'Solidaristic' pay policy under debate
The traditional 'solidaristic' principles behind Finnish pay policy, and the current mechanisms to apply this policy, have been severely criticised by employers during 2004. Trade unions have responded by arguing strongly for the current system, notably in a report published by the Central Organisation of Finnish Trade Unions (SAK) in July. This article presents and evaluates the largely opposing positions on the subject taken by SAK and the Confederation of Finnish Industry and Employers (TT).
The attitudes of Finnish employers' organisations towards the country's prevailing pay policy and collective bargaining structure recently seem to have become less enthusiastic. In 2003, according to a study published in June that year (FI0308202F), 64% of employers (and 75% of employees) indicated their satisfaction with the current largely centralised wage bargaining system - based mainly on central incomes policy agreements (FI0212103F) and subsequent sectoral agreements, with some scope for local bargaining - which has been based on principles of 'solidaristic' pay policy since the 1970s. However, during 2004 employers' organisations have on several occasions demanded major changes to the system.
The position of the Confederation of Finnish Industry and Employers (Teollisuuden ja Työnantajain Keskusliitto, TT) is that: first, the bargaining structure in Finland is too centralised; and, second, the present 'pay norm' whereby the average growth rate of productivity determines wage rises in all sectors, should be scrapped. Instead, TT endorses a system in which the rate of growth of productivity in each sector would determine its particular level of wage increases. Furthermore, more scope should be given to company-level bargaining, it contends. The current system, as TT sees it, is not only too inflexible but also does not sufficiently allow for the differentiation of incomes. This it sees as being vital for the attracting of skilled employees to Finland and for increasing employment for the low-skilled.
The Central Organisation of Finnish Trade Unions (Suomen Ammattiliittojen Keskusjärjestö, SAK) has reacted to these demands by strongly defending the current system. In July 2004, it published a review of the wage determination process in Finland in which it seeks especially to highlight the economic benefits of the system. SAK’s views put forward in this and other documents are examined below, along with the counter-arguments that TT has presented in the course of the debate during 2004.
Equal pay for equal work
Pay determination in Finland is considered as having been 'solidaristic' since the 1970s. This is due to the fact that two core principles have successfully been established to guide pay policy decision-making. The aim of these has been to combine economic stability and growth with a relatively equal distribution of incomes. The first of the principles is that the wages of all employees whose work requires equal skills and is similar in intensity should be the same.
This equal pay principle, states SAK, is designed to simulate the conditions of 'perfect competition', whereby the price of a commodity, in this case labour power, is set at the same level for all buyers (employers). In market conditions, this is usually not the case. Instead, companies that hold a dominant position have an advantage over others when buying labour power, regardless of their labour productivity level. Over time, differences in wage levels should, through competition, come to represent the differences in companies’ productivity levels. However, even if this does finally happen, which is contestable, until then the price of labour in the market does not correspond to its 'actual' value. The simulation of perfect competition though the equal pay principle seeks to root out such inefficiency of the market and create a 'level playing field' for companies. Unproductive firms are thus forced to modernise and the power of monopolies is reduced. This contributes to an increase in productivity and overall growth. Furthermore, as wage fluctuations remain relatively small, inflation is easier to manage.
The position of TT is that simulating the market in such a way is not effective enough, because workers lack incentives to change jobs. Structural change in the economy, it argues, would occur more effectively if wages were to a greater extent determined in the market; the most competitive firms and sectors would be able to pay the highest wages and thus attract labour while the opposite would happen to uncompetitive ones. The movement of labour would more closely be in accordance with the fluctuations of the market, which would result in a more flexible economy, TT argues. To achieve these changes, bargaining should be strongly decentralised to the company level, it insists.
SAK does not agree with such a way of increasing flexibility. Moreover, it has pointed to the fact that enhanced pay conditions, including performance bonuses, profit-related payments and increases above nationally or sectorally agreed pay levels, are already commonly agreed at local level. These have created flexibility into the system. Therefore, centralised wage bargaining structure and the use of such incentives together provide an economically sound alternative to the market determination of wages in terms of structural change, SAK contends.
Low level of income inequality
Centralised bargaining continues to be vital for SAK’s aims and objectives concerning pay determination, because the application of the equal pay principle presupposes a centralised or coordinated bargaining structure. This is also the case with the other key idea behind the solidaristic pay policy endorsed by SAK - the limiting of wage variation between workers in dissimilar jobs. This principle is based on the notion that a low level of income inequality is necessary for social justice. It also makes civil society more stable, which SAK sees as necessary for economic development. Moreover, according to SAK, modern growth theory has showed that equality of incomes as such is not an obstacle to growth, although the limited use of incentives does help. Some economists do not agree with this, however, and instead are aligned with TT in insisting that income inequality does produce growth. As discussed above, the role of incentives is important in this line of reasoning. Not only do incentives induce structural change in the labour market but they also increase the overall work effort, TT has implied.
