Wage Formation in Sweden 2003

Wage Formation - Economic conditions in Sweden 2003

Although labour costs will be rising at a slackening rate in 2004-2006, even slower increases would be desirable for the national economy. An annual increase of 3.2 percent would help to speed economic recovery, increase employment and reduce the unemployment rate. Compared to the labour negotiations in 2001, this would mean a downward adjustment of negotiated settlements by an annual average of 0.7 percentage point.

At the time of the 2001 labour negotiations, the economic tendency was one of strong growth and surging employment. With the 2004 negotiations now approaching, conditions are quite different. Growth is modest, employment has stagnated and unemployment has gone up. Although demand and output will be rising more rapidly in the future, recovery will take time. Given the slow pace of recovery, the demand for labour will remain soft.

The margin for wage increases and other labour costs will be determined by the development of payroll capacity in the business sector. This factor is dependent in turn on productivity and product prices. In the long run, an investment must yield the same return in Sweden as abroad. It is estimated that the long-run trend in productivity and prices will provide a margin of 4.0 percent for increases in labour costs.

Negotiated wage increases in the business sector are expected to average 2.1 percent annually in 2004-2006, 0.3 percentage point less than after the 2001 negotiations. The hourly cost of labour in the business sector is thus calculated to increase by an average of 3.7 percent in 2004-2006, or 2.4 percentage points less than in 2001-2003.

Four Reasons for a Lower Rate of Increase

Despite the slowdown in labour costs compared to 2001-2003, an even more modest rate of increase would be appropriate from an economic point of view. There are four reasons for this conclusion:

  • A rate of increase somewhat below the one considered most probable would contribute to more rapid recovery of the economy and of employment. More modest wage increases mean that firms will demand more labour; among other effects, growth will be stimulated by a lower repo rate.
  • If the Government and Parliament implement structural reforms that increase the labour supply, the labour-market parties and their mediators will be able to settle on more moderate wage increases that help speed the adjustment of employment to the higher supply. A reduction in ill health would entail substantial gains for the economy, with benefits to wage earners as a group in the form of better health, higher earnings and lower taxes or improved public services.
  • A lasting reduction in unemployment could result if the labour-market parties and their mediators at the central, local and individual levels gave even greater consideration in practice to the economic benefits of high employment and low unemployment. It is in the interest of wage earners as a group to exercise restraint in wage demands, thus making it possible to achieve durably high employment; for instance, taxes could then be lowered and public services improved.
  • There is substantial uncertainty about such factors as the tendency of the economy and the exchange rate of the Swedish krona against the dollar. So far there are no sure signs that an economic upturn is on its way in the euro zone. If the dollar continues to weaken, cost levels in Sweden will rise further in relation to those in the US and in other countries whose currencies are linked to the dollar.

Annual Increase of 3.2 percent Appropriate for the Economy

For the reasons given above, it is the NIER's assessment that an economically appropriate rate of increase in labour costs for 2004-2006 would be 3.2 percent per year, or 0.5 percentage point less than the rate of increase considered most probable. In addition to negotiated wage hikes and wage drift, this rate of increase includes such factors as changes in negotiated and legislated collective contributions, reductions in work hours and changes in employer costs of sick leave and rehabilitation. If wage increases are thus limited, signifying a lasting improvement in the functioning of wage formation, the annual rate of GDP growth will be 0.2 percentage point higher in 2004-2010. It is estimated that the regular employment rate will then be 77.4 percent instead of 76.4 percent in 2010, compared to Parliament's target rate of 80 percent. The higher employment rate will strengthen public finances, providing a margin of SEK 12 billion for unfinanced tax cuts or reforms entailing additional expenditure.

The economically appropriate rate of increase in labour costs in 2004-2006 corresponds to an annual rise of 2.9 percent in hourly earnings, according to cyclically adjusted earnings statistics. However, the labour-market parties and their mediators are in a better position to limit the increase in labour costs at the central level than in local or individual negotiations. For this reason, the appropriate rate of increase for 2004-2006 is broken down into two components: negotiated increases averaging 1.7 percent, and wage drift accounting for the remaining 1.2 percent. This means that the negotiated settlements have been adjusted downward by an annual average of 0.7 percentage point compared to the 2001 negotiations.