What to expect on the Finnish labour market?

What to expect on the Finnish labour market? Annual Meeting of the International Forecasting Network Nuremberg April 2/21, 29 Ilkka Nio

Contents 1. Economic development 2. Labour market trends and characteristics 3. Connection between economic development and employment 4. Forecasting employment development in short term 5. Economic and labour market policies

Economic development ( The Ministry of Finance) Finland has experienced a strong economic growth since the depression of 199s. Economic developments have also been among the strongest in the euro area during the latest upswing. We have been able to take advantage of the opportunities offered by the globalisation. Exports have expanded much more than GDP growth. The ratio of exports to GDP climbed from one fifth at the beginning of the 199s to one half in 28. The sharp fall in total output occurred late last year. Especially the volumes in industrial production and exports have fallen sharply and there are no signs of improvement in horizon. In 29 GDP is estimated to drop 5-6,5 %, in spite of the stimulus package included in supplementary budget. The nature of expectations ( self realising expectations) plays now an important role in economy. Households are increasingly cautious which hampers consumption and encourages saving. There is no threat of bank crisis this time. Nor a collapse in domestic demand, similar to the one during the 199s slump is likely to occur again. The recovery of the Finnish economy is intimately connected with the cyclical state of international economy.

Economic developments in Finland Key forecast figures 26 27 28* 29** 21** change in volume, % GDP at market prices 4,9 4,2,9-5, -1,4 Imports 7,8 6,5-1,3-13,1-1,4 Exports 11,8 8,1-1,1-17,4-1,9 Consumption 3, 2,5 1,9 -,7 -,3 Investment 4,8 8,7 1, -9, -5, Total demand 5,7 4,9,3-7,3-1,4 Services, change in volume, % 3,2 2,4 1,5-1,5 -,7 Industry, change in volume, % 1,5 8,6,3-12, -2,7 Labour productivity, change 3,5 2,5-1,7,3,6 Employment rate, % 68,9 69,9 7,6 67,3 66,6 Unemployment rate, % 7,7 6,9 6,4 9, 9,5 Index of wage and salary earnings, change, % 3, 3,4 5,2 5, 3,5 General gov. gross debt (EMU), % of GDP 35,3 31,2 29,2 35,8 42,6 Sources: Statistics Finland, Bank of Finland, EU Forecast: Ministry of Finance

GDP growth in 1997-29 (I), monthly figures 15 1 5-5 -1-15 1997-1 1997-9 1998-5 1999-1 1999-9 2-5 21-1 21-9 22-5 23-1 23-9 24-5 25-1 25-9 26-5 27-1 27-9 28-5 29-1 29-9 GDP Trend

GNP growth in the tertiary industries in 1997-29 (I), monthly figures and trend 12 1 8 6 4 2-2 -4-6 -8-1 1997-1 1997-8 1998-3 1998-1 1999-5 1999-12 2-7 21-2 21-9 22-4 22-11 23-6 24-1 24-8 25-3 25-1 26-5 26-12 27-7 28-2 28-9 29-4 29-11 Services Trend

Change in demand 26 28, quarterly figures 25 2 15 1 5-5 -1-15 -2 % Q:26/1 Q:26/2 Q:26/3 Q:26/4 Q:27/1 Q:27/2 Q:27/3 Q:27/4 Q:28/1 Q:28/2 Q:28/3 Q:28/4 Export Consumption Investments

Ratio of exports to GDP in 1991 28 (IV), quarterly figures 6 5 % 4 3 2 1 Q:1991/1 Q:1992/1 Q:1993/1 Q:1994/1 Q:1995/1 Q:1996/1 Q:1997/1 Q:1998/1 Q:1999/1 Q:2/1 Q:21/1 Q:22/1 Q:23/1 Q:24/1 Q:25/1 Q:26/1 Q:27/1 Q:28/1

Consumers confidence index 1988-29 (II) Kuluttajien luottamusindeksi (talouden tila ja työllisyys) 3 25 2 15 1 5-5 -1-15 -2-25 1988 199 1992 1994 1996 1998 2 22 24 26 28 18.3.29/TEM Lähde: Tilastokeskus

Labour market trends and characteristics The turning point of the cycle has recently come up in the labour market, especially in employment offices, which record the laid offs to unemployment. The lag between production and employment is about a half year, and thus, until now the deterioration of labour market situation has been quite moderate. Long term trends in the labour market have declined the employment threshold of GDP. Compared to the depression of 199s, less economic growth is needed to maintain employment; > Contribution of the growth in the service sector, part-time employment, subsidised jobs, removing of income traps, etc. Over the 2s, the stucture of unemployment has greatly improved in that the long-term unemployment and other structural unemployment have declined considerably. During the long period of growth labour shortages began to occur resulting in exess demand of labour ( labour hoarding) and declining productivity in 28.

Unemployment rates according to the LFS and the JSR in 1988-29 (II) 25 2 15 1 5 1988-1 1989-3 199-5 1991-7 1992-9 1993-11 1995-1 1996-3 1997-5 1998-7 1999-9 2-11 22-1 23-3 24-5 25-7 26-9 27-11 29-1 LFS JSR

Monthly change in the number of registered unemployed persons in 1988-29 (II), (change in trend) 2 15 Monthly change of trend, 1 persons 1 5-5 -1 413-38 33

Employed persons in 1988-29 (II), 1 persons, monthly figures 28 27 26 25 24 23 22 21 2 19 1988-1 1989-1 199-1 1991-1 1992-1 1993-1 1994-1 1995-1 1996-1 1997-1 1998-1 1999-1 2-1 21-1 22-1 23-1 24-1 25-1 26-1 27-1 28-1 29-1 Employed Trend

