Wage Formation in Sweden 2012

Smaller pay increases and lower interest rates can mean more jobs

The next few years will be marked by high unemployment and low productivity growth in the business sector. Pay increases at the central and local levels are expected to average 3 percent per year in 2013—2015, and unemployment will decrease to 7 percent, though not until 2015. Economic recovery could proceed faster if more limited pay increases were backed up by a lower policy interest rate. One factor making it harder to reduce unemployment more quickly, however, is that firms face growing problems in finding personnel with the right qualifications. This is the NIER´s assessment in the Report on Wage Formation.

The euro crisis is speeding up the process of structural change, in which exporting industries are losing market share and profits, whereas domestically focused firms are experiencing stronger demand and rising profitability. Layoff notices are on the rise, and there is a risk that many jobs will not come back at the firms where they are disappearing.

New statistics and new indicators show that the recession will deepen in the near future. Unemployment will go up to approximately 8 percent next year and remain high in the years to follow. In addition, the after-effects of the financial crisis will cause productivity growth to remain weak.

Faster economic recovery if parties agree on lower rate of pay increases

If historical patterns are followed, this development is consistent with pay increases at the central and local level totalling 3 percent per year in 2013—2015. On the other hand, if the labour market parties were to break out of the historical pattern and negotiate a lower rate of pay increases, economic recovery would proceed faster, provided the Riksbank at the same time lowered the policy interest rate further.

The greater the transparency and credibility of the Riksbank in its operations, the more easily the parties can anticipate its actions, and thus the more likely they will be to take the economy into account in wage formation. For the Riksbank to lower the policy interest rate, it is also necessary that the parties provide a credible indication that a lower rate of pay increases will result.

Deteriorating matching efficiency in the labour market in recent years

Recent calculations show clear signs that matching efficiency has deteriorated in recent years. One possible explanation is that in the current prolonged and severe recession, the unfilled jobs and the qualifications of the unemployed do not fit together as well as before. At the same time, political reforms have encouraged greater participation in the labour force, where comparatively many are having difficulty in finding work and are quickly consigned to the ranks of the unemployed. Better matching efficiency is necessary if unemployment is to decrease appreciably in the period ahead. For this purpose political action may be required.

Pay gap between genders decreasing slowly

Pay differences between women and men are due in large measure to the uneven distribution of the respective genders over different industries and sectors of the labour market. Since factors like occupation and field of education are slow to change, the pay gap will probably remain for a long time.

Although differences in pay have decreased on an overall basis, they are still greatest at the highest pay levels. This means that the unexplained earnings gap increases with higher incomes. By international comparison, the so-called glass ceiling effect is relatively substantial in Sweden and is present in both private and public sectors.