Swedish and Finnish Catch-Up Growth : Factor Price and Productivity Convergence between Finland and Sweden 1950-2000

The aim of this thesis is to gain improved understanding of the income convergence between Finland and Sweden 1950-2000 with a focus on catch-up growth, wage formation, productivity growth, migration and structural change in a setting of structural and institutional differences on the factor markets. Earlier studies of Finnish and Swedish convergence has overlooked the international perspective and therefore missed the general European – US convergence during the period. The results shows that Sweden converged to 80 percent of the US productivity level in the early 1970s and is following US productivity growth thereafter. The Finnish catch-up growth towards the US continues until the beginning of the 1990s. This corresponds well with the convergence of labour productivity between Finland and Sweden which took place around 1970 and the gap was closed in the beginning of the 1990s. The convergence between the countries can therefore be understood from the catch-up growth against the USA and if the countries growth rates are plotted against their income level 1950 one can see that the two countries are well in line with other West European countries. This means that either country is deviating in a positive or negative direction during the period. This is to some extent in contrast with the view that has been put forward in the countries national economic historical writing where Finland is often since as a growth miracle while Sweden especially since 1970s is seen as a case of falling behind. In order to explain the convergence scenario structural and institutional differences on the countries factor markets is examined. One aspect concerns Barry Eichengreens hypothesis regarding wage moderation as cause of the Post-War European convergence. The wage setting system in Sweden has been put forward by Eichengreen as a raw model for the type of institutional setting that would promote wage moderation. One central finding in this thesis is that we can not find support for wage moderation for Sweden as the labour share of the national income rises during the phase of Swedish catch-up growth while the labour income share was constant and periodically falling in Finland. In contrast with the view of the Finnish low interest rate policy during the post- the actual real interest rate was lower in Sweden. There has also been a significant migration flow from Finland to Sweden especially from the 1950s to mid 1970s. In the thesis we find a positive and significant relationship between wage and productivity differences on industry level between the countries. This supports the conclusion that migration was leading towards factor price convergence between the countries. The shift-share analysis shows that there were higher gains for the productivity growth in reallocating labour on the Finnish labour market than in Sweden. This could be explained by the higher share of the labour in the agricultural sector as predicted by Peter Temin.