Employment in Finland 1960–1996

Abstract

The report examines the factors affecting employment in both the overall economy and the industrial sector from 1960 to 1996. The aim is primarily to characterize the relationship between hours worked and employment. According to the results, changes in production are a key explanation for employment. This is evident at both the macroeconomic level and in the industrial sector. At the national economy level, changes in production appear to have a slightly greater effect on employment than in the industrial sector.

Increases in import prices and real interest rates have a negative impact on employment at the national level, but not in the industrial sector. The effect of the real interest rate on employment appears with a two-year lag. This is likely due to the fact that the impact of the real interest rate on employment is indirect. The effect of the real interest rate becomes noticeable only from the observations in the 1990s, when high interest rates significantly impacted production and employment. This period can be considered exceptional.

The increase in the tax wedge weakens employment both in the overall economy and in the industrial sector. Furthermore, the magnitude of the effect is roughly the same for both the national economy and the industrial sector. An increase in the tax wedge by one percentage point seems to lead to a decrease in employment of about 0.3 percent.

Regarding variables related to working hours, a key observation is that as hours worked decrease, employment per worker appears to improve at the national level. When hours worked in the economy decrease by one percent, employment increases immediately by approximately 0.36 percent per worker. Additionally, it seems that a reduction in normal working hours somewhat improves employment in the industrial sector. In the industry, a one percent reduction in normal working hours leads to an improvement in employment of about 0.1 percent over a three-year period. This means that transitioning from, for example, a 40-hour work week to a 36-hour work week would improve employment by only about one percent if production remains unchanged. On the other hand, the amount of overtime in the industrial sector has little effect on employment. According to the results, overtime starts to translate into changes in employment after just a one-year lag. This indicates that overtime serves as a short-term adjustment mechanism for companies. From the perspective of the discussion on job sharing, it is also important to note that reducing normal working hours has not led to an increase in overtime in the industrial sector. In a situation where the reduction of normal working hours fully translates into increased overtime, there can be no positive effect on employment from shortening normal working hours. Therefore, the results suggest that, in principle, the hours worked in both the overall economy and the industrial sector could be converted to jobs in the short term, provided production remains unchanged. International experiences with reducing working hours indicate that the level of production can be maintained by extending opening and service hours. This allows companies to utilize their existing capital stock more efficiently while preventing an increase in unit labor costs and a decrease in profitability as overall working hours are reduced.

• ISSN: 1236-7184
• ISBN: 952-5071-22-7
• Publication in PDF-format