ETLA Discussion Papers, The Research Institute of the Finnish Economy (ETLA) 930
The wage norm to be applied in the economy has been intensively debated in Finland. By this is meant, to which level of productivity rise the wage hikes should be linked. In this paper we examine the economy-wide productivity rise vs the industry-level rise in productivity as a basis for a wage norm. We evaluate the consequences of these alternatives from the point of view of three industries of Finnish manufacturing, the development of which has widely diverged from each other, namely paper industry, electronics industry and textile, clothing, leather and footware industry. We form a simulation model and simulate with it the above wage norms over the period 1975-2002. The model describes the investment behaviour and labour demand as a function of wage setting. The results show that the choice of the wage norm can have a substantial influence, especially over the longer run, when it can lead to a sizeable cumulative impact on the industry. The incomes policy norm, i.e., that which takes the aggregate productivity rise as its norm, has given room for the profitable industries to grow, but, on the other hand, led to a deeper recession in the less profitable industries. In the application of the industry norm, it is important to take into account the possible secular rise in the price-cost margin of the industry concerned, which notably applies to the Finnish electronics industry. Doing so, it turns out that the industry wage norm would have fared better in the electronics industry than the aggregate norm. When considering the results, it must be taken into account that the effects caused by changes in labour supply are discarded here.