Finland entered the middle of the 2020s with an unemployment problem that had become structurally entrenched. The trend unemployment rate rose to 10.6 percent in November 2025, the highest level observed in the present century, and the economy had settled into what analysts described as a self-reinforcing negative cycle. A significant portion of this unemployment was not merely cyclical. It reflected the interaction of labour market institutions that had been shaped over decades by the preferences and bargaining power of trade unions. Finnish unions occupy a central position in wage setting, in the administration of unemployment insurance, and in the political economy of reform. Their institutional footprint helps explain why unemployment in Finland has proven more persistent than in several comparable European economies. The Macroeconomic and Labour Market Context Finland’s unemployment rate climbed sharply from 8.9 percent in late 2024 to 10.6 percent in late 2025. Bank of Finland analysis noted that both employment and unemployment rates had risen simultaneously, a pattern explained in part by higher labour force participation. Later retirement, more active participation among younger cohorts, and the high share of working-age immigrants in the labour force contributed to this rise in participation. When participation rises during a period of weak demand, unemployment increases even if employment remains relatively high in historical terms. The employment rate for people aged 20 to 64 stood at 76.2 percent in April, higher than the ten-year average, while the unemployment rate at 9.2 percent was also above its decade average. This combination indicated that the Finnish labour market had become less capable of absorbing new entrants and re-entrants at prevailing wage and institutional conditions. The recession in construction, a sector sensitive to interest rates and investment confidence, accounted for a significant share of job losses. Bankruptcies reached their highest level in nearly three decades, driven mainly by construction. Health and social services also shed jobs as wellbeing services counties faced budget shortfalls. These sectoral shocks interacted with structural features of the labour market to produce a sharper and more durable unemployment increase than would have occurred under more flexible wage and employment arrangements. The Institutional Architecture of Finnish Labour Relations Finland’s labour relations system rests on two pillars that reinforce union power. The first is high collective bargaining coverage. Although trade union density declined from a peak of 78 percent in 1994 to 59 percent in 2021, bargaining coverage remained above 80 percent and stood at 89 percent in 2021 according to some estimates. The mechanism behind this stability is the legal extension of sectoral collective agreements to all employers in a sector, whether or not they are members of the signatory employer association. Finland uses the term “generally binding” to describe this arrangement, in contrast to Denmark and Sweden where collective agreements normally bind only signatory employers. This extension means that a union and an employer federation can set wage floors and employment terms for an entire sector, including non-union firms and non-union workers. The economic effect is to remove wage competition at the lower end of the labour market and to impose a union-derived wage floor on employers who might otherwise hire at lower rates. The second pillar is the export-sector wage model. Under the current arrangement, the technology and chemical export sectors set the norm for wage increases, and other sectors follow. A law that came into force at the beginning of 2025 stipulates that the national conciliator cannot propose wage increases for non-export sectors that exceed the export-sector settlement. This model tightly coordinates wage formation across the economy and reduces the scope for sector-specific or firm-specific adjustment. The IMF has observed that wage rigidities in Finland are high, reflecting limited use of lower-level agreements and opening clauses. In Denmark, by contrast, most wages are negotiated individually within collective agreements that guarantee only low minimum standards, and in Sweden sectoral agreements often specify increases in total wage bills while leaving distribution to company-level negotiation. Finland’s room for additional company or individual wage bargaining has been restricted in practice, making wages less responsive to productivity differences and local labour market conditions. The Wage Rigidity Channel The economic logic connecting wage rigidity to unemployment is straightforward. When wages are set above the market-clearing level for a sustained period, the quantity of labour demanded falls short of the quantity supplied, and unemployment results. The Finnish system produces this outcome through several mechanisms. First, the extension of collective agreements to non-signatory employers means that firms facing weaker demand or lower productivity cannot adjust wages downward to preserve jobs. A firm that would otherwise offer employment at a wage reflecting its specific circumstances must instead pay the sectoral minimum. For marginal firms and for workers with limited skills or experience, this wage floor can make the difference between employment