demography and recovery from the financial crisis in finland€¦ · crisis can be described as the...
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DemographyandRecoveryfromtheFinancialCrisisinFinland
RistoVaittinenandReijoVanne
RistoVaittinen(correspondingauthor)(Dr.Pol.Sc.),([email protected])isanEconomistattheFinnishCentreforPensionsand
ReijoVanne([email protected])istheLeadingEconomistatTheFinnishPensionAllianceTELA.
ABSTRACT
Inthisarticle,weassessthesizeandscopeofthealreadyrealisedchangeindemographyformacroeconomicdevelopmentsinFinlandusing
NationalTransferAccounts(NTA).Itisamethodintobreakdownthenationalincomeanditsusebyage.UsingofNTAwedemonstrate
thatpopulationageinghasalreadyhadsurprisinglylargemacroeconomicimplications.Therelativelysizeablecurrentaccountsurplus,at
thebeginningofthiscentury,wouldhavebeensubstantiallyreducedbecauseofageingevenwithouttheconcurrentstructuralproblemsof
theexportindustry.Populationageingcreatespressuretochangethelevelandstructureofconsumptionaswellasrelativeprices.The
growingneedformainlypublichealthandoldagecareservicesisaconsiderablechallenge.There’saneedforextensiveincreaseinlabour
supplytosatisfythecurrentlevelofconsumptionwithprevailingageprofiles.Currentlevelandagepatternofconsumptionrelativeto
earningsneedstobeadjusted,inonewayoranother,tomakeitsustainableinlongerterm.
1. INTRODUCTIONAfterthefinancialcrisisoutputinFinlandhasbeendraggeddownbytheglobaldownturn,thedeclineofthe
electronicsandforestindustriesandtheRussianrecession.InrecoveringfromthefinancialcrisisFinlandhasbeen
performingpoorlyrelativetoitspeers.Finland’sgrowthperformancehasbeenweakerthanintheEUonaverage
orintheneighboringNordiccountries(OECD,2016).Inthisarticlewewillarguethatdemographicdevelopment
isapotentialcandidateinexplainingtheslowrecovery.Thecomingunfavourabledemographicdevelopmentis
widelyrecognizedinbothindomesticandinternationalassessmentsoftheprospectsofFinnisheconomy(MoF,
2013,EC,2013,orOECD2015).However,intheinterpretationoftheprolongedrecessionfollowingthefinancial
crisisdemographyhasreceivedonlymarginalattention.
ThebroadlysharedinterpretationofthemacroeconomicdevelopmentinFinlandfollowingthe2008financial
crisiscanbedescribedasthestoryoftheriseandfallofNokia,supplementedbycutbacksinthetroubledforest
industrycausedbydigitalisation(seeHolmström,KorkmanandPohjola,2014orOECD2016).Finland’sprice-
competitivenesshasfadedthroughoutthe2000s.Alongwiththefinancialcrisis,theICTclusterhasheadedintoa
productivitycrisis.Thishasescalatedtheproblemsoftheunfavourabledevelopmentthathascontinuedforquite
awhile.ThedeteriorationoftheexternalbalanceformorethanadecadeandthechangeoftheFinnisheconomy
fromaninternationalnetlendertoanetborrowerin2011areindicatorsoftheweakeningcompetitiveness
(Kajanoja2012;MalirantaandVihriälä2013).
Inourarticle,wefirstpresentaconciseandstyliseddescriptionofthedevelopmentsoftheFinnisheconomyin
the2000s,bothbeforethefinancialcrisisandduringtheprolongedrecessionfollowingit.Wepresentthe
establishedinterpretationoftheexport-drivencrisisandconsiderinwhichwaysthedemographicchangecould
belinkedtorecentdevelopments.Afterthiswedefinethenationaltransferaccountsandpresenttheage
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decompositionofincomeandconsumptionintheFinnisheconomy.Withthehelpofthedecomposition,we
reviewtheconnectionbetweenthedemographicagestructureandthemacroeconomicdevelopmentinthe
2000s.Finally,weconsiderissuesraisedbythisreviewonthefutureoutlookofthedemographyandthe
economicdevelopment.
2. POPULATIONAGEING,EXTERNALBALANCEANDCOMPETITIVENESS
Deteriorationofexternalbalanceisageneralequilibriumphenomenawhereadverseshockstoexportindustries
hasanimpactbutalsofactorsdeterminingabsorptionrelativetodomesticsuppliesplaysarole.Inthisrespect
lifecycleconsiderationsareofimportance:workerssaveindividuallyandthroughthepensionsystemtosmooth
consumptionoverlifecycle,whileretireesdissavethroughthesamechannels.Thedecliningshareofworkers
reducesthesavingsrateand,foritspart,contributestothedeclineincurrentaccountsurplus.Obstfeldand
Rogoff(1996)showinanoverlappinggenerationsmodelthatageingcausedbyfertilitydeclinedecreasesnet
savingsofaneconomy.
Braude(2000)hasemphasizedthattheagestructureaffectsnotonlythroughthesavingsratebutalsothrough
thewealtheffect.Inadditiontotransferringincomefromtheworking-agedtotheretiredviathepensionsystem,
theelderlywillcovertheirconsumptionwithwealththeyhaveaccumulated.Theincreasingnumberofretirees
raisestheimportanceofassetincomeinformingthepurchasingpower.Thegrowingnumberofretireesincreases
thedemandforconsumptionthroughthewealtheffectwithoutincreasingthelaboursupply.Thiswouldbethe
caseeveniftheretireeswouldsaveashareequivalenttothatoftheworking-agedandiftheirconsumption
structurewouldresemblethatoftheworking-aged.Theindirectdemandforworkincreasesrelativetoitssupply,
Theasseteffectholdsananalogousimplicationasforeignincometransferinanopeneconomy(Obsfeldtand
Rogoff,1996).Inotherwords,itaimsatstrengtheningtherealexchangerate.
