Finland 2008: A better functioning labour market

Finland has enjoyed a period of strong labour market performance in recent years, with robust employment growth and steadily declining unemployment. However, further progress in dealing with the ongoing restructuring associated with globalisation require decisive reforms to labour market institutions. Raising wage flexibility should be a priority. Finland’s wage negotiation framework needs urgent reform to ensure that outcomes more closely reflect productivity developments at the firm and industry level. Future rounds should continue to be negotiated at a decentralised level and the process of determining a greater proportion of wage increases at the firm level should continue. Further de-synchronisation of negotiations across industries should also be encouraged. Opting out of collective agreements should be made easier, and the government should canvass the costs and benefits of eliminating the current practice of extending by legislation virtually all collective agreements to all firms. Finland is increasingly facing skill shortages and the time to fill job vacancies is lengthening, particularly in buoyant regions of the country. This is coupled with high unemployment rates in other regions, pointing to a low level of inter-regional labour mobility. Legal requirements for geographic (and occupational) mobility of the unemployed should be tightened, including real sanctions, and enforcement should be stepped up. In addition, subsidies directed at assisting inter-regional mobility should be rebalanced. Those that are found to be the most effective should be increased while others (such as the second residence subsidy) should be abolished.

Finland’s population is one of the most rapidly ageing in the OECD and the labour force is expected to start declining by 2010. The resulting fall in employment and growing dependency ratios threaten the sustainability of the Nordic model. A number of policy changes are needed to raise labour market participation:

  • The unemployment pipeline that facilitates older workers’ early withdrawal from the workforce should be abolished.
  • Access to sickness and disability pensions should be tightened and greater efforts should be made to assist the current stock of sick and disabled to rejoin the workforce.
  • Unemployment benefits should be tapered over time to better motivate job search and activation.
  • While the full-time working culture should be generally maintained, greater part-time participation should be facilitated for older people, those on disability pensions, and women with young children. For example, old-age and disability pension rules should be made more accommodating of part-time work and inflexibilities in child care arrangements addressed.
  • The interaction between the tax and benefit system should be fine-tuned to raise incentives to find work, participate more intensively in work, and to progress in work. This is likely to require a reduction in some benefit levels.
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