Structural unemployment: a blot on the Finnish success story

In the recent debate on the response to the challenges of globalisation, the so-called Nordic model has received much praise. While the three Nordic countries are often lumped together, their performance has not been the same. A notable feature of the Finnish economy compared with that of Sweden and Denmark is the higher level of unemployment. In the early 1990s, the Finnish economy suffered an exceptionally sharp demand shock that cut almost one fifth of its jobs in just three years and was accompanied by profound structural changes which have tested the limits of the labour market’s capacity to adapt. The spectacular recovery of the Finnish economy has pushed up labour demand. While unemployment has fallen back from a peak of 16% of the labour force towards more "normal" rates, this improvement has stalled in recent years, even in the face of strong employment growth.

The stickiness of unemployment suggests the build-up of an important structural component, implying that strong activity alone will not lead to a proportionate reduction in unemployment. Although the Finnish labour market’s weaker performance than that of the other Nordic countries (Denmark and Sweden) can partly be attributed to the deep impact of the recession on the labour market, deficiencies in the design of labour market institutions are clearly also a factor