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International Monetary Fund. European Dept.

1. The pandemic interrupted a protracted recovery from a sequence of shocks in the late 2000s. Labor productivity growth in Finland has been low, partly because the relatively rigid labor market (IMF 2018) and inefficient matching (IMF 2020) hindered reallocation of resources. Finland’s population has also been rapidly ageing, weighing on growth and public finances.

International Monetary Fund. European Dept.

IMF Country Report No. 22/25

International Monetary Fund. European Dept.
With strong policy support, Finland suffered a relatively mild economic contraction in 2020 followed by a swift recovery in 2021. Medium-term growth prospects are less strong, due to adverse demographics and low productivity growth—trends that precede the pandemic. Public debt has increased due to pandemic-related support and will remain on a rising trajectory in the medium term, largely reflecting permanent spending increases.
Jyrki Ali-Yrkkö, Reda Cherif, Fuad Hasanov, Natalia Kuosmanen, and Mika Pajarinen
Jyrki Ali-Yrkkö, Reda Cherif, Fuad Hasanov, Natalia Kuosmanen, and Mika Pajarinen
Do workers hired from superstar tech-firms contribute to better firm performance? To address this question, we analyze the effects of tacit knowledge spillovers from Nokia in the context of a quasi-natural experiment in Finland, the closure of Nokia’s mobile device division in 2014 and the massive labor movement it implied. We apply a two-stage difference-in-differences approach with heterogeneous treatment to estimate the causal effects of hiring former Nokia employees. Our results provide new evidence supporting the positive causal role of former Nokia workers on firm performance. The evidence of the positive spillovers on firms is particularly strong in terms of employment and value added.
International Monetary Fund. European Dept.
This 2019 Article IV Consultation highlights that Finland’s economy has performed well over the past three years, however, has slowed in 2019. There are some vulnerabilities in household finances, and productivity growth remains weak, with trend growth also constrained by adverse demographics. A new coalition government targets greater social support and inclusion, higher employment, carbon neutrality by 2035, and a balanced budget by 2023. A key challenge is to balance plans to increase spending with the need to maintain fiscal buffers. The fiscal expansion is expected to provide useful cyclical support in the short run, but offsetting measures will be required to ensure the structural balance reaches the government’s medium-term target. The government aims for a substantial increase in employment, but the effectiveness of the proposed wage subsidies is unclear. Alternatively, incentives from tax and benefit schedules could be improved, especially for younger women, older workers, and those out of the workforce. Risks in the banking system remain low overall, but some types of lending are increasing household vulnerabilities. The recent recommendation to limit the ratio of household debt to income is both sensible and in line with steps taken in many other countries.
International Monetary Fund. European Dept.

2018 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Finland

Angana Banerji, Mr. Valerio Crispolti, Ms. Era Dabla-Norris, Mr. Romain A Duval, Mr. Christian H Ebeke, Davide Furceri, Mr. Takuji Komatsuzaki, and Mr. Tigran Poghosyan
Product and labor market reforms are needed to lift persistently sluggish growth in advanced economies. But reforms have progressed slowly because of concerns about their distributive and short-term economic effects. Our analysis, based on new empirical and numerical analysis and country case-studies shows that most labor and product market reforms can improve public debt dynamics over the medium-term. This because reforms raise output by boosting employment and/or labor productivity. But the effect of some labor market reforms on budgetary outcomes and fiscal sustainability depends critically on business cycle conditions. Our evidence also suggests that some temporary and well-designed up-front fiscal stimulus can help enhance the economic impact of reforms. In the past, countries have used fiscal incentives in the past to facilitate reforms by alleviating transition and social costs. But strong ownership of reforms was crucial for their successful implementation.