Finland’s labour market rollercoaster

Finland’s labour market rollercoaster

Employment has recovered quickly from the shock caused by the coronavirus, and there are already more job vacancies than before the crisis. At the same time, unemployment has remained high. There appears to be a mismatch between supply and demand in the labour market that will hamper the economy’s growth potential, requiring swift structural reforms.

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Finnish

Economic Outlook September 2021 cover image showing a butterflyThe employment rate in Finland deteriorated rapidly in spring 2020. The furlough system was used extensively, and the number of people furloughed or unemployed exceeded 400,000 at its highest. However, the number of furloughed employees dropped quickly, and it continued to decrease this spring on the back of improved conditions in services. That said, the number of people registered as unemployed is still approx. at 300 000.

Employment has increased rapidly this year. In June, the employed labour force numbered 2,677 million, or approximately the same figure as in 1989 and 2008 at the peak of those economic upswings. The employment rate has risen to as high as 72.7%. The unemployment rate, on the other hand, has declined more slowly, measuring 7.9% in July. This means that there has been a flow of people into the labour market from outside.

The labour participation rate has increased the most among those aged over 55, an age group that has seen a continuous rise for two decades as the retirement age has been increased and early retirement options have been removed. Participation rates have likewise increased in younger age groups this year – women aged 24–35, in particular, have seen an increase of almost 5 percentage points. The reason for this is primarily the improvement in service sector employment, as well as the drop in the birth rate in recent years and the financial incentives created by cuts to the child home care allowance. The increase in the labour force participation rate is positive for the growth prospects of the Finnish economy.

As the economy recovered, the number of job vacancies soared in the first half of the year. In July, there were 70,000 job vacancies, a much higher figure than what it was pre-coronavirus. The highest number of job vacancies can be found in the customer service, health care and construction sectors. As many as a third of service and construction sector companies report that the availability of labour is limiting growth in their business.

Graph: A / Mismatch between vacancies and the unemployed

Reforms are needed to fix the labour market mismatch.

Juho Kostiainen, Economist

The problems with labour availability have emerged sooner than expected, and a similar situation exists in the other Nordic countries. For example, in the restaurant sector, some of the workforce has moved to other sectors in hopes of finding more secure employment. Similarly, travel restrictions have reduced the availability of foreign workers in the construction sector. Therefore, some of the labour market mismatch is probably temporary, as workers will eventually be allocated to new jobs, and foreign labour will be able to make up for the labour deficit.

However, a part of the mismatch is structural and can only be fixed through structural reforms in the labour market. The removal of the additional period of unemployment as a path to retirement will increase incentives for those over 60 to work, as will the annual four-month increase to the retirement age. Yet, more needs to be done to encourage the unemployed, especially those without a post-elementary school qualification, to study in fields for which there is high demand in the labour market. Improving incentives for those receiving unemployment benefits and allowing local agreements on flexibility at workplaces should also be some of the measures to improve economic growth potential.

The government will be unable to support more than 200,000 unemployed in the coming years when at the same time the costs of caring for the elderly will eat up an increasing share of public resources. There is an urgent need for labour market reforms, and now that the country faces a labour shortage, they should be much easier to pass than in a recession. Without these reforms, Finland faces extensive cuts to public services or sharp increases in taxation.

This article originally appeared in the Nordea Economic Outlook: A new phase, published on 1 September 2021.

Author:

Juho Kostiainen, Senior Analyst, Finland
Juho Kostiainen, Nordea Economist

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