Takingintoaccountrelativepricechangesindomesticeconomygivesanadditionalmechanismhowdemographic
changeaffectmacroeconomy.Whenstudyingimpactsonexternalbalanceofaneconomyitisusefulto
distinguishindustriesthatareopentointernationalcompetitionandthosethatareshelteredfromit,since
demographicchangesaffectrelativedemandinthisrespect.Duetocompetition,tradableindustriesmusttake
internationalpricesasagiven,whilethedomesticindustriescanpassitsexpensestoitsprices.Whenthetotal
demandincreasesrelativetodomesticproduction,therelativepricesofthenon-tradablesectorrisesandthereal
exchangerateisrevalued.Howmuchthedomesticpricesreactdependsonthesupplyofforeignsubstitutes
(ObstfeldandRogoff1996).
Theweakeningofthesupportratiohasanempiricallyobservedincreasingeffectontherelativepricesof
non-tradables.Ithasbeenobservedtohaveasignificantimplicationineconometrictimeseries/cross-section
studiesoftherealexchangerate(Braude2000;GroneckandKaufmann2014).GroneckandKaufmann{2014)use
agroupofOECDcountriestoreviewthereactionofrelativepricestochangesinthesupportratio.Theyestimate
thatanincreaseinthesupportratiooftheelderlybytenpercentwouldraisetherelativepriceoftheclosed
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sectorby6-13percent.Thedifferencesintheproductivitygrowthrates,whichtheymeasurewithlabour
productivity,alsoholdclearandexpectedimplicationsfortherelativeprices.Braude(2000),whosegroupof
reviewedcountriesismorecomprehensive,estimatesthatacountry'spriceswillriseby10-15percentifthe
dependencyratiogrowsby10percent.
Thechangeindemographyaffectstherelativepricebetweentheopenandtheclosedsectorsbychangingthe
balancebetweendemandandsupplyviasavingsandwealtheffects.lnadditiontothesemechanisms,thechange
inagestructureaffectsthestructureofdemand.Comparedtothatoftheworking-agepopulation,alarger
proportionoftheconsumptionoftheelderlyistargetedateconomicservicesprotectedfromforeign
competition.AmericanandEuropeanconsumptionstudiesbasedonindividual-leveldatasupportthisnation
(HojbinandLakatos2003;EwijkandVolkerink2012).EwijkandVolkerink(2012)haveassessedthat52percentof
theprivateconsumptionoftheunder-65-year-oldsintheNetherlandsinvolvesopen-sectorproducts.The
equivalentfigurefortheabove-65-year-oldsis44percent.Onefifthoftheclosed-sectordemandamongthe
under-65-year-oldsinvolvespublic-sectorserviceswhilethefigurefortheabove-65-year-oldswasmorethan40
percent.
However,consumptionstudiesbasedonindividual-leveldatadoesnotprovideacomprehensivepictureofthe
incidenceofconsumptionsincetheydonottendtotakepublicconsumptionintoaccount.Publicconsumptionis
targetedatserviceswithinhealthcareandlong-termcare.Aconsiderablepartofthisconsumptionisindividual
publicallysubsidizedorproducedconsumption,whichisnotincludedinthefiguresforhouseholdconsumptionin
consumersurveys.Amajorpartofthepopulationusingsuchservicesisexcludedfromthetargetgroupof
householdsurveys.Thehealthcareexpenditureaccountsfor,onaverage,10percentofGDPinOECDcountries.
Athirdoftheseservicesareprivatelyfinanced.HagistandKotlikoff{2005)estimatedtheageprofilesofhealth
careexpenditureandconcludedthattheper-personhealthcareexpensesoftheelderlyaremultifoldcompared
tothoseoftheworking-aged.
3. NATIONALTRANSFERACCOUNTS,LIFECYCLEDEFICITSANDDOMESTICABSORPTION
NationalTransfersAccounts(NTA)isamethodologyandaframeworkforcollecting,combiningandanalysing
intergenerationalandlifecyclereallocationvariablesthatareconsistentwiththeSNA,SystemofNational
Accounts(LeeandMason,2009andUN,2013).TheessenceofNTAistoestimateprivateaswellaspublic
consumptionandlabourincomebyage,andtocalculatethedifferenceofthetwo,calledlifecycledeficit(LCD).
Usingthedataonagespecificinformationofpublicandprivateassetincomesavingsandtransfers,thesources
offinancingthelifecycledeficitcanbederived.Ifnecessary,thevariablesareadjustedsothatcorresponding
economy-wideaggregatesintheNationalAccountsaresatisfied.
BothSNAandNTAsharethesamebasiceconomicconcepts:theproductionintheeconomyisequaltototal
factorincome,whichfurtherequalstototalspending.NTAmeasuresnational,notdomestic,values.Netnational
disposableincomeequalsspending:
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l aY=Y Y T C S.+ + = + (1)
wherelaborincome( lY )includesalsonetcompensationofemployeesfromtherestoftheworld,andasset
income( aY )includesalsopropertyandentrepreneurialincomefromtherestoftheworld.Transfersarenet
currenttransfersfromtherestoftheworld.Netincomeequalsconsumption(C)andnetsavings(S)whichboth
havepublicandprivatecomponents.
ThecurrentaccountBisthedifferencebetweentheavailableincomeYandtheexpenditureintheeconomy.The
expenditureisusedforprivateandpublicconsumptionCorfornetinvestmentsI,makingthedifferenceas
follows:
B Y C I= − − (2)
Bydividingthecurrentaccountidentity(2)withY,andbymultiplyinganddividingthemiddletermbythelabour
incomeYl,weget
1 l
l
YB C IY Y Y Y= − − (3)
In other words, the current accounts are determined based on the labour income and the share of net
investmentsofthenationalaccounts,aswellasontheratiobetweenconsumptionandlabourincome(C/Yl).In
thefollowing,wewillreviewhowthelatterratiodependsonthedemographicagestructure.
