2007-11-21

Wage Formation in Sweden 2007

Wage bargaining round not helping to push back unemployment

The 2007 wage bargaining round cover some 3 million wage-earners, and almost all of them have now had their collective bargaining agreements renegotiated. The centrally negotiated wage increases were substantially higher than in 2004—2006, the previous contract period. Together with a strong labour market, this means that wages will be rising rapidly by average of 4.6 percent in 2007-2009, the period covered by the new contracts.

The NIER's analysis shows that the parties have assumed roughly the same degree of responsibility for the general economy as in latest recent rounds of collective bargaining. Consequently, the current downward tendency of unemployment will probably not last, and the high rate of wage increases will not in the long run be compatible with the Riksbank's inflation target.

The 2007 labour negotiations were held in a cyclical phase where resource utilization on the labour market was shifting from balance to a slightly strained position. The tighter the labour market, the stronger the bargaining position of wage-earners and their representative organizations, as the number of vacancies is high in relation to the number of unemployed job seekers. For this reason, a tight labour market is normally associated with high wage increases. The outcome of the 2007 bargaining round, in conjunction with a tight labour market in 2007—2009, will mean a clear upward shift in the rate of wage increases. Hourly earnings in the business sector are expected to increase by 4.3 percent in 2007, 4.7 percent in 2008 and 4.8 percent in 2009 — considerably more than in the previous contract period of 2004-2006, when wages rose by an average of 3.1 percent. The difference between centrally negotiated wage increases and the increases that ultimately result is expected to be greater than in 2004—2006. In the business sector the so-called residual item (wage drift) is forecast to average 1.2 percent per year in the period 2007-2009, compared to 1.0 percent during the previous contract period.

Centrally Negotiated and Final Increases in Hourly Earnings

Percent

 

Agreement 01–03

Result 01–03

Agreement 04–06

Result 04–06

Agreement 07–09

Forecast 07–09

Manufacturing

2.4

3.7

2.0

3.1

3.2

4.4

Construction

2.6

4.1

2.3

3.0

3.2

5.0

Services

2.7

3.8

2.1

3.1

3.8

4.6

Business sector

2.6

3.8

2.1

3.1

3.4

4.6

Local govt.

2.3

4.4

1.9

3.4

4.2

4.5

Central govt.

1.8

4.2

1.6

3.2

*

4.1

Total

2.5

4.0

2.0

3.2

3.3

4.6

 

With no Change in Degree of Responsibility Taken, Equilibrium Unemployment will Exceed 6 Percent


By assuming a varying degree of responsibility for the general economy, the labour market parties can influence employment and unemployment in the Swedish economy. The outcome of the 2007 negotiations means that the responsibility taken is virtually unchanged compared to the two most recent rounds of collective bargaining. As a consequence, the current downward tendency of unemployment will probably not last. After a strong economy in 2007-2009, unemployment is expected to return after a time to a level somewhat above 6 percent (according to the new ILO definition). This is the NIER´s assessment of the equilibrium unemployment rate, that is, the unemployment rate compatible with the Riksbank's inflation target. There is even an upside risk in regard to the level of equilibrium unemployment.

If wages instead had increased by an average of about 4 percent per year during the 2007—2009 contract period, the unemployment rate could go down almost to 5 percent and stay there, equivalent to nearly 50 000 fewer individuals without a job.

Assumption of Responsibility and Equilibrium Unemployment Rate

 

Higher degree of responsibility

Unchanged degree of responsibility

Lower degree of responsibility

Forecast 2007-2009

Hourly earnings

3.9

4.5

5.1

4.6

Cost of labour

4.2

4.8

5.4

4.9

Equilibrium unem-ployment rate (ILO)

5.2

6.2

7.2

6.2

Higher Minimum Wages Reduce Differences in Earnings But May Have Negative Effects on Empoyment


Employment can also be affected by the design of collective bargaining agreements. One feature of the 2007 negotiations was that minimum wages heavily impacted certain low-wage industries. The principal effect of raising minimum wages is to put upward pressure on the wage structure from beneath. Swedish minimum wages are already high by international standards, and the higher minimum wages in this year´s round of bargaining will have certain negative effects on employment. On the other hand, the design of many collective bargaining agreements in the past 10 years has permitted greater local flexibility in wages than before, thus enhancing the employment capacity of the business sector.

Risks: More Rapid Economic Downturn, Weak Growth in Productivity


The collective bargaining agreements reached are based on expectations of a vigorous economy and healthy growth in productivity. If the development of the economy shows less strength, the high level of negotiated wage settlements will negatively affect employment. An international economic decline, leading to a weaker Swedish economy, would reduce demand for labour in the business sector. This would curtail employment and increase unemployment. With the economy in this state, the wage increases recently negotiated could prove excessive, further reducing the willingness of firms to employ personnel. Another risk scenario would unfold if the weak productivity growth in 2007 were to last throughout the contract period. If developments take this course, the Swedish economy could face the problems of both a weak labour market and higher inflationary pressure.

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