by Venla Sipila and Ben Wetherall
The settlement of the paper industry's labor conflict, which crippled Finland's important export sector for nearly seven weeks, was formally approved by the advisory boards of the Finnish Forest Industries Federation and the Finnish Paper Workers' Union on Friday, 1 July. Paper and pulp machines have since been restarted, and the industry should be up to full speed by the end of this week.
The conflict began with a two-day strike in mid-May, followed by a rarely used lockout by the employers. Management argued that the industry was in crisis due to poor competitiveness, so it was necessary to control costs in order to lift productivity. Over the past few decades, paper prices have constantly declined in real terms, and labor productivity in the industry has grown more slowly than that in several competitor countries. At the same time, real wages have climbed; productivity has advanced 6% since 2000, while wages (including social security payments) have jumped 17%. Labor flexibility needed to be increased, as productivity can no longer be boosted by more investment, due to a wood supply that is already nearing its limits.
The three-year labor deal became valid immediately and affects some 24,000 workers. The most difficult issue to settle was the use of outside labor. In the future, most outsourcing issues will be decided upon locally. The settlement eliminates mill shutdowns during the Christmas and the mid-summer holiday periods, leading to increased capacity. In addition, local approval on work shifts, including weekends, and scheduled mill maintenance will be expanded. However, the deal includes plans for shorter hours. Wage increases will be implemented according to the general centralized wage deal; hourly wages will be raised by an average 2.5% in 2005, followed by an additional 1.9% raise in June 2006. A reduction in sick pay, originally demanded by management, was dropped. In addition, the two sides will continue their dialogue on other related issues, including further flexibility in workers' hours. Also, a wider discussion on future competitiveness challenges is planned.
The Finnish paper industry is operating in a changing commercial and industrial environment. Earlier competitiveness problems were solved by exchange rate realignments. During the 1970s, in particular, demand was routinely boosted by devaluing the Finnish markka. Moreover, because the country's banking sector was still tightly regulated until the mid-1980s, banks were eager to finance the paper sector in a bid to boost their own balance sheets and market share. This led to a notorious devaluation/inflation spiral, as wage increases in the booming export industries spread to the rest of the economy—but these developments were not based on market conditions. In today's age of the euro, support through currency devaluation is out of the question.
It is often said that the Finnish economy grows "from the woods", since forests constitute its only significant natural resource and is the basis for its second-most important industrial sector, after the Nokia-led electronics sector. According to the Forest Industries Federation, Finland’s share of world forest industry exports stands at around 10%; its share of paper and card exports is some 12%, and that of printing and writing paper is around 20%. The forest sector directly employs approximately 90,000 workers, and indirectly around the same amount. The paper industry accounts for an estimated 5% of Finnish GDP, and about 25% of the country's exports. As such, production losses due to the labor dispute have important ramifications for the entire economy.
Although the increased labor flexibility should lead to greater productivity and international competitiveness in the longer term, the short-term impact of the seven week shut-down on the economy will be noticeable. Reduced activity in this crucial industry will likely cause weaker second-quarter performances for related sectors such as chemicals, transport, and construction.
As a result, we have lowered our projection of this year’s GDP growth to 2.3%, down from 2.7% in our June interim forecast. Because the lower paper supply has pushed up output prices, the industry can likely recoup some of its losses later this year. The extent of this crucially depends upon developments in the terms of trade. Taking into account the export-dampening effect of the labor conflict, together with the still-strong euro and weak global growth, we will lower 2005 GDP growth to around 2% in our July interim forecast.
However, the divisive nature of the workers' strike and management's decision to endorse a lockout could have wider repercussions on labor relations throughout Finland. Although a new "central incomes policy" was concluded between the main employers' organization, the Confederation of Finnish Industries (EK), and the various labor unions at the end of November 2004, negotiations were considerably strained because the EK adopted a particularly uncompromising position, challenging the unions on a number of sensitive issues including the structure of pay increases. There is a growing desire among employers to challenge the country's collective bargaining system, or at least attempt to move their workforces to smaller sectoral agreements, where unions may be more sympathetic to their demands. Lawyers remain divided about whether employers have the right to shift their workforces to such sectoral unions, but many believe that by confronting the unions, employers will achieve more. At the same time, the unions appear equally determined to confront the employer federations and voice their concerns over the full implementation of the European Union's Lisbon strategy. Therefore, after a long period of relatively peaceful labor relations, Finland's paper dispute may herald the beginning of more disputes.
