(05.07.1998) The economic and social effects of the recession have left a long-lasting mark on Finnish society, despite the fact that prerequisites for economic growth are good. The greatest cause for concern is the slow decline in long-term unemployment.
There is increasing danger that Finland will be split into two groups; citizens who are well off and those in a bad way. Prolonged dependence on social security is even increasing. Recipients of unemployment benefit remain on numerous. The number of people living on income support has not fallen appreciably; in addition, the period covered by income support was extended in 1996. These were among the findings disclosed in a report, "Trends of Social Security in Finland in 1997-98", compiled by the Ministry of Social Affairs and Health and released on December 17, 1997.
This is the second report on trends in social security to be issued by the Ministry. The report gives as up-to-date as possible a picture of changes in social security, and describes the effects these changes have on social security. The report also assesses these considerations in relation to various suggested reforms. The effects of the State budget proposal for 1998 and other anticipated factors are also evaluated in the report.
Slow recovery, both from recession and from massive unemployment, is characteristic of other European countries, too. Unemployment has the greatest effect on workers with the lowest level of education and training and on workers with little or outdated vocational skill. Income differentials are growing in many industrialised nations. In Great Britain and the USA, for instance, unemployment has meant more low-paid jobs and rising income differentials. Indications of a rise in income differentials are also discernible in Finland.
In Denmark, social security has been re-evaluated through what is called an activation policy; this has not led to any marked reduction in the coverage of social security, and the level of benefit has remained reasonable. It is now time to contemplate what we can learn from the solutions devised in other countries, and how these can be applied indrawing policy lines for social welfare in Finland.
Largely on account of social policy, Finland survived the deep recession of the early '90s without any major social disruption. For most citizens the worst is over, and their need for benefit has decreased. Despite cuts made in social security,income transfers and social services have effectively prevented poverty and social exclusion. Taxation, however, had to be tightened to a level that is high by international standards, and the public debt grew quickly. Furthermore, the recession revealed structural problems in social security.
The fact that hundreds of thousands of people are long-term recipients of social security benefits inevitably raises questions concerning the coverage and level of social security. Issues relating to the individual's responsibility, society's responsibility, and rights and obligations are also involved. As a result of other changes in working life apart from unemployment - i.e.increases in fixed-term, temporary and part-time jobs - many working-aged people are in need of social security benefits at least occasionally. Social security benefits originally intended to be temporary (unemployment security) or as the last resort (income support) have become means of ensuring long-term income. For many people, income is made up mainly of a group of social security benefits which supplement each other. Moreover, there are urban districts in Finland where residents in employment form a minority.
In particular, young people's long-term dependence on social security should be avoided. It is in nobody for life to depend on benefits from an early age. Social security continues to give the wrong signals to ageing workers and to employers, even though pensions and unemployment security have been revised to encourage work and rehabilitation.
Action models promoting employment should be devised for young people and for ageing workers. Income support and other social security related services, as well as the weightings between them, should be developed so that they promote work, study and rehabilitation. Nor is this enough. Business cycles, economic policy, taxation and changes on the labour market affect the population's well-being as well as social policy. Encouragement to work and dismantling of income traps also require that taxation and funding of social security are constructed in a way that motivates employers to hire people.
Social expenditure rose dramatically in the early '90s, more than half of the increase stemming from unemployment. The rise would have been even sharper without the amendments made to social security. In 1992, municipalities launched measures to cut the costs of social welfare and health care services. The State handed down several decisions on savings, which meant lower levels of social benefits. Proportionally, the greatest cuts were made first in the field of health care, but in the mid-90s the cuts focused on expenditure for unemployment benefits and on allowances for families with children.
At 48.2 per cent - 2.1 percentage points higher than in the previous year - Finland's tax rate in 1996 was the third highest of all OECD countries. The large public debt and high tax rate will restrict funding for social expenditure in the coming years.
The tax bite, or the difference between the worker's net income and the total costs arising from employing the worker, has increased markedly in the past few years. The big tax bite skews the national economy and weakens economic efficiency. The negative effects of taxation on the labour market are further worsened if value-added tax is also taken into account. Finland's value-added tax rate, too, is above the EU average.
During the recession, the scope of value-added taxation was expanded to include the services sector, and the rate set was fairly high. This may have affected demand for services, thereby weakening the ability of service providers to employ people. In Finland, private services account for relatively low proportions of total output and employment.
Pressure to reduce the tax bite has been mounting. In order to promote employment, both general and targeted tax cuts have been proposed. Such cuts could affect income taxation, social insurance fees or value-added taxation. Cutting the tax bite by reducing the State's tax revenues and social insurance fees would further hamper the funding of social security. With the present funding structure, the high unemployment and pension costs necessitate high social insurance fees. So in the near future it will be necessary to achieve a balance between conflicting objectives.