TheNTAmethodologyoffersacomprehensiveapproachtomeasureincomeanditsusebyageandtoreallocate
incomeandchangesovertimebetweenagegroups(UnitedNations2013).Dividingthenationalaccountsinto
differentagegroupsismotivatedasthefinancialflowsbetweenagegroupsoccurmainlybecausepeopleinthe
beginningandfinalstagesoftheirlifecycletypicallyconsumemorethantheyearn.Thedifferenceiscovered
throughdirectorindirectincometransfersfromtheworking-agepopulation.Thefluctuationinthesizeoftheage
groupschangetheseflowsanddetermine,inthelastresort,inwhichdirectiontheincometransfersmoveonthe
ageaxis.Savingandtheamountofassetincomealsodependonthestagesofthelifecycle.
Currently,NTAisusedtodepictandanalysethefinancialinteractionsbetweenagegroupsinmorethan40
countriesatvariousdevelopmentstages(Lee2014).Thecombinedpopulationofthesecountriesaccountfor
morethan80percentoftheglobalpopulation.Themethodhasalsobeenappliedinthedepictionofthe
financialimplicationsofdemographyinFinland(VaittinenandVanne2011;Riihelä,VaittinenandVanne2011and
2014).
Thedifferencebetweenconsumptionandlabourincomedepictstheneedforfinancingrelativetothevarious
stagesofthelifecycle.Thisneedismanagedthroughpublicandprivatenettransfers,assetincomeandnet
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saving.LeeandMason(2011)callthisfinancialdeficitalifecycledeficit.Therearrangedidentityofincomeand
expenses(1)forasingleone-yearagegroup(a)is:
( ) ( ) ( ) ( ) ( )Y Yl aC a a a S a T a− = − + (4)
Thevariationoftheincomeandconsumptionoverlifecyclemakestheidentityinteresting.Therightsideofthe
equationdividesthedifferencebetweenconsumptionandlabourincomeintonetassetincome ( )aY ,changein
assets ( )S andnetincometransfers ( )T offinancing.Ifthedifferenceisnegative,therightsideoftheequation
dividestheincomedeficitintothosequantities.
In international NTA comparisons or comparisons of different periods, the quantities of equation (4) are
standardisedby thewagesumof theeconomy.Whenequation (4) ispresentedwith thepercapita figures for
eachagegroup,thestandardisationismadewiththeaveragewagesofthe30-49-year-oldsinthestatisticalyear
(LeeandMason2011).
Thepresentationmodeoftheidentityemphasizestheviewofthelifecyclehypothesis.Initially,citizenshaveno
otherfinancialsourcefortheirconsumptionthantheirwagesandnettransfersfromothers.Partofthewagesis
saved,andthesavedamountandtherelatedreceivedprofitareavailableforuseatlaterstagesinthelifecycle.
Age-linked income transfers divide the income between age groups at a certain point in time. By saving or
dissaving,consumptionopportunitiesaretransferredacrosstime.
Numericalproportionsbasedonthesizeofagegroupsorthenumbersofemployedandothergroupsare
commonindicatorsofanageingpopulation.UsingNTA,theratiobetweenthetotalconsumptionandwagesum
oftheeconomycanbeinterpretedasamoney-weightedsupportratio(SR)(LeeandMason2011,75):
00
00
( , ) ( , )( )( ) ,( ) ( , ) ( , )
A
aA
l la
c a t P a tC tSR tY t y a t P a t
=
=
= =∑∑
(5)
inwhichc(a,t0)andyl(a,t0)areconsumptionandlabourincomepercapitainagegroupaattimet0.P(a,t)isthe
sizeoftheagegroupintheyearunderreviewt,andAisthehighestobservedageinthestatisticalyear.In
practice,thefiguresforthehighestagesaretheaveragesofafewhighestone-yearage-groups.
Byselectingc(a)andyl(a)oftheyearchosenasthebaselineyear–forexample,theyearofthemostrecently
calculatedNTA–andbyusingthedemographicweightsofdifferentyears,weseehowthesupportratiohas
developedasaresultofthedemographiceffect.Lookingbackthroughhistory,wecan‘test’howwellthe
demographyexplainstheratiobetweenconsumptionandlabourincome.Ontheotherhand,forfutureyears,we
canmakecalculationsonhowtheratiowillchangeduetothedemography(Lee2014;Leeetal2014;Prskawetz
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andSambt2014).Inotherwords,accordingtoequation(3),thenetlendingoftheeconomyrelativetothe
nationalincomedependsontheweightedsupportratioderivedfromtheNTA.
4. SECTORSPECIFICPATTERNSOFFINNISHECONOMICDEVELOPMENTINTHE2000SBeforethefinancialcrisis,theFinnisheconomygrewbyanaverageannualrateofthreepercent.Thegrowth
wastwiceasfastcomparedtotheaverageEurozonegrowthrateandnearlyasfastasinrestoftheEU
(ConferenceBoard2016).Thetradablesector1oftheeconomygrewparticularlyfast,drivenmainlybythe
rapiddevelopmentofthetotalfactorproductivity2.
Theflipsideofthegrowingproductivitywastheslightlydecreasingemploymentrateoftheopensector.Within
thesametimeframe,thetotalfactorproductivityofthenon-tradablesectordidnotimprove.Productionwas
increasedbyexpandingthelabourforce.Theemploymentinthenon-tradablesectorgrewbyanannualaverage
rateoftwopercentin2000–2008.Measuredinthenumberofemployed,thepublicsectordidnotmushroomin
thisperiod.Althoughthenumberofprivate-sectoremployeesgrew,thegrowthwasslowerthantheaverage
growthoftheeconomy.
