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This article has a dual purpose. Firstly, it presents the nature and the recent development of migration to and from the Åland Islands by means of a probit model. Secondly, the model is estimated in such a fashion that its results are usable in a simulation model. The analysis is conducted by using individual data from longitudinal population censuses, which enables the use of individual-specific characteristics and a panel data specification in the analysis. The results lend support to Harris-Todaro –type expected wage hypothesis, as well to several suggestions of the human capital theory of migration. The results even support an insider advantage hypothesis by showing that staying in Åland is state and duration dependent, i.e. those who already live in Åland, have stayed longer, and are native Ålanders are more probable stayers. However, the results also reveal that there is a time trend in the tendency for native Ålanders to move away from Åland at an increasing rate, whereas the probability of Finnish-born migrants to stay in Åland has slightly risen during the 1990s. The author suggests that this development may be due to a growing internalisation, e.g. through the EU membership, as well as due to a failure to adjust the education policy to changing demand of language skills.

Åland Islands, a small Finnish island region with its own governmental powers, is rapidly aging together with its neighboring regions in mainland Finland and Sweden. The demographic momentum affects its labor market in various ways. Aging will keep exits from labor market high in the near future while the total size of labor force will barely grow. Rising old-age dependency increases the demand for social and health services which have been mainly provided by the public sector, which in turn strain the public finances. However, positive net migration boosted by favorable employment prospects has helped keep the population growth on a healthy annual rate of 0.5 to 1 percent. The economic development prospects of Åland are analyzed by means of an imperfect competition, recursive-dynamic computable general equilibrium model. The future changes are gauged by means of three scenarios: Base, Growth and Deceleration with varying assumptions regarding the competitive pressures, structure of labor demand, productivity and export demand growth among other things. Even industry-specific assumptions are varied, especially regarding shipping, the main industry of Åland. In addition to industrial dimension, the labor market is divided into two levels by educational attainment. However, additional disaggregation of labor supply and demand is carried out outside the behavioral core of the model: labor demand and supply are disaggregated according to sex, age, field of education and occupational grouping. The contribution of migration and education to the disaggregate labor supply are explicitly modeled with the help of detailed statistics on education and migration flows during the past decade. Hence, a rich picture of recent trends affecting the local labor market can be obtained. In our scenarios, we either assume that recent patterns will prevail or make assumptions on coming changes in the structure of labor demand. We show that exits from the labor market represent a major part of the recruiting need rather than changes in aggregate labor demand. We show that female workers with lower educational attainment (up to secondary level education) meet a decreasing recruitment need, whereas demand for higher educated, predominantly female labor seems to grow substantially. In contrast, recruiting need within occupations with predominantly male workers seems to be slowly decreasing. In the future, it may be necessary for men to be employed within traditionally female-dominated occupations, as well as women may have to make sure to acquire sufficiently high education, since occupations with rather low educational content risk disappearing. These changes require that education provided in Åland is flexible, strategically focused and coordinated with other policy areas, e.g. with industrial policies, housing and migration issues.

In this study we evaluate the regional effects of ageing and balancing of fiscal deficits by using a dynamic, regional AGE model for Finnish Economy. It uses MONASH-type dynamics. To study the effects of ageing, we make use of econometric results and long term anticipation results conducted by the European Commission for the parameter values determining the population-driven demand for public services. Public demand for age-dependent services is driven by a general growth trend, and by age-group specific parameters. Thus, foreseen changes in the age composition of the Finnish population is reflected the composition and volume of public demand. The study is related to an on-going evaluation of the financial relations especially between the central government and local authorities. The present study introduces also a sub-regional analysis for one of the twenty regions of Finland, the Central Finland region. For the demographic development, we apply the population forecast of the Statistics Finland. Population is kept exogenous in our analysis. State transfers to municipalities include a kind of Robin Hood-element that treats high- and low-income municipalities asymmetrically. In order to improve our description of the state transfers to municipalities, we introduced individual municipalities within each region for the purposes of the state transfer calculus. Transfers to municipalities are traced from statistics and preliminary calculations between 2004 and 2011. From that on, the development of income and population of each municipality is assumed to coincide with the development of the greater region it belongs to. However, the historical status of the municipality within the income distribution is reflected in the amount of transfers it gets during the simulation period. In addition to rules-based transfers to municipalities, around a third of the transfers are based on more ad-hoc policy decisions. This part of the transfers is our policy variable in the analysis. According to our simulation results, constraining the fiscal deficits of the public sector has considerable effects on the GDP growth. The size of effects varies between our alternative ways to curb the deficits: through state-level or municipal income taxation. The negative effects on GDP are greater if the public deficits are financed through higher state income taxes and transfers to the local administration than through municipal income taxation. However, using municipal taxation increases regional differences. As in several studies using new economic theory framework, we find a trade-off between efficiency and cohesion. Future improvements of our model will include making the demographic development endogenous through migration. In addition, commuting between regions may be taken into account explicitly.

Regional, structural change is currently among the greatest challenges facing the public sector in many EU countries at the moment. 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. 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. 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. 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 a dynamic, regional, AGE model. 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.