Social security reform would help address the employment mismatch problem

According to the Finnish Commerce Federation, there are serious mismatch problems between the unemployed and vacancies, and problems in the availability of labour have also increased in the commerce sector. One of the root causes of the employment mismatch, according to the Finnish Commerce Federation, is the coordination of Finnish social security and work, which continues to create incentive traps.

According to the Employment Review of the Ministry of Economic Affairs and Employment, there were 275,300 unemployed job seekers in December. At the same time, Finland is suffering from a labour shortage. A total of 164,500 jobs were open in December, which is 71,600 more than a year ago.

“Work also competes with social security in the commerce sector. Incentive traps particularly affect part-time workers and affect the availability of labour. For example, traps in housing allowance and unemployment allowance can simply make it economically unviable to take a job,” says Anna Lavikkala, Labour Market Director at the Finnish Commerce Federation.

According to a recent survey by the Research Institute of the Finnish Economy (ETLA), last year over half a million Finns, or 23 per cent of the employed, were in an income trap, that is, in a situation where it may not be financially profitable to do additional work. There were 136,500 people in an unemployment trap, the limit being that disposable income does not exceed 20 per cent of gross income. The unemployment trap is a situation where it is not economically viable to take up work.

“In order to make it profitable to accept and work every working hour, the reform of the social security system should be accelerated and the incentive traps should be dismantled. Unemployment security must also be reformed by staggering income security. At the same time, public economy could be strengthened,” Lavikkala continues.

The various support and payment systems in the social security system form a tangle, which is difficult to unravel by developing individual systems. In practice, only reducing income taxation at all income levels will alleviate incentive traps without shifting the burden of the income limit traps to others. However, the conflict between incentives for work and basic security must be resolved before the dependency ratio of the national economy weakens and the economy becomes even more indebted.

“The Finnish Commerce Federation proposes a basic account as a solution, which is also supported by several specialists. Further preparation of the model should be mobilised urgently in an employment think tank. Similarly, general income security must be investigated as quickly and comprehensively as possible,” emphasises Lavikkala.

Labour immigration must be promoted

In order to overcome labour shortages, labour immigration is needed in the short term and especially in the long term.

“It would solve the availability of highly skilled professionals, but also the recruitment challenges of retailers in the commerce sector, for example. At the same time, labour immigration would improve the dependency ratio of the national economy,” says Simo Hiilamo, Director, Public Policy and Advocacy at the Finnish Commerce Federation.

According to the Finnish Commerce Federation, the licensing processes of foreign labour must be accelerated and sufficient resources must be secured for authorities to process permit applications both in Finland and abroad.

Pay increases are not the answer

In order to solve the mismatch problem, one proposition has been raised in the general public: pay increases. However, no mention is made of the flip side of the coin: more than half of retail sector prices (52%) are already composed of direct and indirect wage costs.

The products and services in the retail sector include a lot of domestic labour and multiple tax wedges from various service, supply and procurement chains. Multiple tax wedges increase salary costs, which increases prices, ultimately weakening purchasing power. This, in turn, attracts people to buy products from foreign online stores at cheaper prices.

The best way to reduce the tax wedge as well as to improve purchasing power and the international competitiveness of commerce sector companies is to reduce the tax burden on labour.

“Providing higher wages in one company or sector will not solve the labour shortage, as availability problems will simply be passed on to others. In addition, wage competition between companies in different sectors is not desirable for the national economy. Attracting new employees with higher wages will also increase the wage costs for the whole company and the sector, as it will also be necessary to increase the wages of older employees,” Anna Lavikkala explains.

Instead of pay increases, the Finnish Commerce Federation supports wider structural reforms to solve the mismatch problem between the unemployed and jobs.

Further information:

Anna Lavikkala, Labour Market Director, Finnish Commerce Federation, tel. +358 (0) 400 406 088, anna.lavikkala(at)kauppa.fi

Simo Hiilamo, Director, Public Policy and Advocacy, Finnish Commerce Federation, tel. +358 (0)50 350 7564, simo.hiilamo(at)kauppa.fi

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