4.3.2016

Practical consequences of the competitiveness pact

The Board of Akava has approved the broad labour market pact reached through the negotiations of the labour market confederations. The Government has approved the competitiveness pact.

Below, we have broken down the pact into questions and answers from the perspective of Akava members.

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Why has Akava approved a pact that will weaken the employment terms, as well as, to some extent, the purchasing power of Akava members?

Akava’s aim was to negotiate a pact that improves the cost competitiveness of companies and the sustainability of the public economy and, above all, increases employment. There are already nearly 60,000 highly educated unemployed persons in Finland. Solutions must be found in order for us to reduce unemployment or, at the very least, to keep it from growing further.

The primary intention of the pact is to improve the cost competitiveness of companies and, thereby, to increase the number of new jobs. The Finnish Government has promised to enact tax solutions that will support the purchasing power of wage and salary earners.

Akava felt that it was necessary to find a solution through agreement. This pact is unquestionably a better solution for both parties than dealing with compelling legislation, which would have been biased and, at its worst, would have complicated the interpretation of employment terms and made bargaining within workplaces more rigid.  

What has been agreed on as relates to wages, salaries and other employment terms and conditions?

The contract periods for currently valid collective agreements will be continued by 12 months without any wage or salary increases.

Any programmes aimed at developing the pay systems that have been agreed on earlier shall be implemented accordingly. Negotiations concerning the changes in employment terms, as agreed on by the confederations, will be dealt with separately for each collective agreement by 31 May 2016. This solution means labour market harmony and predictability for the labour market until autumn 2017. It shall have a significant effect on competitiveness as well.

The annual number of working hours shall be increased by 24 hours without increases to existing wages or salaries. In the public sector, holiday pay will be cut by 30 per cent for a temporary period of three years covering 2017–2019.

The pension and unemployment contributions of wage and salary earners will increase and employers' contributions will decrease.  Why is that?

The aim is to lower labour unit costs in order to improve competitiveness, boost exports and create more jobs in Finland. Now it’s the companies’ turn to show if they will use this benefit to create new jobs.

Akava did not want to endanger the pension funding for future generations. These changes will ensure that it will not be endangered.

How much will the social insurance contributions increase?

The share of the social insurance contributions to be paid by wage and salary earners will increase in stages. These changes concern the unemployment insurance and earnings-related pension contributions.

As of 2018, the average unemployment insurance contributions of the employer and the employee will be equal. In 2017, the contribution paid by employees will be increased by 0.45 percentage points and in 2018, the increase will be an additional 0.4 percentage points. The corresponding decrease in the employer’s unemployment insurance contribution will be 0.85 percentage points.

As a deviation from the pension insurance contribution changes agreed on as part of the pension reform, the employees’ share of the contributions will be increased by 0.2 percentage points and the employers’ share will decrease by the same amount in 2017 and 2018, and correspondingly, by an additional 0.4 percentage points in 2019 and 2020. The employees’ share of the contribution will increase by a total of 1.2 percentage points in 2019–2020. The total level of the pension contribution is 24.4 per cent.

The employers’ sickness insurance contribution will decrease by 0.94 percentage points at the start of 2017, by 1.00 percentage points in 2018 and by 1.04 in 2019.  From 2020 onward, there will be a permanent decrease of 0.58 percentage points in effect. The discount applies to all employers and is funded by the savings that the pact will accrue for the public sector. The contributions of wage and salary earners will not, therefore, increase.

Will wage and salary earners get any compensation for these increases of their social insurance contributions?

The changes in contribution shares translate into an increased number of employee representatives in the Boards of Directors and Supervisory Boards of the Unemployment Insurance Fund and pension companies. In the future, half of the members of the administrative bodies of the Unemployment Insurance Fund will be representatives of employer confederations and half will be representatives of the employee confederations. The number of employee representatives on the administrative bodies of the pension companies will increase to one third instead of the current one fourth.

An increase in the business cycle buffer of the Unemployment Insurance Fund was agreed on for the purpose of securing unemployment security benefits.  The business cycle buffer is a mechanism by which we can even out changes in unemployment insurance contributions caused by predictable trend fluctuations in the national economy.