Pay norm - putting principles into practice
In addition to a central or coordinated bargaining structure, a suitable pay norm is needed for the application of solidaristic pay policy. As with the principles behind the policy, the opinions of TT and SAK also differ widely on the pay norm's desired qualities.
Centralised incomes policy agreements have formed the core of collective bargaining in Finland for most of the past 30 years. The agreements have largely been based on the solidaristic principles of pay policy discussed above. In achieving this, various mechanisms (pay norms) have been used to determine the amount and distribution of wage increases. Since 1995, the pay norm in use has been the 'Tuposeto model'. The margin for pay rises in this model is calculated by adding together the target inflation rate and the average productivity increase of the national economy, and by subtracting from that any increases in employers’ social insurance contributions. The margin is then normally divided between a general pay rise and provisions to grant higher rises for groups whose wages have lagged behind. In this way it has been possible, for example, effectively to bring the incomes of women closer to those of men.
The Tuposeto model was specially designed to curb inflation and to produce a wage development that is both stable and predictable. This is achieved because its application does not alter the relationship between wages and capital gains at national level, as average unit labour costs rise in line with the target inflation rate. However, due to the fact that pay rises are based on the average growth rate of productivity, unit labour costs do rise for firms whose productivity change has not reached the average rate. The contrary happens for companies with better than average rise in productivity. Therefore, the pay norm favours the most dynamic sectors of the economy and puts pressure on unproductive ones to modernise.
Employers have expressed their wish to scrap the current pay norm. TT would like to replace it with a model in which pay rises would be determined independently in each sector based on the particular productivity gains that the sector has achieved. This would increase pay differentiation between sectors. As discussed above, TT insists that this is vital for the economy. Furthermore, more jobs would be created in low-productivity sectors, it argues, as the cost of labour in them would come closer to its market price and not kept 'artificially' high.
Solidaristic pay policy, which has favoured the most dynamic sectors of industry, has no doubt played an important role in increasing the productivity of the national economy. Currently Finnish industry has the most productive labour in the world, and, also partly thanks to the pay policy which has 'discounted' labour for the most productive sectors, its labour costs are only average among the EU 15 nations. The success has a downside, however; after decades of moving resources to productive sectors and practices, investments have started stagnating. Growth is easier to produce through structural change or by moving from very inefficient technologies to the best ones, but now, as these process have come this far, those in possession of capital seem unwilling to continue the process at the same pace as before. This is partly due to companies and investors being freer than before to decide where in the world to allocate their resources and gains tend to be highest in countries going through major structural change, such as China at the moment. Also what may be to blame is that innovation is not taking place fast enough to merit high investments.
Due to the maturing of the economy, investors will increasingly be looking for growth elsewhere than in the already developed industries. Among those are the low-productivity sectors that Finnish solidaristic pay policy has discouraged from developing. Although SAK argues that current pay policy encourages technological development in those sectors, and this is partly the case, in most low-productivity sectors the technological changes needed would simply be far more expensive compared with labour costs or they would for other reasons not be feasible. A good example of the latter is 'person-to-person' services. To bring the unemployment rate substantially lower than the current 9%, and to increase possibilities for investment, labour costs could be lowered in these sectors. SAK is not willing to do this through deregulating the structures of pay determination but it has expressed its qualified support for government plans to subsidise employers in low-productivity sectors, with the aim of increasing employment. This is likely to happen in the near future but the model and budget for doing so have not yet been decided.
SAK is likely to be very wary of this development because effectively what is at stake is a reversal of a decades-long process of hindering the development of low-productivity jobs, which thus far has produced the basis for the rise in the total wage bill. If this reversal becomes a new trend and it gathers momentum, subsidies will not be sufficient for long to keep going a process of economic expansion that lacks the corresponding increase in productivity. Instead, it could ultimately necessitate a decrease in income for some workers, not just indirectly through paying taxes, as is the case with subsidising employers, but directly in their wages. The counter-argument is that it makes a lot of sense to employ people instead of keeping them on unemployment benefits. This may be so, but nevertheless, more people could also be employed in highly productive sectors if some other measures were taken. On the part of the government, these could include heavily subsidising the use of new technologies and increasing funds for research and development. (Aleksi Kuusisto, Labour Institute for Economic Research)