Micro-level Rigidity vs. Macro-level Flexibility: Lessons from Finland

Böckerman, Petri and Laaksonen, Seppo and Vainiomäki, Jari (2009): Micro-level Rigidity vs. Macro-level Flexibility: Lessons from Finland.

Abstract

This paper explores the wage flexibility in Finland. The study covers the private sector workers by using three data sets from the payroll records of employers’ associations. The data span the period 1985-2001. The results reveal that there has been macroeconomic flexibility in the labour market. Average real wages declined during the early 1990’s depression and a large proportion of workers experienced real wage cuts. However, the evidence based on individual-level wage change distributions shows that especially real wages are rigid. In particular, individual-level wage changes have regained the high levels of real rigidity during the late 1990s that prevailed in the 1980s, despite the continued high (but declining) level of unemployment.

• Item Type: MPRA Paper
• Language: English
• Keywords: Wage flexibility; wage rigidity; wage cuts
• Subjects: J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J33 - Compensation Packages ; Payment Methods; J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J30 - General

References

Akerlof, G.A., Dickens, W.T. and Perry, G.L. (1996). The Macroeconomics of Low Inflation. Brookings Papers on Economic Activity, 1, 1-59.

Bewley, T.F. (2007). Fairness, Reciprocity, and Wage Rigidity. In: Diamond, P. and Vartiainen, H. (Eds.), Behavioral Economics and Its Applications. Princeton: Princeton University Press, pp. 157-188.

Böckerman, P. and Kiander, J. (2002). Labour Markets in Finland during the Great Depressions of the Twentieth Century. Scandinavian Economic History Review 50, 55-70.

Böckerman, P., Laaksonen, S. and Vainiomäki, J. (2006). Micro-level Evidence on Wage Rigidities in Finland. Working Paper No. 219. Labour Institute for Economic Research.

Böckerman, P., Laaksonen, S. and Vainiomäki, J. (2007). Who Bears the Burden of Wage Cuts? Evidence from Finland during the 1990s. International Journal of Manpower 28, 100-121.

Böckerman, P. and Uusitalo, R. (2006). Erosion of the Ghent System and Union Membership Decline: Lessons from Finland. British Journal of Industrial Relations 44, 283-303.

Dickens, W.T., Goette, L., Groshen, E.L., Holden, S., Messina, J., Schweitzer, M.E., Turunen, J. and Ward, M.E. (2007). How Wages Change: Micro Evidence from the International Wage Flexibility Project. Journal of Economic Perspectives 21, 195-214.

Gorodnichenko, Y., Mendoza, E.G. and Tesar, L.L. (2009). The Finnish Great Depression: From Russia with Love. NBER Working Paper No. 14874.

Honkapohja, S. and Koskela, E. (1999). The Economic Crisis of the 1990s in Finland. Economic Policy 17, 400-436.

Koskela, E. and Uusitalo, R. (2006). The Un-intended Convergence: How the Finnish Unemployment Reached the European Level. In: Werding, M. (Ed.), Structural Unemployment in Europe: Reasons and Remedies. The MIT Press: Cambridge, Massachusetts, pp. 159-185.

Kyyrä, T. and Maliranta, M. (2008). The Micro-level Dynamics of Declining Labour Share: Lessons from the Finnish Great Leap. Industrial and Corporate Change 17, 1147-1172.

Layard, R. and Nickell, S. (1999). Labor Market Institutions and Economic Performance. In: Ashenfelter, O. and Card, D. (Eds.), Handbook of Labor Economics, Vol. 3C. Amsterdam: North-Holland, pp. 3029-3084.

Marjanen, R. (2002). Palkkaratkaisujen sisältö ja toteutuminen tulopolitiikan aikakaudella. (In Finnish). Series B188. The Research Institute of the Finnish Economy.

Nickell, S. and Quintini, G. (2003). Nominal Wage Rigidity and the Rate of Inflation. The Economic Journal 113, 762-781.

Pehkonen, J. (1999). Wage Formation in Finland, 1960-1994. Finnish Economic Papers 12, 82-93.

Sauramo, P. (2004). Is the Labour Share too Low in Finland? In: Piekkola, H. and Snellman, K. (Eds.), Collective Bargaining and Wage Formation. Performance and Challenges. Heidelberg: Physica-Verlag, pp. 148-164.

Uusitalo, R. (2005). Do Centralized Bargains Lead to Wage Moderation? Time-series Evidence from Finland. In: Piekkola, H. and Snellman, K. (Eds.), Collective Bargaining and Wage Formation. Performance and Challenges. Heidelberg: Physica-Verlag, pp. 121-132.

Uusitalo, R. and Vartiainen, J. (2008). Finland: Firm Factors in Wages and Wage Changes. In: Lazear, E.P. and Shaw, K.L. (Eds.), The Structure of Wages: An International Comparison. Chicago: The University of Chicago Press, pp. 149-178.

Vartiainen, J. (1998). The Labour Market in Finland: Institutions and Outcomes. Publications Series, 1998/2. Prime Minister’s Office.