Chapter 1: Recent performance and key challenges
After assessing Finland’s recent performance, this chapter discusses the key challenges of ensuring the sustainability of public finances, raising the employment rate and of enhancing growth potential.
In addition, the challenges facing policy in respect of housing, the subject of the in-depth chapter, are considered from the perspective of macroeconomic stability and whether the current generous level of public support should be reduced and better targeted. Finally, an illustrative medium-term scenario is used to argue that unless the main challenges are successfully tackled, growth in living standards over coming decades will be sluggish.
Chapter 2: Ensuring fiscal sustainability in the face of imminent ageing
Past tax cuts, expenditure slippage and imminent fiscal pressures from ageing have exhausted the scope for further income tax cuts, even though the latter would help to improve labour market performance. The key to long-run fiscal sustainability and reducing future tax pressures is containment of public spending pressures. This will require improved productivity in public services, re-organising municipal finances and allowing private funding for some of the growth in non-core welfare services. It will also require some elements of the recently implemented pension reform to be revisited.
Chapter 3: Restrict early retirement to make pension reform a success
A wide–ranging pension reform was introduced at the beginning of 2005. A central objective is to extend working lives by 2-3 years. However, success is likely to depend on further curtailment of early retirement pathways which will otherwise blunt the improved financial incentives to work longer in the reformed old-age pension system. The “unemployment pipeline” whereby the unemployed can effectively retire at age 57 should be abolished and activation measures for the older unemployed increased. There is also considerable scope to reduce the large share of the population on a disability pension, following experience of other OECD countries, particularly through better gate-keeping and greater emphasis on activation that involves early intervention combining both medical and vocational rehabilitation. Such an approach is also likely to improve the health and well-being of many of those directly concerned. Moreover, past experience suggests that early retirement pathways can amplify and perpetuate major adverse demand shocks, because the likelihood of returning to employment is low.
Chapter 4: Increasing flexibility in centralised wage agreements
The centralised wage agreements have helped to contain inflation. There is evidence that wage increases were more moderate when a central agreement was concluded than in periods when no central agreement was reached. Nevertheless, there is also evidence that centralised wage setting has had some drawbacks in terms of reducing employment among low-skilled and younger workers because of high minimum wage floors. In the current wage setting system there are components that allow for greater relative wage flexibility. These should be used more extensively. The role of the government in future agreements should be to encourage greater relative wage flexibility within the current bargaining framework.
Read also ECO Working Paper 503 Wage setting in Finland: Increasing flexibility in centralised wage agreement
Chapter 5: Active and passive labour market measures and the employment target
The government is planning a substantial expansion of active labour market policies (ALMPs) as an important component of its strategy to meet the employment target. However, it is not clear on the basis of current evaluations that such an expansion will have a significant effect on regular employment. More important is to change the mix of existing measures towards those that are most effective, in particular to cut back on wage subsidies for public sector employment and expand private sector wage subsidies. It is also important to bring the activation rate for the older unemployed and workers on disability schemes, which is low, in line with that for other workers. The financial incentives to take up work also need to be strengthened by tapering unemployment benefits at longer durations.
Chapter 6: Housing: reducing risks and improving policies
While pronounced cycles in house prices have been a major cause of macroeconomic instability in the past, current house price developments do not yet suggest an overheating of the housing market. However, several important concerns are related to both direct effects of housing markets on overall activity and to more structural and regional issues. A factor making housing markets and the macro economy vulnerable to interest-rate shocks is the high share of mortgage loans linked to variable interest rates. Tax subsidies to housing may largely be capitalised in higher land prices rather than increasing housing availability to the extent that slow planning procedures and municipalities’ unwillingness to provide building land have limited the growth of the housing stock in growth regions. This would argue for improving municipalities’ incentives to provide building land, speeding up planning procedures and a phased removal of the tax advantage associated with housing. Furthermore, the provision of social housing and the housing allowance system should be better targeted on those most in need of affordable housing.
Read also ECO Working Paper 514. Finland's housing market: reducing risks and improving policies
How to obtain this publication
The Policy Brief (pdf format) can be downloaded. It contains the OECD assessment and recommendations, but not all of the charts included on the above pages.
The complete edition of the Economic Survey of Finland 2006 is available from:
For further information please contact the Finland Desk at the OECD Economics Department at email@example.com. The OECD Secretariat's report was prepared by Dave Turner, Asa Johansson and Laura Vartia under the supervision of Peter Hoeller.