and unemployment. Cross-country research has found that high bargaining coverage, controlling for union density and bargaining coordination, is associated with higher unemployment rates and lower employment rates. The study notes that in parts of the economy to which bargaining results are extended, only the monopoly effect of unions is present, and the wage mark-up is not compensated by productivity-enhancing cooperation. Finland’s high coverage combined with its relatively centralized wage-setting structure places it squarely within this pattern. Second, the export-sector wage model transmits wage increases from the tradable sector to the sheltered sector without regard to productivity differences. If the export sector settles at a rate that reflects its own productivity growth, the non-tradable sector must match that increase even if its productivity is stagnant. This mechanism was identified as a source of cost-competitiveness deterioration in Finland after the financial crisis, when unit labour costs in the non-tradable sector rose faster than in the tradable sector. Over time, high multi-year wage increases pushed Finland’s unit labour cost growth far above that of the euro area, Denmark, Germany, and Sweden. The consequence was weaker export performance and slower employment growth in the sectors that must generate the resources to pay for imports and public services. Third, the limited use of opening clauses and firm-level derogations means that the wage structure cannot adapt quickly to shocks. In Denmark and Germany, escape clauses and firm-level bargaining have allowed wages to adjust during downturns, and this flexibility has been credited with stronger labour market performance. Finland’s system offers less scope for such adjustment, so adverse shocks translate more directly into employment losses. The Bank of Finland has noted that the cost-competitiveness of the Finnish tradable sector deteriorated after the crisis partly because labour costs in the non-tradable sector rose faster than in the tradable sector. A wage-setting system that does not allow relative wages to adjust in response to sectoral shocks will generate higher unemployment in the sectors that need to contract. The Insider-Outsider Dynamic Trade unions by their nature represent the interests of their members, and their members are disproportionately drawn from the ranks of the employed. This creates a structural tension between insiders, who have jobs and union representation, and outsiders, who are unemployed or in precarious employment and have little influence over wage bargaining. The insider-outsider theory of unemployment holds that unions primarily pursue the interests of incumbent workers, and that outsiders do not have much influence in the wage-setting process. When unions negotiate wage increases, they weigh the benefit to employed members against the risk that higher wages will reduce employment. If the probability that an employed member will lose their job is low, and if the union does not fully internalize the cost of unemployment to outsiders, the union will push for higher wages than would be optimal for employment as a whole. Empirical work on Finnish manufacturing data has found that both insider and outsider factors play a role in wage determination, but that union power derives from the turnover costs of labour and from the ability to organize. The higher the turnover cost, the more leverage insiders have, and the less responsive wages are to the pool of unemployed workers seeking jobs. In countries with high union density such as Finland and Sweden, wage negotiations have often been conducted at a nationwide or sectoral level, and the unemployment rate tends to be higher as a result of the interest conflict between employed workers and those collecting unemployment compensation. The insider-outsider dynamic also helps explain the persistence of unemployment once it rises. Insiders who retain their jobs have no direct interest in wage moderation that would expand employment for outsiders, especially if the unemployed are not union members or are weakly attached to the labour market. The result is hysteresis: a temporary increase in unemployment becomes permanent because the wage-setting process does not adjust to reabsorb the unemployed. Finland’s long-term unemployment problem, which predates the most recent downturn, is consistent with this mechanism. The Bank of Finland has noted that structural unemployment estimates, including the NAIRU, remain elevated, and that long-term unemployment and other statistics could improve the understanding of the non-accelerating inflation rate of unemployment. Unemployment Insurance and the Membership Incentive Finnish trade unions have a direct institutional stake in the unemployment insurance system that goes beyond their role in wage bargaining. Earnings-related unemployment benefits in Finland are administered through unemployment funds, most of which are linked to trade unions. A worker must be a member of an unemployment fund to receive earnings-related benefits, and until recently, most funds were union-affiliated. This arrangement has historically been a major motivating factor in attracting new union members. At the end of 2023, there were around two million members of unemployment funds, of whom some 1.4 million belonged to trade union-linked