Labour market developments and wage-setting

Labour market developments

• Financial crisis: huge drop in activity and employment

• Recovery: • Very slow adjustment – strong persistence • Signs of increasing structural unemployment

• Reasons for sluggish adjustment? • Wage formation – fixed exchange rate regime • Geographical mobility • Incentive structure • Structural changes

Employment rates, 2008 Q1-2016-Q2

0.88

0.9

0.92

0.94

0.96

0.98

1

1.02

1.04

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

Denmark

Finland

Sweden

Euro area (19 countries)

Index(2008 Q1)=1

Wage increases, Finland and Euro area, 2000-2015

0

1

2

3

4

5

6

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

Finland

Euro area (19 countries)

%

Wage competitiveness has deteriorated

Wage setting systems • Trend towards more decentralized

wage formation • More swift wage adjustment • Changes in relative wages

• Finland: Highly centralized system

• Comparative work on institutions –

few clear cut conclusion • Success stories – complementarity of a

policy package • Decentralization is associated with

more flexible wages • Pattern bargaining: making

”competitive sectors” first movers

0

1

2

3

4

5

6

Bel

giu

m

Fin

lan

d

Au

stri

a

Den

mar

k

Fran

ce

Ger

man

y

Icel

and

Ital

y

Net

her

lan

ds

No

rway

Po

rtu

gal

Spai

n

Swed

en

Swit

zerl

and

Au

stra

lia

Gre

ece

Luxe

mb

ou

rg

Can

ada

Irel

and

Jap

an

New

Ze

alan

d

Un

ited

Kin

gdo

m

Un

ited

Sta

tes

Index

Centralization - dominant level of bargaining, 2014

Wage adjustment during the crisis

2000

2008 2015

-2

-1

0

1

2

3

4

5

5 6 7 8 9 10 11

Ch

ange

in c

on

sum

er

real

wag

e, %

Unemployment %

Consumer real wages and unemployment

2000

2008

2015 -1

-0.5

0

0.5

1

1.5

2

2.5

3

3.5

4

5 6 7 8 9 10 11Ch

ange

in p

rod

ue

r re

al w

age

, %

Unemployment %

Producer real wages and unemployment

Wage adjustment in a low inflation environment • Downward nominal rigidities

• More binding constraint in a low inflation environment

• Negative wage adjustments are observed • Crisis years: Incidence 10-15 %

• Also before the crisis! 0

0.05

0.1

0.15

0.2

0.25

0.3

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

Shar

e o

f ze

ro n

om

inal

wag

e c

han

ges

(a

ge g

rou

p 2

5-5

5)

Hourly wages, all

Monthly earnings, full time monthlypaid

Incidence of zero nominal wage changes, 1996-2013

Vainiomäki – background report: The development of wage dispersion and wage rigidity in Finland

Real wages

• Negative deviations from contracted wages are observed

• Aggregate developments conceal huge variations

• Real wage reductions are observed

0

5

10

15

20

25

30

35

40

45

50

Shar

e o

f re

al w

age

cu

ts o

ver

3-y

ear

pe

rio

d

hourly continuers

hourly switchers

monthly continuers

monthly swithers

%

Incidence of declining real consumption wages over 3-year period, %,1998-2013

Rigidities • Indication that rigidities constrain wage

adjustment

• Counterfactual – no rigidities, 2009-13 • Nominal wage growth: 1.5% lower • Real wage growth:2.4% lower

• Strong rigidities in comparative

perspective

• Rigid wage – more adjustment in employment (firms with low profits)

0

10

20

30

40

50

60

70

1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Nominal wage rigidity

n(IWFP) n(HWSS)

%

0

20

40

60

80

100

120

1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Real wage rigidity

r(IWFP) r(HWSS)

%

Incidence of nominal and real wage rigidity % 1986-2013

Relative wages

• Compressed wage structure in comparative perspective

• Trend: increasing wage dispersion

• Relative high minimum wage • Many employed at the minimum

wage in e.g. retail and cleaning

• Wages vis-a-vis qualification structure

0.20

0.25

0.30

0.35

0.40

0.45

0.50

0.55

0.60

0.65

0.70

USA CZE

JPN

ESP

EST

RO

UIR

LSV

KLV

ALT

UG

RC

PR

TG

BR

PO

LH

UN

CA

NN

LDA

US

BEL

CH

LSV

NFR

AN

ZL

Co

nst

ruct

ion

…W

areh

ou

ses…

Ret

ail (

FIN

)C

lean

ing

(FIN

)

Minimum wage / Mean wage (ratio)Minimum wage / Median wage (ratio)

Wage structure, qualifications and employment

1 and below2 3

4-5

1 and below2 3

4-5 1 and below2

34-5

1 and below

2

3

4-5

1 and below2

34-5

1 and below2

3

4-5

1 and below2

3

4-5

1 and below

2

3

4-5

1 and below2

34-5

510

1520

255

1015

2025

510

1520

25

50 60 70 80 90 50 60 70 80 90 50 60 70 80 90

1 Finland 2 Sweden 3 Denmark

4 Germany 5 Belgium 6 Netherlands

7 UK 8 US 9 Estonia

Med

ian

wag

e

Employment rate

Hourly median wages and employment rates for different skill groups in selected countries.

Summing up

• Persistent employment decline

• Sluggish wage adjustment

• Other dimensions of flexibility – geographical mobility • Mobility does repond to unemployment • Sufficiently strong? • Incentive structure?

• Wage formation: The role of institutions vs. incentives

• The Finnish model is called to a test • Social pact on competitiveness – March 2016 statement: ”labour market contracts will support the

competitiveness of industries exposed to international competition, support long-term employment and productivity growth and strengthen the public sector fiscal balance”