Managed vs free wage-setting in Finland and Estonia: optimising outcomes

Wage-setting systems are a key element of the labour market institutional setup. In Europe, they vary considerably, reflecting the diversity of existing economic and social models. Over the long run, different wage-setting models can have a significant impact on macroeconomic performance, industrial structure, and social cohesion. The Finnish and Estonian wage-setting systems are an example of a stark contrast between close neighbours. In Finland, wage-setting is highly centralised and in Estonia it is almost fully decentralised. While each of these systems appears to have supported a good overall performance in terms of employment and economic activity in these countries, each has given rise to serious challenges in some other areas. Estonia needs to cope with the pro-cyclical volatility of its wage growth, which risks feeding through to higher inflation, and with social equity issues. Conversely, Finnish wage-setting prevents its companies from reacting flexibly to changing markets. Both Estonia and Finland may need to consider how these current drawbacks could be addressed without compromising the credibility and overall positive performance of their wage-setting systems.