funds. About half a million people were members of the YTK fund, which is not linked to a trade union. The connection between unemployment insurance and union membership creates a conflict of interest. Unions have an incentive to maintain a benefit system that requires fund membership, because that requirement sustains their membership base. Proposals to make earnings-related benefits available to all workers, regardless of fund membership, have faced union opposition. The Confederation of Finnish Industries initially opposed such an expansion and then changed its position in 2020, at which point unions accused it of “pulling the rug” from under them. The left-of-centre parties have traditionally been reluctant to weaken the role of unemployment funds because they feared it would weaken trade unions. This political alignment means that reform of the benefit system is constrained by union interests, even when reform might improve employment incentives. The benefit system itself creates work disincentives that contribute to unemployment. OECD analysis has found that benefit withdrawal and income taxation together produce a marginal effective tax rate around 100 percent from about two workdays a week until unemployment insurance is entirely withdrawn at four workdays a week. A person who moves from unemployment to part-time work of two to three days per week may keep almost none of the additional earnings after taxes and benefit reductions. The “cliff-edge” loss of benefits at four days of work produces a sudden jump in the average effective tax rate and a pronounced spike in the marginal effective tax rate. These incentive traps discourage the unemployed from taking part-time or short-term work, which is often the bridge back to full-time employment. The OECD concluded that while work incentives are good for up to two workdays, they are weak for additional work, and that these problems are clearly caused by the design of unemployment insurance. The net replacement rate in Finland is moderate by Nordic standards but still substantial. For a single person, the net replacement rate is 53 percent at three months and at twelve months, falling to 22 percent at twenty-four months. For a couple with two children, the replacement rate is 60 percent at three and twelve months, and 52 percent at twenty-four months. These rates are lower than Denmark’s for couples with children, but they remain high enough to reduce the urgency of job search for some claimants, particularly when combined with housing benefits and social assistance. The duration of earnings-related benefits is also long: 300 days for workers with up to three years of employment history, 400 days for those with more than three years, and 500 days for workers aged 58 or older who meet additional conditions. The 500-day entitlement for older workers functions as a bridge to retirement and reduces the job search intensity of a group that faces significant re-employment barriers. The Finnish government has begun to reform the benefit system, introducing a graduated reduction in earnings-related benefits in September 2024. The new law reduces benefits by 20 percent after 41 days and by an additional 25 percent of the initial benefit after 171 days. The government has also proposed phasing out the extended unemployment benefit for older people ahead of the statutory retirement age, the so-called “unemployment tunnel”. These reforms move in the direction of strengthening work incentives, but they have been opposed by unions and have been implemented amid significant labour unrest. Strikes, Bargaining Posture, and Investment Uncertainty The industrial relations climate in Finland during 2024 and 2025 was marked by large-scale strikes and political protest. The Orpo government’s labour market reforms, which included making it easier to dismiss employees, relaxing regulation of fixed-term contracts, reducing unemployment benefits, and limiting political strikes, provoked massive strike action by trade unions. The Central Organisation of Finnish Trade Unions, SAK, demanded a 10 percent wage increase over two years to compensate for lost purchasing power. The strikes shut down ports, disrupted rail freight and process industries, and led to a 30 percent collapse in Finnish exports at one point. The cumulative damage to the Finnish economy from strikes against government reforms was estimated at about 2 billion euros. The economic significance of these strikes extends beyond their immediate output losses. Strike activity of this magnitude signals to employers and investors that the industrial relations environment is confrontational and that wage settlements may be driven by political and organizational considerations rather than by productivity and market conditions. The Federation of Finnish Enterprises warned that strikes endangered Finland’s fragile growth, complicated the situation of companies already facing payment difficulties, and ate into the purchasing power of employees. The CEO of the federation argued that the stalemate showed the bargaining system was not working and that collective bargaining should be decentralized across companies to better account for sector-specific and company-specific differences. When firms face uncertainty about labour costs and industrial peace, they delay investment and hiring, which further weakens employment growth. The