Therelativeproductivityofthenon-tradabledeclinedbeforethefinancialcrisis.Inordertocompeteforthe
labourforceinaprofitablemanner,thepricelevelofitsproductshadtoriserelativetothatofthetradable
sector.Therelativepricesoftheclosedsectorgrewbymorethanfourpercentannuallyintheperiod2000-2008.
Thestagnationfollowingtheinternationalfinancialcrisiscausedalong-termslumpinproduction.Measuredasa
flat-rateappreciation,theproductionleveloftheoveralleconomyhasnotyetrecoveredtothepre-crisislevelbut
hasremainedwellbelowit.Thetradablesectorhasbeenacentralcontributorinthisdevelopmentcausedmainly
bythedecreasingtotalfactorproductivity.Nokia’sstruggletokeepupwithitscompetitorsinconsumer
innovationswasreflectedtoaconsiderablepartinthedevelopmentofthepost-recessionopen-sectortotal
factorproductivity.
Theoveralldevelopmentofthetotalfactorproductivityhasbeennegativeduringtherecession.Alsothetotal
factorproductivityinnon-tradablesectorhasbeennegativesincethebeginningofrecession.Hence,the
productioninshelteredsectorhasalsofailedtoreachpre-recessionfiguresdespiteitsincreasedemployment.
Table1.EconomicdevelopmentinFinlandinthe2000s
1Theopensectorincludesagricultureandforestry,mining,heavyindustry,transportandstorage,aswellasinformationandcommunicationsservices.Inotherwords,itincludessectorsA,B,C,IandHaccordingtotheStandardIndustrialClassification(SIC).Theflat-rateaddedvaluehasbeenusedastheindicatorofchangeinproduction.Theappreciationdeflationhasbeenusedastheindicatorofchangeinprices.Thisisstandardprocedureincomparativeresearchthatexaminesthedeterminationofexchangeratesfromthepointofviewoftheopenandtheclosedsectors(BettendorfandDewachter2015;Canzoneri,CumbyandDiba1999;DeGregorio,Giovannini,andWolf1994;GroneckandKaufmann2014).2Overallproductivitydepictsthepartofthegrowthinoutputthatcannotbeexplainedbyachangeintheincome-shareweightedinput.Thetotalfactorproductivityfiguresfortheopenandtheclosedsectorshavebeencalculatedbasedonthefiguresoftheindustry-specificproductivitysurveysofStatisticsFinland(2011).
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Period
2000–2008 2008–2013 2000–2013Averagechangeinproduction(%/year) Totaleconomy 2.8 -1.5 1.1Tradablesector1 3.7 -3.3 0.9Non-Tradablesector2 2.3 -0.6 1.2Averagechangeinprices(%/year) Tradablesector3 -0.9 -0.2 -0.6Non-Tradablesector3 3.4 2.1 2.8Relativepriceoftheopensector4 -4.3 -2.3 -3.4Changeintotalfactorproductivity(%/year)5 Totaleconomy 0.9 -1.4 0.0Tradablesector 2.5 -1.7 0.9Non-Tradablesector -0.1 -1.2 -0.5Averagechangeinemploymentrate(%/year) Totaleconomy 1.4 -0.5 0.6Tradablesector -0.1 -2.4 -1.0Non-Tradablesector(incl.publicsector) 2.1 0.3 1.4Publicsector 0.9 0.3 0.7
1Changeinflat-ratedappreciation(SICA,B,C,HandJ);2Changeinfixed-pricedappreciation(SICD,E-G,I,K-T);3Changeindeflationofappreciation;4Changeinopen-sectorpricerelativetoclosed-sectorprice;5Changeinoutput,whichcannotbeexplainedbygrowthininputuse.References:StatisticsFinland,AnnualNationalAccountsandProductivitySurveys.
Table2givesevidenceoncomparativemacroeconomicperformanceonEUcountrieswithinandoutsideof
theEuropeanmonetaryunion.IndicatorsinthegrowthofGDPpercapita,laborproductivityarepresented
foreuroandnon-euroareasonaverageandforFinlandandGermanyasindividualeuromembers,andfor
SwedenasanindividualEUcountrynotmemberinthecurrencyunion.GrowthinGDPpercapitabefore
financialcrisishasonaveragebeenmuchstrongerincountriesoutsidethemonetaryunion.Ithasbeen
basedmainlyonproductivitygrowthandlessonthegrowthinemployment.InFinlandgrowthhasbeen
almostasfastasoutsideEuroareaandsignificantlyfasterthanwithinitonaverage.Economicperformance
priortocrisiswasprettysimilarinFinlandandSweden,whereasGermanyresembledtheaverage
developmentinEuroarea.
Afterthecrisispatternsinperformancehavechangedsignificantly.FinlandandEuro-zoneonaveragehas
notbeenabletorecovertopre-crisislevelofoutputwithinsixyears.ForFinlandthismeansthatithasnot
jetregainedthelaborproductivitylevelprecedingthecrisis.OntheotherhandGermanyandSwedenhas
succeededtogrowafterthecrisis:GermanymainlybybeingabletoincreaseemploymentrateandSweden
morebygrowingproductivityandmaintainingaveryhighemploymentrate.
Table2: FinnishmacroeconomicperformanceinEuropeanperspective
GDP per capita Labor productivity
(Population 0-24 and 60+)
/Population 25-59
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2000=100 2000=100 (%) (%) (%)
2008 2015 2008 2015 2000 2008 2015
Euro Area 111 109 108 114 104 103 107
Finland 123 116 116 115 103 110 122
Germany 112 119 111 116 99 102 105
Non-Euro EU 126 135 120 126 110 105 107
Sweden 118 122 117 123 109 117 122
Source:ConferenceBoarddatabase(2016),Eurostat.