From the beginning of 2017, the maximum amount of the buffer will be increased to equal the size of the expenditure corresponding to an unemployment rate of 7 per cent.  Any rapid growth in the unemployment insurance expenditure can then be counteracted by increasing borrowing from its current level. In 2019, the labour market organisations will prepare a proposal for a new level of the business cycle buffer at a higher per cent than the currently applicable five per cent.

A total of 10 million euro will be utilised in 2016 and 2017 to even out the membership fees in the unemployment funds.

In terms of the pension contributions, the increase in the employees’ contribution was a better option than the use of the pension funds for a temporary contribution discount. Akava did not, at any point, support the use of a so-called EMU buffer, because this would have eaten away at the pension security and its funding for today’s youth and future generations.

Everyone’s annual working hours were increased by 24 hours, or about three days, without any changes to our salary or wage level. Does this mean that weekday holidays, such as the holiday leave during Epiphany would be removed?

Not necessarily. During this spring, the employees’ and employers' unions will individually decide how the increased working hours will be applied to their specific collective agreements.

From the start of the social contract negotiations, Akava’s aim has been to reduce labour costs, not by cutting salaries and undermining purchasing power, but rather by implementing a slight increase in working hours, whereby each field is empowered to decide the best way to incorporate the increase to their own specific collective agreement.

This pact includes plans to cut holiday pay in the public sector. How will the labour costs in the public sector affect the competitiveness of the export industry?

Ultimately, it is the private sector that provides the funding for the public sector. The lowering of labour costs also in the public sector helps to prevent pressure for tax increases. The reduction of the labour costs in the public sector, or the public expenditure, facilitates a reduction in the sickness insurance contribution of private employers.

The holiday pay in the public sector will be cut by 30 per cent for a temporary period of three years. This cut concerns all public sector employees. It is a more equitable method than a reduction of long holidays. Furthermore, it has a faster and more effective impact on the labour costs in the public sector than holiday cutbacks might have had. This method is a better option for the purposes of achieving the competitiveness leap as required by the Finnish Government.

How will the planned sickness pay waiting period be implemented?

There will be no sickness pay waiting period. This was a particularly crucial matter of principle for Akava, since Akava members are so conscientious and are already now doing a great deal of work while ill. Additionally, there is no evidence that the waiting period would actually decrease the number of sickness leave days. The sickness pay waiting period would also have meant that those who are unable to work would essentially be financing the system. This was viewed as an unreasonable scenario.

What changes will be made to the change security of those who are becoming unemployed?

Change security concerns employees who have been dismissed on financial or production-related grounds. The purpose is to provide training to promote the employment of the unemployed and improve change security. Change security will be extended to cover employees within the State administration, parishes, municipalities and joint municipal authorities.

The training compensation will be applicable to companies and public corporations with more than 30 employees. The training compensation concerns employees whose employment relationship has lasted a minimum of five years. The labour administration will be responsible for the assessment of necessary competence development and the acquisition of appropriate training for employees.

The amount of the training compensation should correspond to the personal salary amount of the employee in question, however no less than the average monthly wages or salary paid by the company or public corporation in Finland. It is possible to implement this compensation with another similar arrangement.

Occupational health care will be extended to include also those who have been dismissed. Whom exactly does it benefit?

The expansion refers to the right of employees dismissed for financial or production-related grounds to occupational health care services. These employees retain the right to occupational health care for six months beyond the termination of their work obligation.

The level and extent of the occupational health care must be the same as during the employment relationship. This right concerns employees whose employment relationship lasted a minimum of five years. This also concerns the State administration, parishes, municipalities and joint municipal authorities.

Why was the adult education subsidy included in the labour market pact?

Finnish employers need more workers who are continuously striving to maintain their skills and competence. Additionally, more employees are being forced to supplement their old, disappearing profession with a new one, and this is best achieved through an adult education subsidy. The Finnish Government has decided to replace the adult education subsidy with a study loan. This would weaken the possibility for low and middle-income employees to acquire new competencies that might benefit them as well as the companies they work for and Finland’s overall competitiveness.

Akava has maintained the importance of preserving the adult education subsidy.

The labour market confederations propose that the State cease providing the basic part of the funding for the adult education subsidy and enable it to be funded, instead, by revenue from the Unemployment Insurance Fund. In other words, the basic part should not be transformed to a loan scheme. The maximum duration of the adult education subsidy will be reduced to 15 months and the amount of the basic part will be decreased by 15 per cent.