strikes also illustrate the political role that Finnish unions play. The SAK used political strikes to try to extract concessions from the government on labour market reforms. This use of industrial action for political purposes raises the cost of reform and entrenches the institutional status quo, even when that status quo is associated with poor employment outcomes. The government argued that existing labour market structures had led to poor employment outcomes, citing Finland’s high unionization rates and strong collective agreements. Employer associations viewed the centralized wage-setting system as a source of market rigidity. The unions’ response was to defend the system through industrial action, which delayed or diluted changes that might have improved employment prospects. Cross-Country Comparison and the Rigidity Index Comparative research on labour market institutions provides context for Finland’s position. A study using multiple indices of labour market rigidity found that the United States had the most unrestricted labour market, while Finland and Norway were the most rigid for most of the indices used. The study identified an “index of overall rigidity” that correlated with labour market indicators, and a separate “union factor” associated with union density, concentration, and centralization. The union factor captured activities that indirectly affect wages and employment flows, such as the power to organize strikes and represent workers in the organization of production. Finland’s high scores on these dimensions placed it among the most rigid labour markets in the advanced economies. The IMF has also noted that Finland’s wage bargaining system is less coordinated than those of some peers, reflecting less formal sectoral bargaining in recent rounds, but that wage rigidities remain high because of limited lower-level agreements and opening clauses. This combination of moderate coordination and high rigidity is important. The Calmfors-Driffill hypothesis suggests that highly centralized or highly decentralized bargaining systems can produce better employment outcomes than intermediate systems, because centralized unions internalize the inflationary and unemployment effects of their wage demands. Finland’s system has moved away from peak-level centralized bargaining without fully decentralizing to the firm level. The result is a hybrid that retains the rigidities of centralized extension while losing some of the coordinating discipline that might moderate wage demands. Research on bargaining coverage has found that high coverage is associated with higher unemployment, lower employment, and more inflation than low coverage, after controlling for union density and bargaining coordination. The study notes that bargaining coverage increases both short-term and long-term unemployment and labour supply, but has no effect on productivity growth. Finland’s coverage rate of around 89 percent places it among the high-coverage countries, and its unemployment performance is consistent with the pattern identified in this literature. The extension of collective agreements to non-union employers is a key mechanism: it spreads the monopoly effect of unions throughout the economy without the compensating productivity effects that might arise from worker-management cooperation in unionized firms. The Political Economy of Reform Resistance The persistence of high unemployment in Finland cannot be explained by institutional factors alone. It also reflects the political economy of reform. The Orpo government came to power in 2023 with a mandate to reform the labour market and create 100,000 jobs. Its reforms included making it easier to dismiss employees, relaxing fixed-term contract regulation, reducing unemployment benefits, abolishing the tax exemption for trade union membership fees, allowing non-union representatives in local bargaining, limiting political strikes, increasing penalties for participation in “illegal” strikes, and reducing the national conciliator’s power to propose sector-level wage increases. These reforms were implemented rapidly and unilaterally, without involving labour market actors in the way that the previous government had done during the COVID-19 crisis. The unions’ response was defensive and confrontational. The strikes that followed were the largest in decades and caused significant economic damage. The government remained steadfast, arguing that the reforms were necessary to improve employment outcomes. However, the LSE analysis concluded that the reforms had not delivered the promised economic benefits and had profoundly damaged Finland’s industrial relations model. This assessment raises a question about whether the reforms were well designed or whether they were implemented in a way that provoked unnecessary conflict without addressing the underlying structural problems. The government’s decision to proceed unilaterally, rather than through tripartite negotiation, may have hardened union resistance and made the reforms less effective than they might otherwise have been. At the same time, the unions’ opposition to reform has a clear institutional logic. The reforms threatened the mechanisms that sustain union membership and bargaining power. The abolition of the tax exemption for union dues, the limitation of political strikes, and the reduction of the conciliator’s