Demographicdevelopmentmeasuredbytotaldependencyratiohasbeenrelativelydiverse.Conventionally
dependencyratioismeasuredasashareofpopulationbelow15andabove65toworkingagepopulation(15.64).
Lookingfromlife-phaseperspectiveinEuropeancontext,onaverage,populationbelow25ofageisconsuming
morethanitproducesandisgeneratinglifecycledeficit.Thesameappliestopopulationover60ofage(Hammer,
Prskawetz,andFreund,2015).Usingtheseagebracketsweseethatrelativeto100supportersthenumberof
dependantshasincreasedby19personswithin15yearsinFinland.ThisisthefastestchangewithinEurope
wheresupportratioswhereonaverageslightlyimprovingbeforethefinancialcrisisandonlymodestly
deterioratingafterthecrisis.
Thepopulationaged25-59yearsthatproducesthelifecyclesurplusamountedto2.5millionindividualsin2000.
Theshareofthepopulationgeneratingthelifecycledeficit,thatis,theunder-25-year-oldsandtheabove-59-
year-olds,amountedto1.6millionand1.1millionindividualsrespectively.Thismeansthattherewere103
dependantsper100providersinFinlandintheyear2000(Table1).Bytheendof2013,thenumberofindividuals
producingasurplushadbeenreducedby80,000whilethenumberofelderlyindividualscontributingtothe
deficithadgrownbymorethan400,000toanample1.5million(Figure2).Tocounterbalancethegrowing
numberofageingpeopleinthedeficitphase,thenumberofyoungindividualscontributingtothedeficitwas
reducedby60,000,thatis,byapproximatelyonetenthrelativetothegrowthinthenumberoftheelderly.Asa
resultofthedemographicchange,thedependantsnumbered122relativeto100providers.Thenetchange
equalled460,000individuals,whichmeansthatthenumberofdependantsrelativetotheprovidersgrewby18
percentagepoints.Thechangewasofsuchmagnitudethatithasinevitablyleftamarkonthemacroeconomic
development.
Changesindemographicsupportratiodonotnecessarilygivecorrectmagnitudeofthemacroeconomic
implicationsofageing,sincedifferencesinthegapofearningsandconsumptionvariesbyage.Macroeconomic
costsduetotheagestructurecanchangeevenwithstablesupportratiowhentherelativeweightsoftheyoung
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andtheelderlydevelopinoppositedirectionsandoverturneachother.Increasingnumberofelderlyrelativeto
workingagepopulationrequiresalotmoreinter-agetransfersthanincreasingnumberofyoungdependants.
5. DEMOGRAPHICCHANGEANDAGEPATTERNSOFCONSUMPTIONANDEARNINGSINFINLAND
AgespecificconsumptionprofilesinNationalTransfersAccountsconsistofbothprivateandpublicconsumption.
TodivideprivateconsumptioninFinland,Riihelä,VaittinenandVanne(2011;2014)havemadeuseofhousehold
surveys.Thedivisionofconsumptionperagegrouphasbeenseparatelyreviewedintermsofconsumerdurables,
housing,healthcareandeducation.Educationandhealthcarecomewithaconsiderableage-linkedcomponent,
andtheirconsumptionissignificantlylinkedtopublicservices.Publicconsumptionhasbeenallocatedtotheage
groupsbasedonpublicadministrationdata.Theestimatesoftheage-group-specificlabourincomehavebeen
constructedbasedonincomedistributionstatistics.
Thelabourincomeincludeswageincome,theemployer’swage-relatedpaymentsandpartoftheincomefrom
self-employment.Theaggregatesofincomeandconsumptionitemshavebeenbalancedtocorrespondtothe
figuresofthenationalaccounts.
Inourreview,incomeandconsumptionhavebeenproportionedtotheaveragewagesofthoseinprimeworking
age(30-49-year-olds)(figure1).Thelabourincomecomeswithastrongage-dependencybothduetotheunit
wagesandtheage-linkednatureoftheemploymentrates.Consumptionhasbeendividedintototalconsumption
andprivateconsumptionpercapita.Theirdifferenceispublicconsumption.Thetotalconsumptionisfairlyeven
intheagesbetween15and75years.Tocovertheexpensesofthatconsumption,anincomethatcorrespondsto
theearningsofthepopulationinprimeworkingtimeforanaverageof0.6yearsisrequired.Consumptiongrows
fiercelyaftertheageof80yearsduetogrowingpublicconsumption,i.e.theuseofpublichealthandlong-term
careservices.
Thelabourincomeexceededconsumptionamongthepopulationagedabove26andunder58years.Thelowest
consumptionlevelamongtheadultpopulationwasforthe40-44-year-olds.Thelowestconsumptionlevelin2006
wasfoundamongthoseborninthemid-1960s.Thelowconsumptionlevelforthisagegroupispartlyexplained
bytheirchild-careburden,partlybythelongshadowoftherecessioninthe1990s.Thisagecohortwas
establishingitselfonthelabourmarketswhentherecessionhit.Theirweakpositioninthelabourmarketduring
therecessionresultedinaslowergrowthinearningscomparedtoyoungerorolderagecohorts(Riihelä2007).
Theconsumptionoftheworking-agepopulationin2006wasatitshighestamongthosearound60years,thatis,
amongthoseborninthemid-1940s.
