Good Morning Starshines! 🙂
Today I am going to write a piece about Finland’s labour productivity, because I’m confused by certain popular sentiments that boldly assert that Finland’s labour productivity is high. This is in spite of clear 2015, current evidence by the World Economic Forum that strongly suggests that Finland’s labour productivity is not only low; the nation’s labour productivity growth rate is also dismal over the years vis-a-vis its nordic neighbours, and vis-a-vis the stronger economies in EU15. I wonder how and where people in Finland get the impression that the labour productivity is high in the region?
Clarification of Intention: I researched this topic last night because as the owner of a social media company based in Singapore, we have four permanent staffs. I am always committed to increase the productivity of myself and my team, and we do make quite some investment on IT within the company, for instance. My work ethics is straightforward: I first encourage my team to be clear about what we want to do, then measure our work progress based on what we had originally intended to do. That is, to start with the end in mind, and work towards a common vision that we do mutually agree upon.
From a Macro-perspective in Singapore, there is no doubt that our labour productivity has not been progressing satisfactory over the years, and is regarded as a national challenge for the economy and businesses. With the impending global economic downturn, pressing calls to improve labour productivity in Singapore have increased, with Nomura Global Market Research Team going as far to call the current problem “Singapore’s productivity conundrum“.
This is why there are several campaigns targetted nation-wide for the next 5 years, such as: Productivity@work and SkillsFuture (helmed by our really awesome Singaporean Deputy Prime Minister Tharman Shanmugaratnam). An upcoming event is also a rather interesting dialogue session titled “41/15 IPD: Our Economic and Productivity Challenges”, chaired by the very respectable MP/ NTUC Secretary-General Mr. Chan Chun Sing.
Therefore, if it is true that Finland has indeed such high labour productivity, I felt that Singaporeans can learn greatly from Finns! This is why I started doing the research last night by going back to the reports studying the original economic indicators.
I strongly invite comments to this post. This is–however–probably a boring post because it has to do with economic indicators, but I want to know an answer to whether Finland’s labour productivity is high or low, and WHY there is such a difference in perception VS facts. I also want to find answers to the bigger question of “How can a country REALLY improve its labour productivity?” I acknowledge here that I don’t know what I don’t know, and this is precisely why I will be thankful if you can give me sources that suggests that Finland’s labour productivity is indeed high, so that I can read and learn from those.
Also, please do NOT confuse “labour productivity” with “innovation”. Finland ranks high on innovation year after year (there is no doubt on it), but I want to restrict the discussion of this post today to “labour productivity”. Eventually I would want to study more on Finnish innovation, but that is another post for another day.
A) Definition of “Labour Productivity”:
What exactly is “labour productivity”? Econlib provides a rather comprehensive definition:
“Productivity—the amount of output per unit of input—is a basic yardstick of an economy’s health. When productivity is growing, living standards tend to rise. When productivity is stagnating, so, generally, is well-being…. The most familiar, labor productivity, is simply output divided by the number of workers or, more often, by the number of hours worked.”
I’d be using this definition of “labour productivity’ throughout my post.
B) Why I originally had the impression that Finland’s labour productivity is high.
There are two reasons: From the InvestinFinland website, and from the comments to my viral post.
When it comes to the manufacturing industry, Finland is characterized by high labour productivity vis-a-vis India. When we scrutinize closer, we realized that on page 2 of this undated document which is available on this official InvestinFinland website today:
“Finland is the world’s third most competitive economy, according to the World Economic Forum’s Global Competitiveness Report. Take software development as an example: The total labor cost of a software developer in India is 30% lower than in Finland, yet the work done in a country with low labor costs is still 35% more expensive than in Finland. Why? Productivity in Finland is 4.5 times higher than in the low-cost country. This also has a huge impact on time. A software project that takes 100 hours to complete in the seemingly inexpensive location takes only 22 hours in Helsinki.”
Note that there is no citation whatsoever in that report.
OK, so I thought, “Isn’t Finland’s competitiveness ranking 8th this year?” (Check page17 of the World Economic Document). And yes, it is 8th for 2015/2016. And it is 4th for 2014/2015. It’s only 3rd–like the document had mentioned, for 2013/2014.
In other words, within 2 years, the competitiveness index in Finland (which is tightly linked to labour productivity rates) dropped from 3rd to 8th. This implies that the InvestinFinland document that I’d seen is not updated despite still being available on the website with no 2015 version. (Or at least I can’t find it)
In spite of the report being outdated, this indicator is talking about competitiveness, not labor productivity, even both measures are positively correlated. Here, I’m inclined to agree with Economist Roger Wessman that the drop in competitiveness is due to external economic factors, such as the Russian sanctions and the general slowdown in global economy. Therefore I get the impression then that the Finnish labor productivity is still the highest in the Nordic region.
