Experts question official productivity forecasts
Critics call for long-term examination of trends
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The optimistic views contained in the recent cyclical analysis of the Ministry of Finance concerning Finnish competitiveness have sparked criticism among Finnish financial experts. The conclusions drawn by the ministry are seen to be hasty and incorrect. Some experts say that competitiveness is actually declining rather than improving.
Shortly before Christmas the ministry said that the higher-than-expected figure for growth in production can be explained by positive factors of demand, as well as the exceptionally high growth in the productivity of labour. "Of the six per cent growth in production, 4.5 percentage points come from rising productivity", the report said. The report also noted that high growth figures can be explained partially by new methods of calculating the balance of the national economy.
Economists are wondering where the spike in productivity could be coming from.
Growth in productivity is the source of economic growth. An old rule of thumb states that wages can be raised by the amount that productivity grows, and according to some studies, the much-talked-about pension bomb might fizzle if productivity grows at the current rate.
However, some economists are cautioning against excess optimism.
"One year is too short a time for such examinations. In reality, Finnish productivity is on a downward trend, and now there should be discussion on how it should be raised from the level of two per cent back to three per cent", says Professor Matti Pohjola of the Helsinki School of Economics.
"It can be that productivity has grown, but talk about a great leap is inaccurate. One year is too short a time for comparisons. There was a peak in growth in production, because there was a peak in demand, as well as in the level of the use of capacity", says Antti Suvanto, head of the Department of Monetary Policy and Research at the Bank of Finland.
Jukka Jalava, a researcher into productivity at the Pellervo Economic Research Institute, says that productivity bounces up with the help of improved cyclical factors during the five-year business cycle.
Matti Pohjola feels that five years is a more appropriate time for measuring productivity development: one year is far too short.
This view gets at least indirect acceptance by the man who is behind the Finance Ministry’s survey. "A five-year cyclical period is more reliable. Still, a leap like this is surprising, especially as the productivity survey of Statistics Finland gave unexpected results. This requires closer examination", says Hannu Jokinen of the Ministry of Finance.
Productivity is measured in many different ways. Matti Pohjola uses one of the most descriptive methods, in which growth overall production is divided by the number of hours worked. The result typically varies considerably from year to year.
After the recession, productivity experienced a spurt of growth. In 1993, annual growth was 5.7 per cent, and the rate of growth improved by more than 50 per cent over the previous year. At the same time, the trend figures calculated on the basis of several years rose to 3.2 per cent, which is unusually high for Finland.
Suvanto finds two reasons for the phenomenon. The process of creative destruction removed the least-productive work places, thereby raising the level of overall productivity. There was an improvement in productivity for large companies, because they were able to focus on what is important.
A new turn of events occurred later. The trend curve starting to decline, going down to less than three per cent in 1997, and to below two per cent in 2004.
Pohjola admits that there can be mistakes of measurement in trend figures as well. Suspicions are raised, for instance, by information that productivity in the finance and insurance sector, which recovered at a dizzying rate after the recession of the 1990s, would have declined by one fifth in recent years.
The public sector is especially problematic for measuring productivity, even though it represents nearly one fifth of the value-added produced in the national economy. In Suvanto’s view, productivity in the public sector is declining.
In spite of all of the problems in taking accurate measurements, productivity has been measured also on the international level. In a comparison of the OECD, the productivity level of the United States is given the index figure of 100.
Luxembourg and Norway has achieved productivity levels that are nearly one third better. Belgium, France, Ireland, and The Netherlands also reach the US level. Finland’s figure is 83, and Sweden’s is 89.
Helsingin Sanomat
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| 8.1.2007 - TODAY |
 Experts question official productivity forecasts
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