Many reasons for limited wage growth in the current boom

Variables such as resource utilisation, inflation expectations and productivity growth are not sufficient to explain recent years’ weak wage growth. This year’s Wage Formation Report analyses a variety of possible explanations for how wages have moved.

In the previous economic boom, wage growth in the business sector accelerated gradually to peak at an annual rate of just over 4 per cent. In the current boom, it held below 2.5 per cent until this year. Recent years’ wage growth has been lower than can be explained by productivity growth and inflation expectations, which would suggest that it has made a positive contribution to employment.

This subdued wage growth is not a uniquely Swedish phenomenon, as wages have been unexpectedly weak in other countries too. Standard macroeconomic variables do not seem to be enough to explain the weak wage growth in Sweden. Changes in age composition and an increase in foreign-born workers have had some effect. Other explanations discussed in the report include:

• Expectations of low wage growth in key competitor countries
• Collectively agreed pay increases in 2016 and 2017 were held back by the social partners having overestimated inflation in previous years, and real wages therefore having been higher than expected
• A hidden supply of labour, partly from new EU member states, which has meant that the labour supply has been larger than indicated by standard measures of resource utilisation

About the wage formation report

The last major round of collective bargaining, in 2017, resulted mainly in three-year settlements, and so the next major round will not commence until autumn 2019. The NIER expresses no opinion on how wages, corporate earnings and employment should develop in either the short or the long term. It is up to the social partners to draw conclusions based on their preferences and analysis of the economy.