@article{Honkatukia:332238,
      recid = {332238},
      author = {Honkatukia, Juha and Ahokas, Jussi and Kinnunen, Jouko and  Simola, Antti},
      title = {Coping with Structural Change – the Regional Effects of  Decentralisation in Finland},
      address = {2012},
      pages = {10},
      year = {2012},
      note = {Presented at the 15th Annual Conference on Global Economic  Analysis, Geneva, Switzerland},
      abstract = {Regional, structural change is currently among the  greatest challenges facing the public sector in many EU  countries. Often, structural change is driven not only by  economic factors, but also by demography. In countries like  Finland, where the public sectors have a large role in  providing educational, health and social services,  structural change rapidly becomes a fiscal problem.  Demography is directly linked to the demand for public  services and to the potential growth of regional economies.  On the one hand, ageing increases the demand for  age-related services; on the other, it decreases labour  supply, limiting the growth potential of many regions. Many  regions are also heavily affected by changes within a  specific industry. The fiscal arsenal for coping with the  implications structural change is limited. In Finland, the  public sector consists of three main subsectors: the  central (state) government, municipalities and the social  security funds. Both the central government and  municipalities collect income taxes and have various other  tax-like instruments, whereas the social security sectors’  revenue consists mainly of employers’ and employees’  payments. The state’s main tools for regional policies  consist of both direct subsidies to the regions, as well as  a mechanism reallocating tax revenues between poor and rich  municipalities. However, the welfare costs of funding  subsidies to poorer regions may be considerable. Thus,  instruments not involving changes in spending have been  preferred. Here, we consider the relocation of certain  functions of the central government to the periphery –  decentralization – as an instrument for coping with  regional structural change, as it does not in principle  involve direct changes in spending. An improvement in  regional municipal finances should also reduce the  transfers received from the central government. This study  aims at evaluating the effects of decentralization on  regional development in recent years and in the near  future. The study is related to an on-going evaluation of  the financial relations between the central government and  local authorities. Decentralization has in practice meant  the relocation of central government jobs; for example, the  ministry of the interior relocated some of its jobs from  the capital to northernmost Finland in 2006. We can cover  the relocation of jobs quite accurately, and we also have  the data of the number of employees that actually relocated  with the jobs. Moreover, we are able to calculate state  transfers to municipalities at the level of individual  municipalities within each region. However, to capture all  the implications of relocation to regional economies, we  extend the model to take into account the average size and  age profile of the families of those relocating. In this  way, we obtain an estimate on the effects of  decentralization on demand for public services locally, as  well as on the overall effect on local population, labour  supply and state, municipal and social security funds’  budget balances. We analyse decentralization at the level  of the twenty regions of Finland, using VERM, a dynamic,  regional, AGE model of the Finnish economy. The model is  based on the well-known TERM model, but has been extended  in several aspects. First, we use very detailed data on the  outlays and incomes of the central government, the  municipal level, and social security funds to realistically  study the provision and financing of public services and  social security transfers and pensions; Secondly, we use  occupational data to study the demand for labour especially  in service provision; Thirdly, the model is closed and uses  MONASH-type dynamics. We find that while decentralisation  has been beneficial for many regions by creating new jobs  and increasing municipal tax revenues, it has also entailed  double efforts since there is only limited obligation for  the employees to relocate with the jobs. Interestingly,  however, this effect is partly off-set by a reduction of  transfers to municipalities. The Study is organised as  follows. Section two describes the model used, while  section three explains the computation of the transfers.  Section four describes decentralisation by government  function. Section five shows our simulation results, and  section six concludes.},
      url = {http://ageconsearch.umn.edu/record/332238},
}