Lifting wages is not enough

Antti Leino, Advisor – Labour Market and Social Policy

At the World Economic Forum in Davos, Eric Schmidt, The Executive Chairman of Google argued, that the stagnation of middle-class wages is an increasing economic problem.

He states that as middle-class folks are the biggest spenders, their lack of spending hurts not just the economy, but the companies that depend on them for revenue. According to Schmidt, one company’s expenses are another company’s revenues. So, when firms are cutting wages, they are also cutting their own future revenue growth.

Eric Schmidt is right, in a sense. Nevertheless this problem has many other dimensions. If we take the issue to the Finnish framework adding a few layers of tripartite collective bargaining with the topping of Finnish taxation and social policy, the cake is much bigger and the problem more complex. Companies cannot simply raise their wages in a vacuum without increased productivity and even if they did, other political choices can potentially thin out it all. Here’s why.

On the top of ever increasing sustainability gap in national economy, which was over 9 billion euros last year, in Finland the municipalities are also in vast economic problems. This is mostly due to a municipality system which derives from the ages when we used to drive horse carriages to work instead of cars and buses. The dependency ratio – which describes age-population ratio of those typically not in the labour force – is also alarming. When the rest of the welfare state building golden generation goes to spend their well-earned pension days, less of us remain employed to cover all of the public expenses.

The dependency ratio in Finland ensures that unemployment percentage cannot rise to catastrophic levels; nevertheless unemployment is an enormous problem. Besides unemployment and potentially rising pension contributions, the future increases to taxation provide largest threat to consumers’ purchasing power.

Finland is a country with relatively low level of purchasing power and high level of taxation (Eurostat, 2013). In the article, Eric Schmidt discussed the gross salaries, but gross wages are just a part of whereof employees’ purchasing power shapes up. Purchasing power is strongly affected by for example the value added tax (VAT) and both national and municipal income tax. Many municipalities are facing problems with their economic sustainability. If the economic growth remains sluggish, council tax rates can go up by three percent on average by the end of 2017 (Association of Finnish Local and Regional Authorities, 2013).

 

We have a great tripartite system to increase gross wages

Unfortunately, the whole process would not have much effect if the purchasing power is deteriorated by taxation. Around half of the municipalities raised their municipal tax in the beginning of this year and the Ministry of Finance is now planning to raise VAT this year. If we end up lifting wages without the consideration of total purchasing power, there would not be any benefit for the companies in terms of domestic demand.

The worst case scenario is ending up in a situation where we have ever-decreasing amount of those who work with ever-increasing taxes topped with stagnant salaries and constant threat of unemployment. This potentially deteriorates the solidarity of those who bear the burden for everyone and leads to the destruction of the welfare state. Many people have been hurt and affected by the lay-offs Finnish companies have had to do during the past few years.

It is essential that politicians understand there are no good solutions that solve all our problems, only solutions that are less bad than others. If we are unable to make required decisions that might hurt in the short-term, we end up with never-ending bad news throughout this decade. As the former prime minister of Luxembourg, Jean-Claude Juncker stated it: “We all know what to do, we just don’t know how to get re-elected after we’ve done it.”

Antti Leino
Advisor – Labour Market and Social Policy
Finnish Association of Business School Graduates SEFE ry