Wage Formation in Sweden 2016

Social partners can influence unemployment

The economic boom will continue in 2016-2017, and there are shortages of labour in many sectors. Divisions in the labour market are also growing, with much higher unemployment among those without the required skills and qualifications. The social partners can contribute here with measured pay settlements and minimum wages that ease entry into the labour market for groups currently excluded.

Both the labour force participation rate and the employment rate are high in Sweden relative to other countries, but unemployment and the average duration of unemployment are also high in some groups, especially immigrants and the unskilled. These groups are set to grow in the coming years, which could push up unemployment.

This issue needs to be tackled from different angles, including through wage formation and labour market policy. Now is a better time than for many years given the strong demand for labour. This can be seen partly from firms’ recruitment plans being more positive than normal, both in manufacturing and in retail and services. Unemployment is set to fall from 6.8 per cent this year to 6.3 per cent in 2018.

The social partners can contribute to favourable developments in the labour market by ensuring that wage growth does not accelerate unduly during the current economic boom. They can also help lower the thresholds for entry into the labour market by adjusting minimum wages.

The NIER’s analysis shows that wage formation is relatively flexible in relation to economic activity, with wages that adjust to regional labour market conditions. This helps reduce variations in unemployment over the business cycle.

Weak productivity growth and rising inflation

One factor for the social partners to bear in mind is that productivity growth is expected to be below the historical average in 2017-2020 at just under 1.8 per cent per year on average in the business sector. This can be compared with an average of 2.1 per cent in 1980-2015.

Another factor is profitability in the business sector, which can currently be considered normal. Inflation expectations are rising, and CPIF inflation – the rise in the consumer price index with a fixed interest rate – will hit 2 per cent in 2018.

Employers and employees both have much to gain from inflation being returned to the target level. It is important for the social partners to have faith in the inflation target and to reach settlements that are compatible with it, as this reduces the risk of the Riksbank being forced to pursue policies that create unnecessary variations in unemployment.

About the report

The report Wage Formation in Sweden 2016 presents the economic background to wage formation and the coming round of collective bargaining. The aim of the report is to assist the social partners and the National Mediation Office with high-quality analysis.

The key factor for wage formation is not wages but labour costs, which also include other costs, in particular employers´ social security contributions. The NIER expresses no opinion on how wages and salaries should develop.