Traps also have a negative bearing on the entire national economy. If increasing the amount of work done does not result in economic gain, the labour supply shrinks. A smaller supply of labour tends to mean rises in wages, which in turn cut demand for labour. Traps and imbalance on the labour market may mean increased tax evasion and growth in the grey labour market. This, too, affects the funding of social security.
The OECD Job Study points out that creation of low-paying jobs should not be promoted by means of tax reliefs or employment support measures, unless there is total conviction that major social advantages will be achieved. The drawbacks can be minimised by arranging further education and training forworkers. In the best case, low-paying jobs would provide the necessary experience and would give young workers a stepping stone to better jobs. Low-paying sectors, however, are "poor" work alternatives if those involved remain in that area of employment for along time. According to the OECD Job Study, there are indications that people do indeed get trapped in this way. Many countries have worker groups that have become caught in a vicious circle of low-paying jobs and unemployment.
Expansion of education insurance is currently being prepared in Finland. It is in the interest of both employers and society to support lifelong learning which augments workers' professional skills and competence and increases the ability of the labour force to adapt to changes in working life.
Because the effects of education and training can largely be seen only in the long term, there is also a need for measures having more immediate effects. Various targeted tax cuts have been widely discussed in the OECD, in the EU and in Finland. Cuts in taxes and fees are thought to promote employment most effectively if they affect the cost of less-skilled labour.
It has been suggested that low pay should be offset by benefits that improve low-paid workers' livelihood. In order to receive this benefit, claimants would have to be working. The benefit level would fall as earnings rise. Such a scheme could prove very costly. If the adoption of wage-related benefits led to an increase in the supply of labour for low-paying jobs, the outcome might be pressure to reduce the wages of low-paid work still further.
The issue of cuts in social insurance fees has been contemplated in Finland in various connections. Such cuts would not necessarily lead to lower employment costs and positive effects on employment. The outcome ultimately depends on wage flexibility in the demand and supply of work. Studies indicate that, in the long term, it doesn't matter whether fees are paid by employers or by workers. If insurance fees are transferred from employers to workers, the resulting pressure to increase wages can quickly nullify the momentary drop in employment costs. Incontrast, fees paid by workers and by those insured increase awareness of their own liability and make social insurance more transparent, thus perhaps having a positive impact on employment.
If the aim is to improve employment substantially by means of cuts in social insurance fees, the cuts need to be sizeable. Minor changes have little effect.
New gradation alternatives would be most beneficial to very small enterprises with a total payroll expenditure of under a million Finnish marks (1 U.S.dollar is 5,5 Finnish Marks). A less attractive feature of such gradation alternatives is that the fees payable by slightly larger companies would be considerably higher than at present. The fees payable by the very largest companies would rise only slightly and in some cases they might even fall. This, in turn, is self-defeating if the aim is to favour small companies in low-paying sectors.
Cutting employers' social insurance fees, however, can be justified on the grounds that some of the fees are not directly linked with work. For instance, the higher national pension contribution paid by the employer, the smaller the national pension received by the wage-earner. Only fees for earnings-related benefits should be collected on the basis of wages; basic security benefit should be funded through the State's tax revenues.
Numbers of municipal social welfare and health care personnel took an upward turn in 1996, when municipalities and municipal federations employed a total of 215,900 professionals for such work. One reason for the increase in personnel is expansion of the right to daycare for children, though in fact, some staff increases were recorded in all segments of social welfare and healthcare.
In 1996, permanent post-holders came to 154,300 people, a rise of 1,300 (1%) on the previous year. The percentage of permanent employees of the entire personnel continued to decline, and is now only 71 per cent. There was a radical increase (41%) in fixed-term personnel in both the social welfare sector and the health care sector, their number totalling 5,600 people. Half of the personnel growth is explained by the increase in staff members with fixed-term contracts.
It appears that, to an appreciable extent, permanent job tasks are being carried out by fixed-term personnel and people on employment schemes. Their high proportion impairs the quality of social welfare and health care services, and weakens staff members' motivation and opportunities for systematic development of their work and of their work community. Guidance for new workers consumes the energy of permanent employees and lessens the time they have to spend with patients and clients. There is less opportunity to develop permanent client relationships. In the long term this is likely to increase the cost of services and to have a detrimental effect on the health and well-being of staff members and the population at large. Further, unemployment among social-welfare and health-care personnel increases unemployment expenditure.
The age structure of social welfare and health care personnel has a concentration of middle-aged staff members, the proportion of young personnel being lower than average. For this reason, too, municipalities should wake up to the need of social welfare and health care personnel for early rehabilitation and supplementary education and training, and should ensure the availability of sufficient permanent staff.
Social problems have become more widespread and problematic in the '90s. It is therefore important to develop social welfare work. Income difficulties, child protection, mobilizing the unemployed, reducing intoxicant abuse, and promoting the well-being and safety of communities in relation to these issues all require that sufficient resources are available for social welfarework. The acceptable minimum requirement could be one social welfare worker per 2,000 residents.
Translated by Sheryl Hinkkanen
(Published originally in Socius Finland 1/1998)