Finnish unemployment: observations and conjectures

In this study we analyze the factors behind the Finnish unemployment shock of the 1990s. The analysis is based on labour demand, wage-setting and current account equations that form a structural labour market model. The results of this model are compared to those obtained from a reduced form unemployment equation. We find that the both approaches yield relatively similar results. The main factor causing the dramatic increase in Finnish unemployment in the early 1990s seem to have been the real interest rate shocks of the years 1989–92. In addition to interest rates, there are other explaining variables although they are of minor importance. They include domestic supply side factors such as increased tax wedge and replacement ratio, and variables related to the economy’s external constraint. These are the terms of trade and the economy’s foreign indebtedness.