Productivity increases rapidly in private services

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There has been considerable debate in Finland on the growth of service sector employment and on the provision of services by the public or private sectors. In this context, the Employers' Confederation of Service Industries commissioned a research study in autumn 2002 on the development of productivity. According to the findings, labour productivity in Finland's private services has increased by 60% during the past 20 years. It is believed that the provision of services still has great growth potential in employment terms.

A research study on the productivity of services in Finland and in its main competing countries, commissioned by the Employers’ Confederation of Service Industries (Palvelutyönantajat, PT), was published in autumn 2002 (Productivity in services – structural changes induced by increasing competition and technological advance, Research Institute of the Finnish Economy [ETLA], Helsinki, 2002).

Findings

According to the findings of the new study, productivity in private services has increased by over 60% during the past 20 years - ie about twice as fast as the average in western industrial countries. Nonetheless, the growth in service sector productivity has been slightly slower than in the Finnish national economy on average, and over 50% slower than in Finnish industry. At present, the productivity of labour in Finnish private services is at an average level for western countries, though the highest in the Nordic countries. However, there are many differences between the various sectors.

Productivity has increased most in the information technology (IT) and finance/banking sectors. Also in trade, Finnish productivity growth has been faster than in many other countries under comparison, even though Finnish productivity is at or below the international average.

Rapid development in productivity

In international comparison, the rise in Finnish productivity has been rapid, especially after the beginning of the recession of the 1990s, the report finds. Between 1980 and 2001, the productivity of labour in the whole Finnish economy increased by about 75% - ie 2.5 times faster than in the industrialised countries on average. Finland's rapid increase was also influenced by quite a low starting level. In private services, productivity growth was 60% over this period, twice as high as the average in the countries under comparison.

The productivity of the Finnish private service sector is average in relation to western countries as a whole. The differences between Finland and the top countries have become smaller. For example, in 1980 the productivity of the Finnish service sector was about 40% lower than that in the USA, but by 1999 the gap had narrowed to just under 20%.

Increased productivity differences between service sectors

Differences in productivity between various service sectors have increased since the beginning of the 1990s. The fastest productivity growth has been in IT services which use information and communication technologies and are open to international competition. These are also the sectors that had increased their production and employment the most.

According to the report, the application of technology and openness to international competition are key factors in productivity growth. The increased productivity of labour during recent years has been explained by technological development, improvements in the quality of the work and organisational changes. This differs from earlier periods, when labour productivity grew in both industry and services - due as much to capital investment as to technological development. The reason for the slower productivity development in the service sector is that it has not been possible to make equally extensive use of technological development in this sector. According to the report, there is considerable potential linked to the utilisation of new technology.

The private service sector is the largest business sector in Finland, but its size in comparison with the overall national economy is the smallest in the developed industrialised countries, measured both by employment and by share in production. An exception are the fast-growing transport and telecommunications sectors. The report states that the small size of the private service sector cannot be explained by the large scale of the public service sector, because the service sector as a whole is still relatively small. In Finland, only half of the growth in production and employment comes from services, whereas the average figure in Organisation for Economic Cooperation and Development (OECD) countries has long been two-thirds. The report states that there is potential for growth in services and in domestic demand for them.

Commentary

There has been much talk about the growth potential of services, in Finland as in the rest of the EU. According to the ETLA report, IT has been the most significant factor explaining increased productivity in services over recent years. PT would like to increase the provision of services even more. Through lowering taxation, other social partners too believe that jobs could be created in service sectors with low productivity. At the same time, Finland is concentrating on technological innovations with high productivity, a strategy accepted on a tripartite basis.

There has been criticism from the trade union side over the kind of jobs that will be created in the growing services sector. It is feared that service jobs will be so low-paid that Finland will face the 'working poor' phenomenon. Furthermore, jobs in the service sector are often on a fixed-term basis, which has detracted from the reputation of services to quite an extent. In the recent debate, there has also been much discussion of privatising the public sector services which are very much the basis of Nordic welfare states, and some have indeed been a target for privatisation. Healthcare, for instance, underwent major changes during the 1990s. It has been made more cost-effective, involving numerous cost-saving measures. Doctors resorted to strike action in 2001 on the grounds that such changes had pushed them too far. As a result, they were able to obtain significant wage increases (FI0108197N), but this has caused financial problems in health service provision.

Strike action taken by key groups in the public sector may also influence the centralised Finnish incomes policy system as a whole (FI0212103F). When such groups start to strike, the pressures towards more decentralisation and privatisation in the public sector will grow. So far, however, the Finnish industrial relations system has remained quite stable.

The trade unions – notably the Central Organisation of Finnish Trade Unions (Suomen Ammattiliittojen Keskusjärjestö, SAK) - have widely promoted the cause of the welfare state and basic services, financed by taxes. The document Work generates welfare, adopted at the SAK congress in 2001 (FI0106190F) states: 'The biggest achievement of the trade union movement and the whole labour movement is the Nordic welfare model. Its core is formed by welfare services of good quality, which are mainly free and financed by common taxes, and which belong to every one. Good public administration, safe living environment and infrastructure that is functioning in all respects, are the basic conditions of welfare. The public services help also toward the implementation of equal opportunities. However, there is a need for improvement in the schools, hospitals, care of the elderly, and cultural services. SAK will make purposeful efforts in order that the financial basis of welfare services which are the responsibility of the government and municipalities will be guaranteed, and that the availability and quality of public services will be improved throughout the whole country.'

If key public sector groups take their own strike action, these goals may be reconsidered. If such key groups aim to achieve considerably higher pay increases than others, the question will be raised as to how these increases can be financed. If they are funded through the public budget, this will mean pressure in the direction of tax increases for wage earners, especially if the economy slows and corporation tax revenues drop. Though the government has been asked for extra resources for the public sector, it has been trying to maintain strict budgetary discipline, which has arguably led to a continually worsening level of services and a weakening welfare state. At the same time, the government has tried to ease taxation to bring it closer to the EU average. Given this equation, it seems that Finland is not able to afford the welfare state in its previous form. This debate is likely to be a central topic in connection with the general elections in spring 2003. Some measures will be taken in order to cut unemployment. Obviously, the debate will centre around the supply of services, too. (Juha Hietanen, Ministry of Labour)