Figure1.AgeprofilesoflabourincomeandconsumptioninFinlandin2006
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Source::StatisticsFinlandandowncalculations(Riihelä,VanneandVaittinen,2014)
Theshareofpublicconsumptionofthetotalconsumptionisrelativelysmallandstableintheagerangebetween
30and65years.Theweightonpublicconsumptionisconsiderablyhighamongagegroupsyoungerorolderthan
that.Amongtheyoungagegroups,approximatelyhalfoftheconsumptionconsistsofpublicservices.Inolderage
groups,publicconsumptionformstwothirdsoftheirtotalconsumption.Theconsumptionofapersoninthe
olderagegroupsin2006equals,onaverage,1.2timestheannualearningsofapersoninprimeworkingage.
Publictransferarrangements,thatis,netpublicincometransfersandservicesdominatethefinancingofthelife
cycledeficitandtheuseofthesurplus.Intheolderagegroups,theshareofconsumptionreceivedandfinanced
aspublicservicesgrowswithageandfinallysupersedestheshareofreceivedpensions.Fromthepointofviewof
intergenerationalincometransfers,thesignificanceofage-dependentpublicexpenditureismajor.In2011,
approximatelytwothirdsofthepublic-sectorexpenditure,incometransfersandsubsidizedservicescanbe
classifiedasage-dependent.Thiswas32percentrelativetoGDP.
Theshareofage-dependentincometransfersofexpenditurewascirca18percentagepoints(Vaittinenand
Vanne,2013).Thenetincomeofthepublicsectorwasaccumulatedbytheabove25-year-oldsandthelessthan
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90+Percap
itavalue
relativ
etoaveragewages
AgeTotalConsumption Privateconsumption Wageincome
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62-year-olds.Theagerangeissomewhatwiderbecausepartofthetotalconsumptionwascoveredbycapital
income.
Byexaminingtheratiooftotalconsumptionandwageincomeasaresultofdemographicchange,wecan
estimatetheconnectionofdemographicchangewiththemacroeconomicdevelopment.Thiscanbedoneby
weightingthepopulationpresentedinFigure1withthelifecycle-specificconsumptionandwageincome
accordingtoequation(5).Weascribemonetaryweighttodemographicchange,whichnaturallyconnects
demographicchangetotheannualnationalaccounts.
6. DEMOGRAPHYANDEXTERNALBALANCE
Theratiobetweenconsumptionandwageincomeandthedevelopmentofnetlendingthatdepictstheexternal
balancehavebeeneachother'smirrorimagesinthe2000s(Figure3).Intheearly2000s,netlendingrelativeto
thenationalaccountswasremarkablypositive.Finlandfinancedforeigncountriesor,inotherwords,saved9per
centinforeignclaimsrelativetothenetnationalaccounts.Consumptionrangedapproximately15percentabove
thewageincome.Thedifferencehadtobecoveredeitherbycapitalincomeorforeignnetincometransfers.At
theendofthereviewperiod,thisratiohadgrownbyapproximately10percentagepoints.Atthesametime,net
lendingturnednegative,whichmeantthatpartofthedemandsoftheeconomywascoveredbyforeigndebt.
TheratiobetweenconsumptionandwageincomeisreviewedinFigure3,bothbasedontheaggregatesofthe
nationalaccounts(unbrokenline)andwiththechangeindemographyweightedwiththe2006lifecycleprofiles
(dottedline).Thedevelopmentofthelifecycle-weighteddemographydepictsthesignificanceofdemographyfor
thechangeintheratiobetweenconsumptionandwageincome.Thedifferenceobservedintheratiobetween
consumptionandwageincomeandtheweighteddemographydepictsthedecision-basedreactionsoffinancial
actorstochangesintheeconomicenvironment.Thechangethathasoccurredduringthereviewperiod
correspondsalmostexactlywiththedevelopmentofthemoney-weighteddemography.
Figure3.ExternalbalanceandtheweightedeconomicsupportratiooftheFinnisheconomy
12
Source:StatisticsFinlandandowncalculations(Riihelä,VanneandVaittinen,2014)
Thecurrentaccountsarethecombinedsavingssurplusoftheprivateandthepublicsectorsinthenational
accounts.Finns’willingnesstosaveisaffected,inpart,bythesuccessoftheexportindustry,asincomegenerated
throughitcanbeusedtoaccumulateassets.Thecollapseinexportafterthefinancialcrisiscanbeseenina
growingconsumptionrelativetothewageincomeascitizenstrytobalancetheirconsumptionrelativetothe
changeinincome.Theattempttobalanceconsumptionispartlyevidentinweakercurrentaccounts.Thereaction
relatingtothisincomeshockisdampeningandwearereturningtothelevelofconsumptionrelativetowage
incomeprojectedbythedemographicchange.
Inadditiontochangesinincome,theeconomy’ssavingdependsonitsagestructure.Theageingofthe
populationreducesthesavingsrate.Peopleintheiractiveandmostproductiveworkingagearepronetosave–
inFinlandparticularlythroughthepensionsystem–whilesavings(bothprivateandthoseinpensionproviders)
aredissavedatretirement.Therecentdemographicchangehasfortifiedthisdevelopmentonamacroeconomic
level.Accordingtoanexport-ledeconomicdevelopment(Kajanoja,2012;MalirantaandVihriälä2013),the
changeintheexternalbalanceisseenastheresultofacontractedexportsector.Inourinterpretation,inwhich
thestartingpointofthereviewperiodisthesameasforKajanoja(2012),weemphasizetheeffectofdomestic
absorptionfactorsontheexternalbalance.Weparticularlyemphasizethesignificanceofdemographyinthe
-3.0
0.0
3.0
6.0
9.0
12.0
105
110
115
120
125
130
2000
2002
2004
2006
2008
2010
2012
Netfo
reignlen
ding
/Nationa
lincom
e(%
)
Econ
omicSup
portra
tio(%
)Co
nsum
ptionrelativ
etowagesum(%
)
Consumptionrelativetowagesum,SNAEconomicsupportratioForeignnetlending/NationalIncome(%)
13
determinationofthesefactors.Areductionorslow-downinthegrowthofthenumberofworking-agepeopledue
toageingreducestheinvestmentratesincetheupkeepofasufficientproductioncapacityperemployedperson
isreduced(Cutleretal1990).Thisimprovestheexternalbalance.Sincetheexternalbalancehasseverely
weakenedinthereviewperiod,theassessmentofthisimpacthasbeenignoredinthisconnection.Braude(2000)
hasemphasisedthattheagestructureaffectsnotonlythroughthesavingsratebutalsothroughthewealth
effect.