power all weakened the organizational capacity of unions. The proposal to make earnings-related unemployment benefits available to non-fund members threatened the link between benefit eligibility and union membership, which is a key recruitment tool. Unions therefore had strong incentives to resist reforms regardless of their potential employment benefits. This resistance has contributed to the persistence of institutional arrangements that are associated with high unemployment. The Structural Unemployment Problem The interaction of wage rigidity, insider-oriented bargaining, benefit disincentives, and reform resistance produces structural unemployment that is resistant to cyclical recovery. The Bank of Finland has noted that structural unemployment estimates remain elevated and that long-term unemployment could provide additional information about the non-accelerating inflation rate of unemployment. Finland’s unemployment rate has not returned to the low levels seen in the 2000s, and each recession has left behind a higher floor of unemployment than the previous one. This pattern is consistent with hysteresis, in which the short-term unemployed lose skills and labour market attachment and become structurally unemployed. The insider-outsider mechanism reinforces this process. Insiders who keep their jobs during a downturn have no incentive to accept wage moderation that would create jobs for outsiders. Unions, which represent insiders, negotiate wages that protect the purchasing power of their members without fully accounting for the employment prospects of the unemployed. The result is a labour market in which the burden of adjustment falls disproportionately on outsiders, who have little voice in wage setting and weak political influence. The high share of immigrants among the unemployed and the low employment rate among immigrants, around 59.6 percent at the end of 2024, reflect this pattern. Immigrants are overrepresented among outsiders and face the full force of wage floors and benefit traps that insiders have designed to protect themselves. The benefit system amplifies this dynamic. The high marginal effective tax rates at low hours of work discourage the unemployed from taking part-time jobs that could serve as stepping stones to full-time employment. The long duration of earnings-related benefits, particularly for older workers, reduces job search intensity and allows workers to remain unemployed for extended periods. The interaction of benefits with housing allowances and social assistance creates complex eligibility rules and bureaucratic hurdles that can delay re-employment and discourage benefit recipients from taking risks. These features of the system are not accidental. They reflect political choices that unions have defended because they protect the interests of their members, who value income security and generous benefits. Reassessing the Union Role: Constraints and Counterarguments A rigorous analysis must acknowledge that union influence operates within constraints and that some outcomes attributed to unions have other causes. The Finnish economy has been hit by a series of external shocks, including the decline of Nokia and the electronics industry, the COVID-19 pandemic, the energy crisis following Russia’s invasion of Ukraine, and the downturn in construction. These shocks would have raised unemployment regardless of the labour market institutions in place. The Bank of Finland has emphasized that higher participation, rather than institutional rigidities alone, explains part of the simultaneous rise in employment and unemployment. Immigration has increased the labour force and created matching challenges that are not directly attributable to union behaviour. Employer associations also bear responsibility for the wage-setting model. The export-sector bargaining model is tightly coordinated by employers’ associations, and employers have supported centralized wage setting when it served their interests. The decision to extend collective agreements to non-signatory employers is a legal arrangement that governments have maintained, and employers have not consistently opposed it. The high coverage rate reflects a political settlement that employers have accepted, even if some employer representatives now criticize it. Blaming unions alone for wage rigidity overlooks the role of employer coordination and government policy in sustaining the system. Some research has found that the positive effect of union strength on wages and employment in Finnish manufacturing is not evidence of an efficient contract model, but rather a reflection of a negotiated equilibrium in which both sides accept the bargaining framework. This finding suggests that unions are not simply rent-seeking actors but participants in a system that has produced relatively low in-work poverty and moderate wage inequality. Finland’s in-work poverty rate is remarkably low, and the low-paid segment of the labour market has remained almost unchanged, with low-wage sectors dominated by female and migrant labour. The extension of collective agreements has prevented a race to the bottom in wages, even as it has imposed costs on employment. The normative question is whether the benefits of reduced inequality and poverty outweigh the costs of higher unemployment. That question cannot be answered on economic grounds alone.