Wage earners' purchasing power has developed positively under incomes policy agreements

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In September 1999, the views of Finland's social partners over a possible new national incomes policy agreement were being sounded out. The willingness to conclude a new incomes policy deal may have been strengthened by the report of a tripartite fact-finding commission on the practical implementation of the last two incomes policy agreements, which finds that purchasing power has grown considerably faster than envisaged when the agreements were signed.

Since 1995, Finland has been covered by two successive national incomes policy agreements, with the second, concluded in December 1997 (FI9801145F), due to expire in January 2000. In September 1999, the preliminary sounding-out of opinions began with a view to negotiating the shape of the next incomes policy round (FI9905104F). A tripartite fact-finding commission on incomes policy, which monitors the practical implementation of the agreements, stated in its report published in June 1999 that wage earners' purchasing power has clearly developed in a more positive direction than was envisaged when the agreements were concluded. It is estimated that the real level of wages, after taxes, rose by 6% in 1998, and that 1999's growth will be around 5%. During the earlier incomes policy agreement period, the purchasing power of wage earners grew by 4% and 4.5% in the two years concerned. There are indications that, thanks to this positive trend, the chances of a new incomes policy solution being reached may be good.

Moderate wage solutions combined with a small reduction in income tax have produced an end result that is perhaps somewhat surprising. Purchasing power has clearly increased more rapidly than in the years of high nominal pay increases and rapid inflation in the 1980s, for example.

That wage earners' purchasing power has grown more than was envisaged is due above all to the fact that the rise in prices in 1996 and 1997, taken together, proved to be more than 3.5% lower than anticipated. This lower than expected inflation rate resulted from - among other factors - a reduction in employer's unemployment insurance contributions from the beginning of 1996. This reduction could not be taken into account when preparing the estimates immediately after the agreement was signed. Another influencing factor was a more pronounced decrease in interest rates than had been forecast.

The significance of the incomes policy solutions

According to the commission's report, the incomes policy agreement of autumn 1995 played a central part in an economic policy which succeeded in restoring a growth- and employment-supporting trend in basic areas of the economy. If the pay-rise policy lines laid down in the pre-1995 round of agreements had been followed, this would have led in 1996 to higher interest rates, weaker development of production and employment, and a piling-up of economic problems. The December 1997 agreement, in its turn, contributed elements conducive to a continued positive economic trend.

Of further significance was the fact that by combining both wage and tax solutions, both the 1995 and 1997 agreements succeeded in safeguarding both price competitiveness and a positive trend in the purchasing power of wage earners. A successful application of the bargaining system contributed to this process. In both cases, the central organisations' member organisations negotiated collective agreements in complete accordance with the provisions on pay increases of the central incomes policy deal. Moreover, these agreements covered a large majority (over 90%) of wage earners.

In its report, the fact-finding commission states that, despite the favourable experiences, the incomes policy agreements have also given rise to certain questions. Although the December 1997 agreement can be considered very moderate in view of that particular phase in the economic cycle and the growth prospects at that time, the collective agreements based on it were nevertheless concluded in an economic situation which followed an exceptionally severe depression, in conditions where unemployment was still extremely high. In fact, from the standpoint of future economic development and adaptation of the labour market to the requirements of Economic and Monetary Union (EMU) (FI9711138F), the crucial issue is how the wage formation model implemented in the last few years - tailored to a low inflation target - will work in conditions of lower unemployment and improved competitiveness. According to the latest statistical data from Eurostat, the rise in hourly labour costs appears to have been more rapid in Finland lately than in the euro single currency area as a whole. Measured in terms of relative unit labour costs in industry, Finland's competitiveness in comparison with that of its major competing countries has nevertheless continued to improve.

Employment effects

In the light of an upward employment trend that is weaker than expected, the report questions whether, across the economy, the targeting of funds reserved for pay increases has been optimal from the employment standpoint. When drawing up the incomes policy agreements, the starting-point was to seek the kind of wage development that would, at the level of the national economy, be in harmony with the target of low inflation. Not so much attention was paid to particular sector- and company-specific issues, nor to the question of how job-seeking and filling vacancies could be promoted through wage formation.

Wage rises based on the increase in average productivity in the national economy, along with an effort to achieve uniform earnings development, have led to a greater rise in unit labour costs in those sectors and companies in which productivity increases have been slower than average. The form of the general wage increases contained in the incomes policy deals, along with increments for women and for employees with low wages, has resulted in relatively greater wage rises in low-paid sectors, which may have adversely affected the demand for labour in the sectors concerned. It is possible, on the other hand, that the uniform development in earnings based on the rise in average productivity in the national economy has increased the demand for labour in those sectors where productivity growth has been faster than average.

Seen from the wage earners' point of view, the fact that general wage rises and the increments for women and low-paid employees have been formulated in cash terms rather than percentages has, in turn, meant that job-seeking has become more attractive than before, especially in the low-paid sectors. In principle, the trend in this direction has made possible an improved employment situation in sectors where there had been a labour shortage. On the other hand, companies suffering from a labour shortage can attract labour through higher pay rates even without provisions to this effect in collective agreements, if this is considered necessary and if information on the salaries to be paid is sufficient. However, this has not happened in all sectors, states the report.

The situation for companies

The commission has also investigated the effects of the incomes policy agreements from the standpoint of companies. According to the report, the profitability of enterprises has improved markedly in the last few years. In conditions of free capital movement and higher profit requirements, this has been one of the vital prerequisites for the post-depression growth in production and the improved employment rate. Adaptation to the euro single currency also calls for a high tolerance of risk on the part of companies. The more vulnerable a company is to economic fluctuations, the higher should be the proportion of shareholders' equity in total funds. Despite the fact that this basic principle has been generally known also in the labour market field, the change in functional income distribution that has taken place in recent years may have increased the pressures to raise salaries, states the report. Besides improved profitability, other factors that may have worked in the same direction include the growth in share dividend incomes - and also the share option arrangements for company management, which have given rise to considerable publicity (FI9804158F).


Such a positive evaluation by the fact-finding commission of the practical implementation of the incomes policy agreements speaks volumes for the system in question. In September 1999, the atmosphere of the initial sounding-out discussions is expectant and it is anticipated that the viewpoints of the social partners will be clarified during the autumn. In the new circumstances of EMU, economic predictability and low inflation are the goal of all parties. The social partners have declared that EMU membership will not in itself cause any special pressures toward change in the current collective bargaining system, nor will it mean any interference with the minimum terms of collective agreements or any reduction of nominal wages. The social partners also see the existing bargaining system as enabling a wage development that is in harmony with the inflation target. All this supports the view that an incomes policy solution will once again be reached for the period from January 2000. On the other hand, some sector-specific problems (eg outsourcing), and also the reluctance of entrepreneurs to accept a wide-ranging national-level solution, may still obstruct the conclusion of a new incomes policy agreement. The Finnish system has nevertheless effectively demonstrated its functionality by also taking company-level problems into account in such a way that even a wide-ranging agreement need not be an obstacle to the resolution of such problems. (Juha Hietanen, Ministry of Labour)

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