7. AGEINGPOPULATIONANDSTRUCTUREOFINDUSTRY
Thechangeindemographyaffectstherelativepricebetweentheopenandtheclosedsectorsbychangingthe
balancebetweendemandandsupplyviasavingsandwealtheffects.Inadditiontothesemechanisms,thechange
inagestructureaffectsthestructureofdemand.Comparedtothatoftheworking-agepopulation,alarger
portionoftheconsumptionoftheelderlyistargetedateconomicservicesprotectedfromforeigncompetition.
Therelativepriceoftheopenandclosedsectorsisacentraldeterminantoftherealexchangerate.Iftherateof
exchangeofexportandimportpricesisgiven,therelativeincreaseinpricesintheclosedsectorisdirectly
reflectedasarevaluationoftherealexchangerate.Alreadyinthe1960s,thedifferencesinthegrowthof
productivityintheopenandtheclosedsectorswereseenasimportantexplanatoryfactorsoftherevaluationof
therealexchangerate(Balassa1964;Samuelson1964).Asarule,itiseasiertoincreasetheproductivityinthe
productionofcommoditiesintheopensectorthanintheservice-intensiveclosedsector.Beforelong,thewage
differentialsbetweenthesectorswillbefixedduetothelabourforcemobility.Inorderfortheclosedsectorto
maintainitsprofitability,ithastoraiseitspricestocompensateforthegapsinproductivity.Assuch,thegapsin
productivityareinharmonywiththeeconomy'slong-termbalanceddevelopment(ObstfeldandRogoff1996,
204-209).Inadditiontothegapsinproductivity,thechangesinthestructureofdemandcanaffecttherelative
prices(Braude2000;GroneckandKaufmann2014).
Therealisedchangeinrelativeproductivityhasitsimplicationsforrelativeprices.Duringtherecession,theprices
oftheshelteredsectorhavecontinuedrisingcomparedtothepricesoftheopensector.Thepaceatwhichthe
comparativechangehasoccurredhasbecomemoremoderateduetothenarrowingofthechangeinthe
productivitygap.Ontheotherhand,ifthechangeinproductivityweretheonlyexplanatoryfactorofthechange
inthepriceproportion,therelativepricesoftheopensectorwouldhaverisenrecentlysincethetotalfactor
productivityhasdevelopedmoreunfavourablyinthetradablethaninthenon-tradablesector.Weoffera
complementaryexplanationforchangesinrelativepricesbasedondemographicchanceandlifecyclepatternsof
productionandconsumptionconstructedinNationalTransferAccountsforFinland.
14
Thereisacleardependencybetweentherelativeprices(v)3oftheopenandclosedsectorsandtheeconomic
supportratiointhereviewperiod(Figure4).Theeconomicsupportratiohasweakenedby10percentagepoints
atthesametimeastherateofexchangewasrevaluatedbynearly30percent.
Figure4.RelativepricesandeconomicsupportratioinFinland2000-2013
Source:StatisticsFinlandandowncalculations
Thepriceratiounderreviewhasbeenadjustedwiththerelativechangeinproductivityinordertoavoida
spuriouscorrelationbetweenthevariables.Theproductivity-adjustedrelativepriceoftheopensectorhasbeen
reducedbynearly30percentinthereviewperiod(Figure5).In2009,theyearfollowingthefinancialcrisis,the
relativepricefellbyapproximately10percentagepoints.Lateritrecoveredslightly,onlytocontinueitsdecline.
However,itwouldappearthatthefinancialcrisiscausedonlyasuddenshiftinanotherwisepredisposedchange
inthepriceratio.
3Therelativepricevistheopensector’spriceindexadjustedwithproductivityrelativetothatoftheclosedsector.Intheproductivityadjustment,priceindexhasbeendividedbythesector’stotalfactorproductivityindex.
2000
200820092010
2013
110
115
120
125
130
0.65 0.70 0.75 0.80 0.85 0.90 0.95 1.00 1.05
Econ
omicsu
pportratio(SR
),%
Relativeprice(v)2000=1,00
15
Figure5.Changeinpriceratioandproductionintheopenandclosedsectors
Source:StatisticsFinlandandowncalculations
Thereisastrongandanexpectedconnectionbetweenthechangeinpriceratioandproductionstructure.The
closedsectorwasapproximately30percentlargerthantheopensectoratthebeginningofthecentury,butnow
theclosedsectorismorethantwiceasbigastheopensector.Therelativechangehasbeenconsiderablylarge
takingintoconsiderationtheperiodinwhichithasbeenrealised.Ajumpresultingfromthefinancialcrisisisalso
visibleinthecovariationoftherelativepriceandproduction.Aswiththepriceratioandtheeconomicsupport
ratio,thecrisishasonlyacceleratedtheunderlyingtrend.
Whenwereviewtherelativesizesoftheindustries,agoodquestiontoaskiswhetherFinland'seconomywasin
balanceintheyear2000inthefirstplace(Sauramo2015).AccordingtoSauramo,theFinnishMarkkawaslinked
totheERMthroughtheEMUprocessataverylowexchangeratein1996.Duetotheresultingfavourable
competitiveness,theshareofexportofthetotalproductivityreachedarecord-highlevelintheearly2000s.Part
oftheadjustmentofthechangeinthepriceratioandtheproductionstructureinthe2000smaybeareaction
thatwasfreefromthepressureofchangeduetodemographyinadisproportionateproductionstructureatthe
turnofthecentury.Theratioofthesefactorsisanopenresearchquestion.
