Helsinki 22.10.2003 (VATT NYT 1-2003) Compared to other industrialised countries, productivity growth in Finland has been very rapid indeed. Productivity in industry rose in the late 1990s to a level almost equal to that of the USA. Productivity in other branches of the private sector also grew more rapidly than in comparable countries. In transport and communications, for example, Finland already surpassed the USA in the late 1990s.
Over the period from 1975 to 2000 the productivity of Finland's national economy grew by an average of 3.1 per cent annually. The average annual rise in productivity during the era of comprehensive incomes policy agreements from 1966 to 2000 was 3.5 per cent.
This growth was especially marked in industry, with an average of 5.6 per cent annually between 1975 and 2000. The rapid rise in industrial productivity growth in the latter half of the 1990s was mainly due to expansion of the electronics industry. Annual productivity in this sector grew by almost 20 per cent between 1996 and 2000. Other industrial sectors recorded average annual growth in productivity of only 2.6 per cent.
Productivity also grew rapidly in the service sectors in the 1990s. The most rapid progress occurred in the postal, telecommunications, financial and insurance sectors. In the latter half of the 1990s productivity in the banking sector grew by an annual average of 12 per cent.
These are the findings of a study* by Teuvo Junkas into productivity and investment in Finland over the last quarter of the 20th century. Capital productivity and total productivity are also analysed, and the study includes a brief international comparison of productivity changes and levels.
Over the reference period real incomes in the national economy grew by an average of 1.5 per cent annually. In the period of comprehensive incomes policy agreements from 1966 to 2000 real incomes increased annually by an average of 2.1 per cent. The growth rate in industry over the reference period was modest, averaging 1.7 per cent per annum. This means that productivity grew over three times more rapidly than real incomes.
This modest rise in real income coupled with rapid productivity growth reduced unit labour costs in Finland compared to those of the main OECD countries. This meant that Finland's competitiveness improved rapidly. However, the "price" of this improvement was a rapid shift in the functional income division in favour of capital income and at the expense of wage and salary incomes. This change in income division was most pronounced in the electronics industry and banking sectors, i.e. in the very industries that developed most rapidly.
The provision of added gross value received by wage and salary earners decreased in the 1990s in most EU Member States, but nowhere was the trend as steep as in Finland. The provision in Finland fell over a ten-year period from 64 per cent to 54 per cent. In the European Union Member States this provision is now lower than in Finland only in Greece, Ireland and Italy.
The income division shift in favour of capital incomes meant an increase in profits. In the 1990s there was a tendency to use growing profits to pay increasing dividends. The level of domestic investment in relation to gross national product fell. Although the volume of investment has grown since the recession of the early 1990s, the investment rate remains low compared to that of previous decades.
*Teuvo Junka, Maailman kilpailukykyisin maa? Tuottavuus ja investoinnit Suomessa 1975-2000 [The world's most competitive country? Productivity and investment in Finland 1975-2000), VATT-tutkimuksia 95 [VATT research publications series no. 95 - in Finnish language only]
VATT – Government Institute for Economic Research