GDP growth and change in employment 1977-28 6 4 Employment change, % 2-2 -4-6 -8 91 93 92-6 -4-2 2 4 6 8 GDP growth (lag of ½ year)

GDP growth and change in unemployment rate in 1977 28 Change of unemployment rate (JSR) 7 6 5 4 3 2 1-1 -2-3 92 93 91-6 -4-2 2 4 6 8 Growth of GDP ( lag of ½ year)

Growth of output = increase of hours worked + increase of productivity per hour 1 8 6 4 2-2 -4-6 -8-1 % Y:1977 Y:1979 Y:1981 Y:1983 Y:1985 Y:1987 Y:1989 Y:1991 Y:1993 Y:1995 Y:1997 Y:1999 Y:21 Y:23 Y:25 Y:27* Hours Productivity Added value

Started spells 8 7 6 5 4 3 2 1 Started unemployment spells and average length of a spell (monthly figures, trends) 4 35 3 25 2 15 1 5 Duration, weeks 1988 199 1992 1994 1996 1998 2 22 24 26 28

Inflow to long term unemployment 1987-29 (II) 25 2 15 1 5 16 14 12 1 8 6 4 2 1987-1 1988-5 1989-9 1991-1 1992-5 1993-9 1995-1 1996-5 1997-9 1999-1 2-5 21-9 23-1 24-5 25-9 27-1 28-5 29-9 Per cent Persons % of started spells persons

Structural unemployment (hard to place job-seekers) in 1997, 24 and 28, in average a Long-term unemployment ( 12 months) b Recurrent unemployment (12/16) c Unemployed after participation in active labour policy measures d Recurrent participation in ALMP measures (12/16) 28 43 7 29 6 28 9 4 24 73 41 8 39 5 13 2 1997 128 8 64 8 57 8 22 5 1997-28 change change % -35 4-66,1-16 -54,3-29 8-51,6-13 1-58,2 Structural unemployment ( a + b + c + d) Per cent of labour force 11 6 4,1 167 6 6,5 274 11, -163 4-59,6 b) unemployed who have been unemployed in total 12 months during the last 16 months d) those placed recurrently in LMP measure who have been unemployed or in measure in total 12 months during the last 16 months

Forecasting employment development in short term The outlook for next year is still unclear. Recovery is expected to start, but there is still the risk of a global depression. Should the global economy start recovering early next year at the latest, growth in Finland will soon follow. Domestic demand now plays a smaller role in relative terms and thus it alone cannot prevent a substantial fall in employment. Employment remained at a high level until the end of 28, but serious deterioration will be experienced this year. Over one hundred thousand jobs (- 5 % ) will be lost during the next two years and the unemployment will rise at least to 1 %. In case the recovery would follow the same pattern as in the early 199s, the losses of jobs will be even much bigger!?

Unemployment forecast compared to the path of 199s, registered unemployment ( unemployment rate of LFS) 6 5 4 18 % 1993 (XII) 3 2 1 6 % 3 % 199(I) 1-11 % 28-1 28-4 28-7 28-1 29-1 29-4 29-7 29-1 21-1 21-4 21-7 21-1 211-1 211-4 211-7 211-1

Economic and labour market policies Two main challenges in the Finnish labour market To ensure the availability of qualified labour for companies To prevent the structural (long term) unemployment Economic growth in the medium term will be restricted by the shrinking of working age population and radical deterioration in the dependency ratio. This development will be more radical in Finland than in the rest of the EU and will also take place earlier. Due to the ageing population and the stimulation of economy, the central government finances will soon deteriorate considerably. Central government will remain in hefty deficit for a number of years to come. As the labour supply decreases, economic growth will have to rely on improved productivity. Structural policy measures by the Government include improvements in matching demand and supply of labour, social security reform, tax cuts, reforms in education, training and labour policies. Pressures for the increase of long-term unemployment will start again, if the recession would lengthen. Our experience indicates that the long-term unemployment is a national disaster which is difficult to cure >> cutting the public spending after the recovery has begun; lengthening working careers; more intensive training and research to upgrade the skills and production processes. The role of ALMP is a bit unclear!?

Expection of time spent in the labour market at age of 5 in 199-28 12 11 1 9 8 7 6 5 '9 '92 '94 '96 '98 ' '2 '4 '6 `8* in labour force in employment

Probability of an unemployment spell to end during one month by duration of unemployment, trends,6,5,4,3,2,1 1988-1 1989-2 199-3 1991-4 1992-5 1993-6 1994-7 1995-8 1996-9 1997-1 1998-11 1999-12 21-1 22-2 23-3 24-4 25-5 26-6 27-7 28-8 29-9 >52 weeks 27-52 week s 13-26 weeks <13 weeks

UV- relationship in 1988 29 ( II), monthly figures Vacancy rate, % (JSR 1,8 1,6 1,4 1,2 1,8,6,4,2 8 9 9 (II) 98 1988 94 5 1 15 2 25 Unemployment rate (JSR)

ALMP measures in 1988-29 (II), per cent of labour force 6 5 4 3 2 1 1988-1 1989-3 199-5 1991-7 1992-9 1993-11 1995-1 1996-3 1997-5 1998-7 1999-9 2-11 22-1 23-3 24-5 25-7 26-9 27-11 29-1 ALMP Trend

Activation rate of labour market policy in 1988 29 (II), % 4 35 3 25 2 15 1 1988-1 1989-3 199-5 1991-7 1992-9 1993-11 1995-1 1996-3 1997-5 1998-7 1999-9 2-11 22-1 23-3 24-5 25-7 26-9 27-11 29-1 Activation rate Trend