2006-09-20

Wage Formation in Sweden 2006

Responsible wage formation in 2007-2009 means higher employment, lower unemployment and higher incomes

The approaching round of pay negotiations, covering 80 percent of all wage-earners, will significantly affect the Swedish economy for a long time to come. The NIER has analyzed how different pay bargaining outcomes would impact unemployment and employment. One of these alternatives shows that the parties and their mediators can permanently reduce unemployment and increase employment. In this alternative, the incomes of wage-earners are higher as well.

The NIER has analyzed how various wage outcomes in the impending labour negotiations would affect unemployment and employment. Here we illustrate two of these outcomes, designated the low and high alternatives. The figures presented are for the average wage increases in the business sector. As before, wage increases of course are assumed to vary among different industries, firms, occupations and individuals.

In the low alternative the parties show a substantial degree of macroeconomic responsibility through an average annual wage increase of 3.5 percent in 2007-2009. Employment rises strongly, nearly reaching the employment target of 80 percent. Unemployment shrinks permanently below 4 percent. The parties thus take greater responsibility for the overall economy than in previous labour negotiations. In this alternative, despite a much stronger labour market, the rate of wage increases is only 0.3 percentage points higher than in 2004-2006.

In the high alternative the parties take less macroeconomic responsibility for the general economy, and wage increases average 4.7 percent per year in 2007- 2009. Inthis alternative the unemployment rate rises to 5.7 percent. The upswing in employment ceases by 2008, and the regular employment rate drops to 76.5 percent.

From 2010 on, wages increase at the same rate in the two alternatives, as long-term wage growth is largely determined by the Riksbank´s inflation target and the growth in productivity. In the low alternative, the temporary restraint of the parties in regard to wage increases leads to permanent reduction of unemployment by 93 000 persons compared to the high alternative. Employment in the low alternative is higher by a full 140 000 persons, as more seek to enter the labour market when it is easier to find a job.

Restraint in 2007-2009 will give Wage Earners Higher Incomes in the Long run


In the short run, wages increase somewhat more slowly in the low alternative. But in even inflation is lower in that alternative, and with higher employment there is more tax revenue and less expenditure on items like unemployment compensation. The improvement in public finances is passed back to households through lower taxes. The real disposable income of wage earners as a group is thus higher from 2009 onwards thanks to the restraint shown in 2007-2009.

In the longer term, the indirect effects in the form of higher employment and lower taxes are even greater. In 2015 wage earners as a group receive 2.5 percent more in real disposable income in the low alternative than in the high one. Real disposable income per person employed thus averages about SEK 7500 more in2015 inthe low alternative.

Table: Economic Effects of Action by the Parties


Percentage change, average per year

 

2007–2009

 

2010–2015

   

Action by the parties:

Low alternative

High alternative

Low alternative

High alternative

  

Hourly earnings(1)

3.5

4.7

4.1

4.1

  

Cost of labour(2)

3.8

5.0

4.4

4.4

  

Economic effects:

      

Unemployment rate

3.8

5.0

3.7

5.7

  

Regular employment rate (3)

79.7

77.7

79.5

76.5

  

Real disposable income(4)

2.5

2.4

2.4

2.1

  

GDP, constant prices

3.0

2.4

2.2

2.0

  

(1) Hourly earnings according to Short-Term Wage and Salary Statistics. (2) Cost of labour according to National Accounts, excluding the pension-premium rebate. (3) Percent, proportion of population aged 20-64 with employment, excluding participants in labour market programmes. (4) Refers to wage earners as a group. Deflated by the household consumption deflator. Source: NIER.

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