Furthermore, from the comments to this post, some Finnish commentators are saying things like that, for instance and I quote–
“You seem to idealize working hard and feel that it isn’t appreciated in Finland. You may be right. The huge advantage of drinking coffee(Juhla Mokka is shit, try Löfberg’s) and enjoying the view is that you might have time to think, breathe and understand that in 50 or 60 years the society we know will be no more. There will be no work for 240 days a year and 8 hours a day. Our productivity is already amazing and it will exponentially increase over the years. What would you have if GDP per capita grew in a linear fashion like some people seem to think is optimal? “
You can scroll through the 200+ comments, there are a few comments of this nature that suggests strongly that Finnish labour productivity is (1) really high, and (2) will only “exponentially increase” over the years. Not knowing better, I used to be a sheep and blindly agree! Until I did my research yesterday and started having doubts, which I hope you can enlighten me a little on.
Again, don’t just trust me, scrutinize the sources yourself:
(C) My research which suggests that Finnish Labor Productivity is actually low, relative to its Nordic neighbors and the healthier economies in EU.
Recently, in July 2015, the World Economic forum published this article, and I quote–
“Currently Finland has the seventh-highest labor costs in the Eurozone, joint with Germany. However, its labor productivity (GDP per hour worked) is significantly below the Euro-zone average.“
And then it gave this graph. The black bar EA15 refers to the Euro-zone average hourly labor productivity:
Whenever we talk about whether something is high-er or low-er, we need to have a benchmark, correct?
Let’s benchmark the Finnish economy to the Nordic/ healthier Eurozone economies then. Recall that the labor productivity calculation is Total GDP/ Total labor hours. Clearly from this graph, Finland’s hourly labor productivity level is lower than its European counterparts Belgium, France, Germany. It is ALSO lower than its Nordic counterparts Norway, Sweden and Denmark.
It is, however and thankfully, higher than the OECD average. But who are Finland’s immediate export competitors? The far away OECD foreign countries, or the nearby Nordic/EU states?
Let’s take another look at another article–the 2013 OECD report on Finland’s economy, titled Finland: Fit for the Future. On page 4, it makes the recommendation that “Finland must boost productivity growth in most sectors, particularly retail trade and network industries, but also in the public sector.”
On page 6 of the document was this statement:
“The 2008-09 recession halted productivity convergence. While labor productivity fell by almost 4% from its peak in the OECD area, the decline was more than twice as large in Finland. This weakening performance can, to a large extent, be explained by a sharp fall in value added per employee in the ICT sector, that roughly coincided with the downturn. Productivity growth has now resumed, but the level of labor productivity remains about 7% below the pre-recession trend.Boosting productivity is therefore a central challenge for the Finnish economy.”
And then there is this graph on page 7:
This graph clearly indicates that the average labour productivity growth in Finland, from 2007 to 2012, is lower than the Sweden, Germany and OECD average.
Next, we must consider why low labor productivity might persist, vis-a-vis Finland’s EU (those with healthier economies) and Nordic counterparts. Let’s examine, for instance, how tax rates and labour unions negatively correlates with labour productivity. I quote from this dated but pretty theoretically sound report by ETLA Finland. They based their 2006 published research on the development of labour productivity and hours worked by the working-aged population in the EU25 countries and other OECD countries from 1960-2004:
“According to the results, taxes and gross replacement rates do have a negative effect on the average number of hours worked. Also the ratio between collective bargaining coverage and trade union density as well as higher product market regulation seem to have a negative effect on the number of hours worked. “
Well high tax rates and strong labor unions would still apply today in Finland, won’t it?
Then my next question is, why is the labor productivity in Nordic countries like Denmark, Norway and Sweden still higher than the EU15 average, or higher than Finland? These countries have really strong labor unions and high tax rates too–ranging from income tax to value added taxes. When it comes to indirect taxes like VAT, Denmark, Norway and Sweden have high VAT at 25%, whereas Finland has it at 24%. Yet, in spite of VAT being higher–which some might view as an influence towards GDP (in Purchasing Power Parity terms) –Finland still has a lower labour productivity vis-a-vis these three countries, strongly backed by evidence from the World Economic Forum.
(D) The Open Question
So I’d end this piece with an open question: “Is Finland’s Labour Productivity High, or Low, vis-a-vis its Nordic Neighbours/ EU “healthier-economy” counterparts”? Did the silly me go wrong anywhere with this economic analysis? Let me know in the comments, or you know how to reach me! 🙂