudo out-of-sample forecasting results are generally in line with the in-sample results, and suggest that in the one-quarter ahead forecasts a model combining the term spread, the unemployment expectation component of the consumer confidence index, and the real housing price index performs the best based on the area under the receiver operating characteristic curve. Autoregressive probit models yield higher in-sample fits compared to the static probit models, and the best pseudo out-of-sample forecasts for longer forecasting horizons are given by an autoregressive model.

(JEL: C22, C25, E32, E37.)

Finnish Economic Papers 1/2020