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Agreement on counter-cyclical EMU buffers

Helsinki (21.11.1997 - SAK) The Finnish labour market organisations reached an agreement on counter-cyclical buffers which help to stabilise the economy if Finland joins the EMU. Read the full story offered by the International Department of SAK


The Finnish Social Partners made history:
Agreement on Counter-Cyclical EMU Buffers

The Finnish labour market organisations reached a week ago (17.11.1997) an agreement on counter-cyclical buffers, which will stabilise the economy if Finland joins EMU.

The central trade unions and employer organisations, the social partners, agreed last spring that by autumn they would explore the possibilities to prepare for economic disturbances in the EMU environment where there are no longer any possibilities for exchange rate realignments. The agreement includes a joint statement on the use of employment pension funds, unemployment insurance funds and personnel funds as counter-cyclical buffers. The deal on unemployment security is part of a wider framework where, in addition to buffer funds, agreement was reached on the long-term principles for financing as well as administrative reforms.

All eight labour market central organisations signed the agreement, namely The Confederation of Unions for Academic Professionals in Finland - AKAVA, The Church of Finland Negotiating Commission, The Commission for Local Authority Employers - KT, The Employers' Confederation of Service Industries - PT, The Central Organisation of Finnish Trade Unions - SAK, The Confederation of Finnish Industry and Employers - TT, The Finnish Confederation of Salaried Employees - STTK and the State Employers' Office - VTML.


1.

The central labour market organisations reached unanimous agreement on the principles by which the financing of unemployment security will be safeguarded and fluctuations in the employers unemployment insurance contributions will be smoothened. The solution does no change unemployment allowances nor the status of the trade unions' unemployment benefit funds.

On the basis of the decision the central government will contribute an amount to the financing of unemployment security equivalent to the basic daily compensation starting in 1999 (in 1998 FIM 120 per day per unemployed beneficiary). The unemployment benefit funds will continue to contribute to the financing of unemployment security an amount equal to 5.5 per cent of their benefit expenditures.

A social partners' Common Unemployment Insurance Fund will be established. Two thirds of the seats on the administrative board of the fund are held by the employers and one-third by trade unions. The Common Unemployment Insurance Fund will be responsible for the expenditures not covered by the State or the unions unemployment benefit funds. The benefits cover unemployment allowance, adult retraining programmes, voluntary education programmes for the unemployed, compensation for persons on sabbatical, supplementary employment pensions as well as the training and severance pay fund. The expenditures of the Common Unemployment Insurance Fund are financed by employers' and employees' insurance contributions and the returns on investments. In 1998 the employers contribution is 2,8 % of the wage sum and the employees contribution is 1,4 % of wages/salaries.

Starting in 1999 the insurance contributions of employers and the obligatory contributions of employees will be adjusted in equal proportions. The Ministry of Social Affairs and Health will set the level of insurance contributions on the basis of the proposal of the Common Unemployment Insurance Fund.

In order to smoothen the fluctuation in contributions stemming from economic developments, a counter-cyclical buffer fund of about FIM 3 billion will be accumulated in the Common Unemployment Insurance Fund. The state budget will act as a buffer in the case of basic unemployment allowances.

The buffer will be collected when the decline in unemployment and benefit expenditures make this possible. The target level is projected to be reached in the years 2002-2004. Under conditions of economic disturbances the fund can borrow to cover its expenditures. The agreement is expected to buffer the unemployment benefit system not only from economic but also from political fluctuations.


2.

The labour market organisations and employment pension institutions have agreed upon the use of employment pension funds to smoothen cyclical fluctuations in employment pension contributions. The aim is to use the already existing stabilisation fund. The purpose of the fund is to ensure the undisturbed payment of pensions.

When implementing the buffer scheme, the intention is to expand the stabilisation fund in line with growth in the total wage sum in boom years. During a recession the stabilisation fund would be allowed to decrease. This will reduce pressure to raise employment pension contributions stemming from the slow growth or even a decrease in the wage sum. It is estimated that the buffer necessary for smoothening ordinary cyclically related fluctuations in the contributions would be about 2.5 per cent of the wage sum in the private sector, i.e. about 3,5 billion FIM.

The scheme will not require changes in legislation. The accumulation and depletion of the buffer fund will be decided upon by the labour market organisations and the pension insurance institutions in annual negotiations on employment pension contributions.

In the negotiations on the buffer funds it was noted that in times of severe economic disturbances it may be necessary to impose changes in the legislation to allow use of the entire capital of the employment pension fund, about 180 billion FIM and to ease upward pressure on employment pension contributions.


3.

According to the negotiating group that studied the use of personnel funds as EMU buffers, it is important for all parties concerned to evaluate the effects of EMU on the functioning of the labour market. The organisations note that the significance for the enterprise and the personnel of personnel funds and payment-by-results schemes must be determined locally. It is also necessary to develop other forms of co-operation for motivating personnel and promoting work incentives.

The organisations recognise that financially sound enterprises and firm-specific solutions facilitate the adjustment to economic shocks and foster economic stability. The personnel funds in companies and various kinds of payment-by-results schemes can function as buffers smoothening fluctuations in profitability. When the profitability of enterprises is high, part of the earnings can be channelled to employees via these schemes if desired.

The negotiating group emphasised the importance of information. The organisations have jointly produced information material for use by enterprises and personnel. The organisations will also supply their member unions and member companies with information about the joint statement by the end of this year. Information about personnel funds and payment-by-results schemes will be intensified.

In the joint statement it is noted that the ability of the economy to withstand cyclical disturbances can be improved by, among other things, diversifying the industrial structure. Wage developments compatible with steady low inflation will also foster economic stability.