Wage formation can boost employment

The Swedish economy is in a slowdown phase, and unemployment has risen sharply in recent months. Profitability in the business sector is currently close to the historical average. In manufacturing, profitability is likely to fall as export growth and business conditions deteriorate. The social partners can help keep unemployment down by showing wage restraint. However, further subdued wage growth may mean that very low interest rates continue to be needed to meet the 2 per cent inflation target.

The NIER’s calculations show what rate of wage growth is consistent in the longer term with the inflation target being met. These calculations build on a number of simplified assumptions, most critically for productivity, as this affects what wages firms can afford without needing to raise prices. Productivity growth has been low in recent years and is forecast to be around 1.3 per cent in the business sector over the next few years. If this lower productivity growth were to persist in the longer term, wage growth of 3.0 per cent would be consistent with the inflation target. Were productivity growth instead to return to its higher historical average, wage growth of 3.5 per cent would be consistent with the inflation target.

Another way for the social partners to contribute to lower unemployment, aside from negotiating generally low wage growth, is to encourage lower minimum wages. However, it is possible that lower minimum wages would also put pressure on wages for those already in work in some industries. This risk must, however, be weighed against the economic and social costs arising if wage formation makes it harder for significant groups in the labour market to find work.

About the wage formation report

The purpose of the report is to present the economic preconditions for the wage formation and so assist the social partners and the National Mediation Office.