Employers propose balance sheet buffers for employees

Download article in original language : FI9901189FFI.DOC

With the dawn of the European single currency in January 1999, the managing director of Finland's PT service sector employers' organisation has called for the national industrial relations system to be adapted to the changed operational environment. He proposes the creation of "buffer reserves" in company balance sheets, for the benefit of employees. These buffers should be accumulated in periods of economic upswing and spent when enterprises are facing hard times.

A precondition set by Finnish trade unions for supporting the country's membership of EU Economic and Monetary Union (EMU) were the so-called "EMU buffers" (FI9711138F), which are intended to prevent economic fluctuations within EMU from affecting some social contributions and thus increasing labour costs. The aim of the buffers is to accumulate reserves from the unemployment insurance and occupational pension contributions of employers and employees during good times. These reserves can be used in times of recession so that, in the event of a rise in unemployment, the contributions need not be increased. Once an agreement on EMU buffers was concluded in November 1997, trade unions organisations were ready to back the government's goal of being among the first wave of Member States to join the euro single currency area.

The EMU buffers are regarded as a complement to the Finnish model of industrial relations. Until now, the incomes policy system has stabilised the economy: in difficult times, the aim has been to achieve moderate national-level incomes policy agreements, covering as much of the workforce as possible, in order to maintain competitiveness. In boom periods, the trade unions have endeavoured to reach agreements at sectoral level. Now it seems inevitable that the single currency will mean new challenges for the Finnish industrial relations system. Economic fluctuations will affect businesses and households more directly, as the option of foreign exchange policy cannot be exercised any longer. Competition will intensify when matters are transparent within EMU.

PT proposal

The discussion on complementing the Finnish model has now been relaunched, from a somewhat unexpected direction. Arto Ojala, the new managing director of Employers' Confederation of Service Industries (Palvelutyönantajat, PT), considers that enterprises should have "company-specific buffers", which could compensate for fluctuations in economic performance. According to Mr Ojala, EMU requires that companies should be able to live within their own resources. This means that more flexible pay systems are needed, based on the performance of particular companies and sectors. The PT leader proposes that a system be created whereby a buffer reserve is augmented when the business is doing well - using money which would otherwise have gone to employees as pay rises. When performance is poorer, the reserve should be spent. The system could be called a "pay reserve system" or a company-specific buffer system.

Mr Ojala's idea is that the buffer should not be used according to some simplistic principle, as in payment by results or bonuses, whereby more is paid when things are going well and less in times of . The system should instead work on a more far-sighted basis. Furthermore, he believes that the proposed system would need control from the central social partner organisations. Whatever the government view of the labour market solution, Mr Ojala considers that these company-specific buffers should be put into effect. According to him, the buffer system would serve to reinforce a wise wage policy under normal conditions. He states that the Finnish incomes policy system is designed only for crises.

Discussions with union leaders

The PT managing director has presented his proposal to union leaders, who have not rejected it but have agreed that discussions will be continued. The final decisions should be made in the forthcoming round of negotiations over a new national incomes policy agreement. The chair of the Central Organisation of Finnish Trade Unions (Suomen Ammattiliittojen Keskusjärjestö, SAK), Lauri Ihalainen, finds the proposal a "healthy and interesting" addition to the discussion started by SAK in connection with the EMU buffers. Mr Ihalainen sees the proposal as justified on the condition that the pay reserves be used as an alternative to lay-offs and dismissals, and that contractual pay and the principle of general validity of sectoral collective agreements should maintain untouched. He states that the reserves could be used for training of personnel and for increasing working capacity. Mr Ihalainen believes that existing personnel funds (a form of profit-sharing scheme) could constitute one model for the new scheme, and that the relevant legislation should be improved so as to increase their use. One limitation of the personnel funds, however, is that they are not applicable in small companies; new ideas are therefore needed.

The chair of the Confederation of Unions for Academic Professionals in Finland (Akateemisten Toimihenkilöiden Keskusjärjestö, AKAVA), Mikko Viitasalo, considers the proposal as an opening in the right direction. He thinks that companies could use the buffer reserves when facing difficulties, or when modernising their production capacity - for staff training, for instance. He expresses willingness to discuss the grounds for accumulating and spending the reserves and the required legislative changes, in a cooperative spirit with the other social partners.

The chair of the Finnish Confederation of Salaried Employees (Toimihenkilökeskusjärjestö, STTK), Esa Swanljung, has the most reservations on the subject. He is opposed to developing new schemes which compete with personnel funds. In his view, the rules for the latter should be improved so that they could be used more widely. As to another idea proposed by Mr Ojala of PT, that pay solutions in the private sector should not be reflected in the public sector, Mr Swanljung regards it as dangerous. According to him, pay in the two sectors follow each other to some extent anyhow. During the most recent recession, state sector pay fell behind private pay by about 5%, a development which he believes cannot continue forever.

The government is reacting rather coolly to the proposal, and the Minister of Finance, Sauli Niinistö, does not promise any support for the idea. He is afraid that this transfer of profit on the balance sheet would mean some kind of new tax deduction system.


The Finnish national-level incomes policy system has shown its functionality, especially in the crises of the 1990s. There have been only two bargaining rounds with agreements at sectoral level, in 1994 and 1995. The last two national incomes policy agreements (FI9801145F) have been very extensive and moderate wage settlements, with the aim of safeguarding the competitiveness of companies.

The new environment of the single currency, where the domestic market will be expanded and competition will become harder, will create pressure in the direction of wage arrangements at company level. The company-level buffer system now being proposed seems to be much in line with the trade unions' ideas of how to restructure the industrial relations system in the new circumstances. It is quite surprising that the proposal is being welcomed so positively despite the fact that these company-specific, result-related systems will gnaw away at the incomes policy model. The quest for a pay policy which displays solidarity, especially between the private and the public sectors, could become an arduous one if successful companies are able to accumulate reserves on their balance sheets and provide better benefits than others when the economy is in a downswing. (Juha Hietanen, Ministry of Labour)

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