Finnish workers have once again been cautioned against demanding large wage hikes. Wage discipline is the key in the coming centralised income talks. According to the representatives of the employer side and the Finnish state, small raises will help jobs remain in Finland. But is there any concrete proof of a connection between wage discipline and employment? A round of calls placed to research institutes and authorities reveals that there is little.
According to some experts, moderate wage policies may actually have
negative consequences from the point of view of wage earners.
Researcher Pekka Sauramo from the Labour Institute for Economic
Research has focused on wage issues and the division of income for
Wage discipline is reflected primarily in a growth in dividends,
not in a growth in investments that would improve employment,
In fact, the statistics show that dividends have been paid out
generously over the past few years.
Sauramo has calculated that during the years 1994-2003, Finnish
corporations distributed 64 billion euros in dividends.
Of this total, 19 billion euros were paid to foreign shareholders. At
the same time, 21 billion euros were invested in machinery, equipment,
and plants in Finland.
The world is completely different than it used to be. In the 1980s,
dividends totalled only seven billion euros, and investments worth
over 50 billion were made, Sauramo observes.
One factor behind this development is the structural change in
society. The share of industrial manufacturing in the gross domestic
product has declined, with services gaining ground.
But what else do corporations spend their money on besides dividends?
Ritva Pitkänen, a retired auditor, noticed during the last decade that
the operating profits of industrial corporations grew at an astounding
rate as the turn of the millennium approached.
Despite the increase in GDP, public discussions continued to contain
complaints that Finland is a poor country and that cuts to public
spending must be made.
Profits and turnovers grew, but at the same time businesses were
streamlined, Pitkänen recalls her dismay.
The complaints regarding a lack of money made the retired auditor
wonder where all the money had disappeared to.
Pitkänen eventually turned her observations concerning the 1990s into
a published study, using Statistics Finland data on the financial
statements of corporations as her data.
She has recently updated the figures to cover the past years, and no
large changes in the results are visible.
According to Pitkänen's research, the Finnish industrial sector
has invested hardly any money in adding to their means of production,
or in creating new jobs.
During the years 1991-2002, the industry spent less than nine billion
euros on investments in new production facilities, machinery,
equipment, land, and buildings.
I found the small value of investments astonishing, Pitkänen
recalls. In other words, the record profits were not used to create
anything new in Finland.
The majority of after-tax revenues were invested in group companies or
spent on acquisitions. Of that spending, over 60 percent was directed
The value of dividends clearly exceeded the amount of taxes
corporations paid to society.
These record-high dividends were distributed to other corporations as
well as foreign and domestic shareholders, of whom regular wage
earners form a small part.
Pitkänen was also surprised by the substantial change that occurred in
the financial structures of Finnish firms.
The need for long-term debt financing has been marginal, because
earnings have sufficed to cover investments. From this it can be
deduced that the companies have had plenty of money to go around.
Contrary to the common perception, the industrial sector has not directed its investments primarily at countries with cheap labour costs, but at Western nations where wages form a larger part of GDP than in Finland. In 2002, the clear majority of investments were made in high-cost countries—according to the Bank of Finland, the largest recipients were Sweden, Switzerland, and Belgium. In other words, the talk of international competition in taxes and wage expenses is not entirely accurate. The industrial sector has invested in countries were it is no cheaper to operate than in Finland. On the contrary, in most of the countries that have received Finnish money, wages are higher than in Finland. The key factor behind the investments has most likely been the aim of conquering new markets.
Although the rise in real wage costs stopped in Finland already in
1996, corporations cut their staff numbers by a total of 50,000 during
the fat years of the late 1990s. The unemployment rate has remained
high despite wage discipline.
Employment cannot improve if companies do not invest in
Finland. Foreign companies can probably not be relied on to lend a
helping hand. The amount they invest in Finland is only half the
amount Finnish corporations direct abroad.
There is an important link between the distribution of corporate
profits and the Finnish unemployment problem, Pekka Sauramo
observes. He says that the level of investments has been low in the
service sector as well.
At the turn of the millennium, the rate of investment in the
service industry was more or less at the level of the mid-1970s
recession, Sauramo points out.
Director Tarmo Korpela from the Confederation of Finnish Industry and
Employers estimates that the value of investments in Finland will
decline this year as well.
He believes that investments in China, Brazil, and Russia will grow
According to Korpela, the large dividends of the past years can be
the common laws of doing business.
If corporations have capacity but no lucrative targets for
investments, the share of investments is lower. In these situations,
the money is spent on dividends, or financial structures are
strengthened Korpela explains.
In the centralised income talks, both the state and employers will use
the familiar rhetoric:
If you keep your demands moderate, Finnish
companies can invest and create new jobs.
This fall, the employer side began early on to speak for a long three-year contract and for tight wage control—the threat of cheap foreign labour may take our jobs away otherwise.
The government has supported this message by promising tax cuts if wage hikes remain moderate.