Workers receive diminishing share of national income

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In March 2002, Finland's Government Institute for Economic Research published a research study on the distribution of national income between labour and capital, commissioned by the tripartite incomes policy information commission. According to the findings, the share of wages in the national income has decreased drastically since the early 1990s. In response, the SAK trade union confederation has warned of a new battle over the distribution of income.

In March 2002, the Government Institute for Economic Research (Valtion taloudellinen tutkimuslaitos, VATT) published a research study (Funktionaalinen tulonjako Suomessa, Kyyrä Tomi, VATT, Helsinki, 2002) on'functional income distribution', ie the division between labour and capital of the value added created in production. This approach distinguishes between wage earners' income and income from profits and property. The research was carried out on behalf of the incomes policy information commission, which consists of the social partners and representatives from the Ministry of Finance. The purpose of the research was to give a general picture of the development in functional income distribution and the background factors linked to it. The context is that the exceptionally deep recession of the early 1990s and the high level of internationalisation of the economy has had a strong moulding effect on Finnish company structure.

Capital income favoured

According to the research findings, national income distribution has shifted in favour of capital income in almost all the EU countries. The development in Nordic countries differs from that in other EU countries in that the share of wage income did not decrease until the 1990s, whereas in the other countries the change in income distribution started at the beginning of the 1980s. The share of labour income decreased strongly in Finland in the 1990s - as illustrated by the figure below. At the start of the recession of the 1990s, the share of labour income initially increased to a record high of over 75% in 1991-2, but shrank within a few years to a level of below 60% not seen since the 1950s. The rapid economic growth in the latter part of the 1990s did not solve the situation - rather, the share of wage income continued to diminish until 2000. Only in 2001 did the trend in income distribution change. The share of labour income in national income rose in this year, because the wage sum grew by over 6%.

The share of income from work in the national income

Source: Statistics Finland

Change in distribution more moderate at company level

During the 1990s recession, company structure changed drastically in Finland, with the weaker companies drifting into bankruptcy and the stronger companies having to make their operations more effective. A significant part of the decrease in the share of labour income in the early 1990s can be explained, according to the research, by this structural change in companies. This has meant that income distribution has changed more moderately in individual companies than at the general level.

Impact of incomes policy agreements

Especially in the aftermath of the recession of the 1990s, there have been significant differences between the industry, service and construction sectors, influenced by the two differing strands of development since the recession. The economic growth in the later 1990s was based largely on the growth in exports only, whereas the sectors dependent on domestic demand recovered much more slowly. The moderate national incomes policy agreements (FI0012170F andFI9801145F) concluded since the 1990s have constrained the growth of wage differences between sectors. This has led to a change in income distribution in favour of capital income in sectors where productivity and producer prices have developed more strongly than on average. There are five sectors where the share of income from work has shrunk more than the average: production of textiles, clothing, leather and leather goods; the forestry industry; the electro-technological industry; finance; and transport, warehousing and telecommunications.

Response of incomes policy information commission

The incomes policy information commission, in a statement on the findings of the VATT report, considered the employment effects of the moderate incomes policy agreements as good, while'at the same time, the agreements have constrained the growth of sectoral wage differences, producing a change of income distribution in favour of capital income in sectors where productivity has grown faster than the average.'

According to the commission, the drastic change in the operational environment of the economy due to internationalisation may have long-term effects on income distribution between work income and capital income. It also forecasts higher wage demands:'It is possible that the change in functional income distribution in favour of capital income, and the way in which the reward arrangements of company managers have been represented to the public, have increased the demands for better wages. However, the continuation of positive economic and employment developments requires that the necessity of low inflation is internalised.'

SAK warns of income distribution battle

According to Ismo Luimula, economist at the blue-collar Central Organisation of Finnish Trade Unions (Suomen Ammattiliittojen Keskusjärjestö, SAK), the economic effects of the moderate wage agreements and responsible wage policy have been excellent:'The companies have paid off their debts and their profitability has soared. With the vigorous and sustained economic growth, the employment rate has improved noticeably - 300,000 new jobs have been created. The real purchasing power of wage earners has increased by 3%-4 % a year. The incomes policy agreements have strengthened the stability and predictability of the economy.'

Mr Luimula stated that companies now have greater capital and'buffers', which provide them with possibilities to take care of the workforce and employment during less favourable business cycles, too. The wage earners have taken responsibility for the employment situation, including in sectors where the economic growth and high profitability could have provided an opportunity for larger wage increases.

Further, Mr Luimula considers that the controversial decisions of some listed companies as to how to share out dividends (FI0203102F) and excessive reward arrangements for managers, are irresponsible in the present situation and are undermining the preconditions for stable economic growth:'The owners who collect oversized dividends are paving the way for an income distribution battle and wage competition, in which both the owners and the wage earners try to extract everything possible out of companies by'distraint'.'

Commentary

The change in national income distribution in favour of capital income is part of a wider European development. This change has been especially strong in the Nordic countries. In Finland, reasons for this can be found in the deep recession of the early 1990s and the change in the financial structure to favour companies operating globally. In the background lies the'Nokia phenomenon', which has created many cases of wealth through capital income (FI9804158F). However, it has to be remembered that ordinary wage earners too have begun to invest part of their assets in the investment markets. So the wage earners, too, have been able to gain indirectly from the capital markets.

After Finland joined EU Economic and Monetary Union, the general goal of the social partners was low inflation (FI9706120N andFI9711138F). Wage earners have clearly committed themselves to this aim through moderate incomes policy agreements. Companies have been successful, but are still very ready to shed staff, especially if opportunities for improving productivity are in sight. In the recession which began in autumn 2001 and the structural change connected with it, employees have been made redundant at a rapid rate, even though in the economically stable sectors this has mainly been a question of temporary lay-offs. The change in income distribution in favour of capital income will increase the demands for higher wages and also the tensions surrounding a new incomes policy agreement when the current deal expires at the end of 2002. (Juha Hietanen, Ministry of Labour)