Study finds that chronic unemployment remains widespread

Source: Simo Aho (2004): Kroonisen työttömyyden laajuus, rakenne ja syntytausta, Ministry of Labour.

The social structure of the chronically unemployed is surprisingly close to that of the unemployed in general, according to the study. Gender, age, education and place of residence explain very little of the propensity of some to remain outside employment for extended periods of time. The only groups that were significantly over-represented among the chronically unemployed were foreign citizens, those aged over 55 and those diagnosed with a disability. However, these groups’ share of all chronic unemployment was not very great. The individual background variables cannot, therefore, explain away the problem.

Aho also looked at the work history of the chronically unemployed and discovered that about a half of them had dropped out of a stable work career while the other half had never properly got into working life. The share of the latter group has somewhat increased in recent years.

Early 1990s recession marked a turning point

Finland went through one of the deepest recessions in its history in the early 1990s and the unemployment rate rose from 3% in 1990 to a high of 17% in 1994. According to one study (in which chronic unemployment was somewhat differently defined than in the study by Aho), chronic unemployment increased six-fold in the early 1990s, from 2% in 1990 to a peak of 12% in 1996. It then fell to 8% by 2000 but remained four times greater than before the recession. Average unemployment developed very similarly and its ratio to chronic unemployment did not change much during the 1990s. After 2000, average unemployment has ceased to decline and was at 9% in 2003. It is most probable that the fall of chronic unemployment too has at least slowed down but there are as yet no data on this point.

Structural change that took place during and after the recession was dramatic, Aho points out. The level of GDP of 1990 was reached again in 1996 but 377,000, or 15%, fewer employees were needed then for achieving it. Even in 2000 employment continued to be 9% lower than in 1990, although GDP had grown by 24% since then. The increase in productivity was achieved by both changes within firms and workplaces and by production shifting to firms and sectors where productivity was high. As a consequence, the occupational structure also changed rapidly and the skills of many workers became obsolete. Low-skilled labour in particular came to be in oversupply.

The changing patterns of labour demand contributed to the rise of structural unemployment in Finland during the 1990s. According to the Organisation for Economic Cooperation and Development (OECD) its level was 5% in the late 1980s and it rose to a high of 10% in the mid 1990s. Structural unemployment has fallen thereafter but not significantly, it was still 8.5% in 2003, within half a percentage point of the actual unemployment rate, which is where it has remained since the late 1990s.

In this context it is not surprising that chronic unemployment remained a problem in the second half of the 1990s. Aho’s examination of developments during that time reveals that in a sense the problem even became more serious because the share of those who had been outside the open labour market for a very long time (at least seven years) increased. Otherwise the structure of chronic unemployment did not change much although the share of older workers increased somewhat. The level of chronic unemployment did fall in 1994-2000; nonetheless, flow into it continued in a rather constant fashion even during the much improved employment conditions of the late 1990s, the study finds. Therefore, chronic unemployment cannot simply be thought of as being a heritage of the recession. Instead, the main reason must be that the supply of and demand for labour became 'misfits' during 1990s, Aho argues. The problem has also probably been exacerbated by social segregation and discouragement, which are connected to chronic unemployment. Nothing suggests that 'income traps' are an important explanation, he concludes.

Government measures to promote employability

Chronic unemployment continues to be such a major problem, partly because unemployed people do not meet the requirements of the labour market. The government has recognised this and is tackling the problem in various ways. Increasing the competence of labour is emphasised; training in subsidised employment is a widespread practice; and a special programme for increasing adult education has been in place since 2003. One of the key objectives is to decrease the flow into long-term unemployment by 'early intervention'; for example, it has been decided that, starting in 2005, work or training opportunities must be offered to young unemployed people as early as three months after unemployment has begun. There are also plans to reform the financing of unemployment benefits - the government's plan is to place municipalities under an increasing obligation to 'activate' long-term unemployed people and possibly to make municipalities bear part of the financial burden.

One successful item of reform has been the reorganisation of support services for long-term unemployed people. Special service centres have been established to offer them a range of support services under one roof. Increased cooperation among different authorities, including the Employment Service, the Social Insurance Institution and municipal social and healthcare services, has made it possible to offer versatile individualised services for long-term unemployed people. 'Employability' at the centres has, at over 20%, been very promising.

Commentary

In addition to the government measures described above, attempts at lowering labour costs may prove significant in affecting the supply of labour. Employers have argued that 'solidaristic' pay policy enacted through centralised bargaining has raised the cost of low-productivity labour too high (FI0408202F). The government seems to share this view as it has, for example, recently proposed that domestic-help workers' employment costs be lowered through making them partly tax-deductible. More importantly, the government is also planning to start subsidising employers in low-productivity sectors. The employers’ central organisation, Finnish Industries (Elinkeinoelämän keskusliitto, EK), welcomes these measures but it also insists that they are not sufficient; wage increases in low-productivity sectors should not, it argues, follow the average rise in productivity in the national economy, as has long been the case under centralised agreements. The Central Organisation of Finnish Trade Unions (Suomen Ammattiliittojen Keskusjärjestö, SAK) strongly disagrees and has defended the 'solidaristic' model on various grounds (FI0408202F).

The plans related to increasing low-productivity jobs for the low-skilled are a reflection of how weak the overall demand for labour has been since the early 1990s recession. Productivity grew so fast in the 1990s that a large part of the labour force was made more or less permanently redundant, as the study by Aho shows. In the process, so much capacity was built up in industry that even during the present upswing in the business cycle manufacturing firms’ domestic investments and employment remain relatively stagnant. Furthermore, unemployment has remained at 9% for several years now. From the point of view of trade unions this is problematic - a chronic oversupply of labour tends to equal less bargaining power. It is therefore in their interest to look for ways to promote employment. SAK currently emphasises the importance of education as a way of overcoming long-term unemployment. While this is important, the problem of sluggish labour demand must also be addressed. Currently the bulk of the growth potential for labour demand in Finland is in low-productivity services; the size of Finland's private service sector compared with the overall national economy, measured both by employment and by share in production, is the smallest in all developed industrialised countries. There is therefore a lot of potential there for creating new jobs, much of it is for low-skilled and low-productivity. (Aleksi Kuusisto, Labour Institute for Economic Research)