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Productivity improvement should play a central role in social policy

Seppo Kangaspunta Published Date 14.2.2020 14.55 Blog

Seppo KangaspuntaProductivity and economic growth should be among the key social policy objectives, according to professor Matti Pohjola. In his report Technology, investments, structural change and productivity – Finland in international comparison for the Ministry of Economic Affairs and Employment, professor Pohjola explains why.

Pohjola is concerned about Finland’s current economic policy debate, which focuses on ways to boost the employment rate and balance public finances instead of concentrating on labour productivity issues. He believes this is because jobs, taxes and public expenditure are more tangible matters for voters, the media and political decision-makers alike, whereas productivity is a more abstract concept, one that has to be created in workplaces and doesn’t lend itself to political decision-making.

Higher productivity brings more wellbeing and a better standard of living

Working longer hours will not result in a higher level of income; better pay will, Pohjola points out. Pay rises, in turn, come about when labour productivity grows. In other words, by producing better quality products and services in greater numbers per hour of work increases productivity.

Striving for a higher material standard of living is no longer as important as it was when Finns were poor. However, it still provides means for pursuing the things we consider essential for our wellbeing, such as health, education, leisure time, happiness and fair distribution of income. Higher productivity could also provide means for lowering taxes, broadening the range of public services, or reducing income inequalities.

Achieving higher labour productivity is the result of technological progress, innovations and structural renewal of the economy. Technology offers information on ways to combine resources to produce goods and services that people need and want. Economic growth translates into new and better-quality products rather than higher production volumes of the existing ones.

Finland falling behind in new technology

Since 2008, productivity growth in Finland has been weaker than in its closest competitor countries. Take Sweden for instance: It takes Sweden just nine days to generate a volume of industrial output that Finland produces is ten days. Sweden’s lead in productivity stems primarily from stronger productivity development in knowledge-intensive services.

Pohjola conducted an international comparison, which reveals that Finland is no longer the leader in new technology and structural change that generates higher productivity than it was a few decades ago. It is alarming that investment in intellectual property products has been shrinking in Finland since 2008. Finland is falling behind its competitor countries when it comes to investment in information and communications technology and in research and development. Finland also lags behind in the use of robotics. In terms of the ratio of market services to total output value, Finland is now at the level where Sweden was in the late 1990s.

According to professor Pohjola, we are now experiencing a technological and economic transformation of the kind that happens once in a century. Our chances of raising our wellbeing and our standard of living are at least as good as they were during Finland’s industrialisation process a hundred years ago. Pohjola suggests a familiar course of action: investing in education and new technologies, deregulation, and promoting competition. Any measures are justified that help create, introduce and spread new ideas, and that promote the transfer of production resources from declining to thriving industries. We must be able to repeat our past successes and tap into the new drivers of economic growth.

Seppo Kangaspunta, Ministerial Adviser, Ministry of Economic Affairs and Employment

Report: Technology, investments, structural change and productivity – Finland in international comparison (in Finnish)

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