Lower equilibrium unemployment after the 2007 pay negotiations

Despite a strong labour market, pay increases after the 2007 round of collective bargaining have been lower than expected. The low rate of wage increases suggests that wage formation, from the standpoint of the national economy, has functioned better than before. The NIER has reduced its estimate of the equilibrium unemployment rate, from 6.2 percent to 5.7 percent.

The margin for pay increases in the 2010 negotiations will be limited by weak structural productivity growth, high unemployment and a changed operational inflation target which leads to lower inflation. For the equilibrium unemployment rate to remain at the new lower level, the current assessment is that the 2010 round of bargaining should result in considerably smaller pay increases than the 2007 negotiations.

Equilibrium unemployment rate reduced from 6.2 percent to 5.7 percent

Pay increases in 2007 and the first half of 2008 have been less than expected by the NIER in 2007. Hourly earnings have risen by an average of 3.7 percent in 2007 and 2008, leading to a downward revision of the earnings forecast by an average of 0.8 percentage point per year compared to the Report on Wage Formation for 2007. The NIER´s assessment is that the low rate of increase in earnings and labour costs in 2007 and the first half of 2008 has been due in part to better-functioning and more responsible wage formation. The NIER has therefore lowered its estimate of equilibrium unemployment, from 6.2 percent to 5.7 percent of the labour force.

Table: Pay Increases according to Collective Agreements and Final Pay Increase Outcome, According to Short-Term Wage and Salary Statistics

Average per year, percent

Note: Agreements with no specified rate of wage increases are weighted in the average centrally negotiated pay increases as negotiated pay increases of zero.
Source: National Mediation Office and NIER.

The 2110 pay negotiations - a challenge

The NIER´s preliminary assessment for 2010 is that the negotiations held then must result in considerably lower pay increases than the 2007 bargaining round if the equilibrium unemployment rate is to be kept below 6 percent. The reason is partly that the 2010 negotiations will probably take place in a contractionary economy and partly that the structural increase in labour costs (the rate of increase in labour costs when the economy is in cyclical balance) has been revised downward.

Contractionary Swedish Economy in 2009 and 2010

In contrast to economic conditions during the previous round of bargaining, several cyclical factors will limit the margin for pay increases. Negative productivity growth in 2007 and 2008 will contribute to substantially higher labour costs per unit of output, with a negative effect on profits. Both internationally and in Sweden, a recession is expected in 2009 and 2010. The GDP growth forecast for 2009 is close to zero, and unemployment in 2010 is anticipated to considerably exceed equilibrium rate.

Reduced Productivity Growth and a Changed Operational Inflation Target Imply Smaller Structural Increase in Labour Costs

The structural increase in labour costs is forecast to be 3.5 percent for the years 2010-2012, corresponding to an increase of roughly 3.3 percent in hourly earnings. In the Report on Wage Formation for 2007, the structural rate of increase in labour costs in 2007-2015 was estimated at 4.4 percent. One reason for the downward revision is the expectation of more limited structural growth in productivity, based partly on analysis of the low actual growth of productivity in the recent years. Another reason is that the Riksbank has changed its way of applying the operational inflation target; as a result, medium-term CPI inflation is 0.3 percentage point lower than with the target as previously applied.

Given the recession and high unemployment in 2010, the increase in labour costs that ultimately results will have to be considerably less than the structural rate of increase if equilibrium unemployment is to be kept below 6 percent in the period ahead.

Table: Structural Growth in the Business Sector

Average annual increase, percent

Note: The respective alternatives represent slower and faster recovery of productivity growth than in the main scenario.
Source: NIER.