Commerce sector sales are decreasing – incentive traps are also causing headaches

The impact of rising costs and prices started to be felt in the retail sector already at the end of 2021 when sales volumes stopped growing. The development continued to be even steeper throughout last year as, according to the preliminary data, the sales volume decreased by 3.4 per cent while the turnover in euros increased by 3.9 per cent.

The Finnish Commerce Federation forecasts that the volume of retail trade sales will continue to decrease this year by roughly 2 per cent but will start to increase at a modest rate of 0.5 per cent next year.

“While inflation will slow down as the year goes on, it will remain resilient. At the same time, rising interest rates are making households less inclined to spend money, and an even smaller share of consumption will be directed to the retail sector,” says Jaana Kurjenoja, Chief Economist at the Finnish Commerce Federation.

Employment in commerce once again taking a downturn

Businesses in the commerce sector will increasingly be competing on costs and prices. In practice, this will be reflected in the number of employed persons in commerce when the largest employer in the sector begins to adjust its operations.

“The more the costs of labour rise, the more flexible the amount of work will have to be. This and next year, the retail sector will see a loss of several thousands of jobs,” predicts Kurjenoja.

Adjusting employment and improving productivity growth are important for commerce, as companies in the sector are in the midst of international competition. International chains are able to weigh costs down with their large scale advantages in procurement, and international online stores or platforms do not even have personnel in Finland.

“Commerce does not take place in a closed market: especially in specialty goods trade, the cost level is determined in Finland, but the prices are often determined abroad,” says Kurjenoja.

In the longer term, fierce cost competition does not promote the development of the sector. As companies focus on cutting costs, investments in reaching new customer segments and markets and in testing and developing new ideas and functions will have to be left out.

In the future, commerce will be burdened by labour shortages

While efforts will be made over the next two years to improve the productivity and cost-effectiveness of commerce through employment adjustments, commerce will also be suffering from labour shortages.

“Last year, around 40 per cent of member companies had suffered from problems caused by incentive traps,” says Kurjenoja.

According to a report by the Finnish Commerce Federation, the combined effect of housing allowance, unemployment security and income taxation, in particular, creates incentive traps that affect the commerce sector, which is why even moving to full-time work is not always considered meaningful.

“For decades, incentive traps have been dismantled by focusing on individual income-related systems. Moving forward, we will no longer be able to tackle the problem of the traps in this way. We should dare to try and develop a uniform and comprehensive benefit system to improve the incentives to work,” says Kurjenoja.

The availability of labour should be at the top of the next government’s agenda

The next government should take seriously the labour shortage, which has plagued many sectors for some time now and will likely worsen in the future, despite the economic fluctuations.

The Finnish Commerce Federation believes that the next government should first and foremost have the courage to reform the benefit systems, thereby improving the incentives to work. Secondly, the government should streamline and increase work-related immigration. Thirdly, the focus should be on improving competence and training at all levels of education.

“Possible problems at lower levels of education are shifting to higher levels and hindering the development of students’ competence, from comprehensive school to university,” says Mari Kiviniemi, Managing Director of the Finnish Commerce Federation.

In Kiviniemi’s opinion, capacity building should not only aim at increasing the share of higher education graduates but should also address the quality of education at all levels.

“Dismantling incentive traps, increasing work-related immigration and improving education will certainly involve many different interests and conflicts thereof. While resolving these will not be easy, in an ageing society, it is necessary,” says Kiviniemi.

*Inflation-adjusted turnover.

For further information, please contact:

Jaana Kurjenoja, Chief Economist, Finnish Commerce Federation, tel. +358 (0)40 820 5378, jaana.kurjenoja(at)kauppa.fi

Mari Kiviniemi, Managing Director, Finnish Commerce Federation, tel. +358 (0)50 511 3189, mari.kiviniemi(at)kauppa.fi