Jobless Growth in Finland? Evidence from the 1990s

The purpose of the paper is to assess the validity of two interpretations which have been used in the description of the relationship between employment growth and economic activity in Finland during the 1990s. According to the New Era view the Finnish economy has moved into a new era which, as a result of a faster-than-before rate of labour productivity growth, is characterized by “jobless growth”. According to the Cyclical Rebound view no change in the rate of trend productivity growth has taken place. The productivityled growth, which after the very deep depression characterized the recovery of the economy, only reflected a normal cyclical rebound. The main result of my investigation is as follows. Neither the New Era view nor the Cyclical Rebound view provides a telling interpretation about the developments of productivity and the relationship between output and employment growth in the 1990s. Characterizing the years of the recovery as reflecting a New Era which is associated with an increase in the rate of long-run productivity growth is misleading, because that kind of change has not taken place. On the other hand, the movements of productivity are hard to reconcile with the Cyclical Rebound view because the years from 1992 to1994, especially, were exceptional. During the period movements in productivity were not consistent with a pro-cyclical pattern, and, what is important, the productivity trend shifted upwards. However, the shift was not associated with an acceleration in the rate of trend productivity growth. The upward shift was caused by a sequence of positive technology shocks, which were identified by using a structural VAR model. The identifying restriction was rationalized by utilizing a new Keynesian dynamic general equilibrium model. The positive technology shocks which dominated the developments of aggregate productivity during the period from 1992 to 1994 mainly reflect micro-structural changes like business restructuring and labour reallocation in manufacturing.