2000
2008
2009
2010
2013
1
1.3
1.6
1.9
2.2
2.5
0.65 0.70 0.75 0.80 0.85 0.90 0.95 1.00 1.05
Outpu
tintrad
ablesrelativetooutpu
tinno
n-trad
ables
Relativeprice(v)2000=1,00
16
8. PROJECTEDDEMOGRAPHYANDLIFECYCLEDEFICIT
Theresultsofthedemographicprojectionsbyvariousactorsmeanthat,inallprobabilityandmeasuredwithall
indicators,thetraditionaldemographicdependencyratiowillweakenatanacceleratedrateinthenexttwenty
years.Aroundmid-century,itwillstabiliseatalevelthatcorrespondstothatoftheearly1900s.Contrarytothe
early1900s,themajorityofthedependentswillnowconsistofelderlypeopleratherthanchildren(Riihelä,
VaittinenandVanne2014).
Howthecomponentsoftheagestructureaffecttheeconomicdependencyratiocanbeestimatedbyreviewing
thelifecycledeficitofequation(4)peragegroup.Asimplewaytoindicatedemographicchangesistoadjustthe
observedlifecycleprofileswithexistingdemographyprojectionsand,basedonthat,considertheeconomic
implicationsofdemography(Lee2014;Leeetal2014;PrskawetzandSambt2014).Utilisingthepopulation
projectionofStatisticsFinland(OSF2012)andthelifecycleprofilesofFigure1,wecanprojecthowthelifecycle
deficitwouldchangein2030asaresultofdemographyalone,withoutchangesinconsumptionortheage
structureofproduction.
Withthecurrentworkinglivesandageprofilesofwagesandconsumption,38percentofconsumptionwillbe
financedwithcapitalincomerelativetowagesin2030(Figure6).Thisequalstheaveragevalueofcapitalincome
proportionedtothewagesumofthe2000s.Intheprojection,thedeficitoftheyoungwillgrowbyanampleone
percentagepoint.Thegrowthinthesurplusoftheworking-agedwillcompensateforthisdeficit.The15-
percentage-pointgrowthofthelifecycledeficitisalmostcompletelyduetothegrowthinthedeficitofthe
elderly.This,inturn,isaresultoftheincreasingpublic-sectorhealthandcareservices(VaittinenandVanne,
2011).Thesituationissimilarinotherhigh-income-levelcountries,inwhichthepopulationisageing(Leeetal
2014).
Thelifecycledeficitisnotanactualsustainabilityindicatoroftheeconomicdevelopmentandcanthusnotbe
ascribedasingle-valuedtargetlevel.Howlargeaproportionoftheeconomy’stotalconsumptioncanbefinanced
withcapitalincomedependspartlyonhowtheincomeisdividedbetweenwageandassetincome.Inthe2000s,
theaverageshareofcapitalincomeofthedisposableincomeoftheeconomywas39percentrelativetothe
wagesum.
Inthecorrespondingtimeframe,thelifecycledeficitwasfinancedwiththesumofthecapitalincomewhich,
relativetothewageincome,amountedto19percentonaverage.Approximatelyhalfofthecapitalincomewas
thususedtofinanceconsumptionandhalfofitwassaved.However,inthelongrun,thelifecycledeficitcannot
besolargethattheeconomy,withthegiveninvestmentlevel,isrunintodebttoforeigncountries.In2011-2013,
theFinnisheconomyincreaseditsforeignnetborrowing,whichispossibleonatemporarybutnotpermanent
basis.
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18
VaittinenandVanne2014,74–77)inorderforthecurrentlifecycleprofilestobeharmoniouswiththeexternal
balanceoftheeconomy.
9. CONCLUSIONS
Thealreadyrealisedchangestodemographyhavehadperhapssurprisinglylargemacroeconomicimplications.
EvenwithoutthecrashofNokiaandthewaningforestindustry,thesurplusofthecurrentaccountswouldhave
beensignificantlyreduced.Itisalsopossiblethatwewouldhaveincurredmoreforeigndebtevenwithout
industrialstructuralchanges.
Theageingofthepopulationcreatespressurefor,amongotherthings,changesinconsumption,inthefinancing
anddemandstructures,andinthepriceratiosofconsumption.Theinitialadjustmenthasbeendonethroughthe
currentaccounts.Previoussavingintheeconomyisnotadequatetofinancethemorerapidlygrowinggap
betweenconsumptionandincomewithcapitalincome.Inthelongterm,theadjustmentmustbedoneby,onthe
onehand,extendingworkinglivesand,ontheother,adjustingconsumption.
Agreatpartofthefuturelifecycledeficitwillstemfromagrowingneedofcurrentlypublically-producedhealth
andcareservicesattributedtotheageingpopulation(VaittinenandVanne2013).Ithasbeenknownforalong
timethattheseliabilitiesaregrowing.Yet,inthe2000s,thegrosstaxrateandthepublicsavingsratiowiththe
givenexpenditurelevelwerereducedbyfivepercentagepointsrelativetoGDP.Nowtheaimistoreducethe
deficitbyextendingworkinglives.
Theaimofthepensionreformthatwillcomeintoeffectin2017istopostponeretirement.Thecurrent
governmentplatformalsoincludesanumberofmeasureswhicharebelievedtoincreaselaboursupply.Withthe
currentconsumptionprofiles,thechangeinlaboursupplymustbeextensiveinordertoavoidtheneedtoadjust
consumption,inonewayoranother,toasustainablelevelvis-à-visthelong-termdevelopment.
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