Welfare Differentials and Inequality in the Finnish Labour Market over the 1990s Recession

Using a large panel of Finnish males, we study how the recession of the early 1990s hit different worker groups and affected inequality in the labour market. Despite large employment losses the cross-section dispersion of earnings is found be almost constant, while differences in layoff and hiring rates between groups have been changing over the early 1990s. To bring these divergent patterns together, we analyse the evolution of inequality in the cross-section distributions of life-time employment values derived from a search model. We show that the recession caused welfare losses in all worker groups and increased inequality. Compared to the figures reported for the U.S., the average levels of inequality based on life-time welfare measures are found to be very close to each others in both countries, even though wage inequality is much lower in Finland.