Wage Formation in Sweden 2011

Possible to reach an unemployment rate of 5 percent

An unemployment rate close to the low levels of the 1980's can be achieved. For an unemployment rate of 5 percent to last, however, earnings must not increase more than 3.1 percent annually in 2012—2014.

Two central questions facing the Swedish economy are how long employment can continue rising, and how far unemployment can go down without leading to increases in earnings and prices above a level compatible with the Riksbank's inflation target. For a permanent reduction of unemployment to 5 percent, earnings during the three-year period 2012-2014 must increase by no more than 3.1 percent per year on average.

Once the lower rate of equilibrium unemployment has been reached, earnings can go up by 3.7 percent per year in 2015-2020. The uncertainty in these calculations is considerable, but they represent the NIER's best assessment.

Higher disposable income with more modest increases in earnings

Despite an initially lower rate of increase in earnings, 5-percent unemployment means a higher dispos-able income for wage earners. In addition, more tax revenue and less unemployment-related expenditure will leave a margin that can be used for tax cuts, increases in transfer payments or general government consumption. If this margin is made available to households, they will have more money left over to spend during the period 2012—2014.

Tax credit on earned income may initially tend to limit earnings

The NIER's analysis suggests that growth in earnings will initially be slowed somewhat by the tax credit on earned income. Thanks to the lower tax imposed, however, after-tax earnings will still increase; as a percentage this effect will be greatest for those with low pay. In the long run an increased labour supply will be matched by higher demand since firms that find labour more easily will invest more. This will create a potential for higher labour productivity and thus stronger growth in earnings later on.

Higher propotion of women managers reduces the earnings gap between genders

The NIER has analyzed the earnings gap between female and male managers. The analysis suggests that a higher proportion of women in managerial positions has a beneficial effect on the relative earnings of women.