Why do the confederations want to change the Government’s decision, by which groundless fixed-term employment contracts would have been possible?

Already now, these fixed-term employments are particularly directed at young women. The chaining together of fixed-term employments is problematic in terms of women’s labour market position and the planning of everyday life. The change that the Government is proposing to make to the Employment Contracts Act would allow for an increase in fixed-term employments without any justified grounds. They have not, however, been able to present any reliable assessments regarding this proposal’s capacity to increase employment.   

Akava has already earlier suggested that the grounds for fixed-term employments might be loosened as concerns the long-term unemployed. Employee organisations are now also suggesting that this might also concern those who are partially disabled and disabled. In these cases, fixed-term employments could be used to facilitate the employment of those for whom it is most difficult to find jobs.

Does the Finnish Government also have some role in this pact?

Yes, the compelling legislation would be withdrawn. The Government would withdraw its proposal for 1.5 billion euro in cuts and increased taxes, as presented in the Government Programme as an alternative to the social contract, and it would implement the income tax cuts specified in the Programme.

Akava is satisfied with the Government’s willingness to compromise, because the additional savings would be primarily directed at families, the unemployed and pensioners. Tax cuts would also increase the purchasing power of salaries and improve the profitability of gainful work.

In the future, the employers want to decide on salaries and wages at the union level rather than through centralised agreements. What does this mean?

In autumn 2017, the general collective agreements continued on the basis of this pact will begin to reach the end of their term. There is no roadmap for how things will continue beyond that point. A collective bargaining round at the union level will be implemented if the Confederation of Finnish Industries (EK) is not ready to settle on a centralised solution.

The current pact also specifies the common policies which the National Conciliator should take into consideration when making negotiation settlements. The objective of this is to endeavour to keep the earnings development at a level that would safeguard international competitiveness and employment.

What did the confederations agree on with regard to local bargaining?

Local bargaining is currently based largely on collective agreements, which make it possible for workplaces to utilise local agreements to decide independently on the terms and conditions of employment that differ from the general stipulations in the collective agreements. However, the needs, practices and possibilities to deviate from the collective agreements differ greatly from one field to another. The best means of promoting local bargaining is by developing the collective agreements to include increased local bargaining as required by the needs and conditions of the parties involved and by strengthening the position of employee representatives. This is expressed in the pact.

The confederations also agreed that the possibilities for local bargaining would extend to non-unionised companies that are governed by collective agreements. This would require legislative changes and would signify a major change to the current situation. The confederations demand that no legislative changes be implemented that might override collective agreements or infringe on the freedom of contract.

The employees’ and employers’ unions will negotiate on the advancement of local bargaining in their respective fields by 31 May 2016, after which an assessment will be made as to whether the coverage is sufficient; in other words, whether a sufficient number of the parties to the collective agreements have approved the resolution.

How much will the purchasing power of salary and wage earners drop as a result of this pact?

According to this package, the preliminary estimate for the permanent purchasing power decrease would be 0.7 per cent in both the public and private sectors from 2020 onward.

Furthermore, the holiday pay cut for those in the public sector would weaken their purchasing power by a further 1.2 per cent during the years 2017–2019.

These estimates do not include the possible tax cuts by the Finnish Government, as these are linked to the establishment of a social contract and wage moderation.

Estimated effect of competitiveness pact on purchasing power

*The effects on salaries and purchasing power (real wages) are calculated cumulatively from the initial year 2016 until the year in review.                 

For example, the purchasing power will weaken by altogether 0.7% by 2020 in both the public and private sectors. In the public sector, the purchasing power will weaken by 1.6% by 2019 due to the temporary holiday pay cuts.                 

The effect of the holiday pay cut will be removed in 2020.                   

Other considerations:                 

This calculation only reflects the effects of the competitiveness pact. Any possible changes in taxation, in particular, have not been estimated.                

  • Text: Chief Economist Eugen Koev, Director Maria Löfgren (Working Life), Communications Director Marjo Ollikainen and Senior Advisor Katja Veirto (Pensions and Social Insurance). 
  • The original text in Finnish was published on February 29, 2016.


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