Wage Formation in Sweden 2014

A divided labour market — challenge for the social partners

The Swedish labour market contains a divide between those who are firmly established and those who are not.  Collective agreements take little account of the less well established. To address these structural challenges, both labour market policy and the social partners need to take vulnerable groups into account.

The Swedish labour market is functioning well at an aggregate level. Labour market participation is high among both women and men, and wage formation has generally been responsible. At the same time, unemployment is high, and there are major structural challenges. For example, there are groups with a markedly smaller chance of finding work, such as those with limited education and those born abroad. These groups struggle to get jobs with minimum wages at their current levels.

Sweden's collectively agreed minimum wages are high in relation to both other wages and other countries. The wage distribution is also compressed, with only a small difference between the lowest wage and the average wage.

A compressed wage distribution can arise if productivity is evenly distributed in the labour force. Recent developments indicate, however, that productivity differences have increased, presenting wage formation and labour market policy with tough new challenges.

To bridge the gap perceived by employers between the wages warranted by the unemployed's productivity and the wages required by collective agreements, the government can issue wage subsidies. In recent years, such subsidies have mainly reached employees in industries with low wages.

They can therefore be assumed to support those who struggle to find work, and to help create jobs, while also making labour in more productive industries relatively more expensive.

The social partners could contribute more clearly to reducing this divide by taking more account of vulnerable groups. This can be done in various ways, for example by adjusting wage levels and/or including training contracts in the agreements they reach. At the same time, Sweden's relatively generous welfare system puts a limit on how far minimum wages can be lowered.

Some groups overrepresented among the lowest paid

Women, the young, those with limited education and those born abroad are overrepresented among the lowest paid in Sweden, defined as the lowest-paid decile. A person who has a low wage one year will often have a low wage the next year, but the probability of remaining in the lowest-paid category decreases with time.

Around a third are still in this category after five years. Older people, those with limited education and those born abroad are most likely to remain among the lowest paid. Men and those born in Sweden tend to climb higher up the wage distribution, as do those who change job.