Pay settlements bring stability, but major challenges remain

Given the weak economic outlook, the year’s central pay settlements were in line with previous patterns. However, there are also some worrying signs in the labour market. The average period of unemployment will soon be up at the levels of the early 1990s crisis. The long time to fill vacancies despite high unemployment points to matching problems which could prevent a permanent decrease in unemployment. In addition, the long-term unemployed do not seem to be having a moderating effect on wage formation. Such are the conclusions of the latest Report on Wage Formation in Sweden from the National Institute of Economic Research (NIER), published today.

This year’s three-year central pay settlements entail an average annual increase in labour costs of 2.3 per cent. Taking account of the weak economy, high unemployment and weak productivity growth, this is in line with previous settlements. The engineering settlement set the tone for the entire labour market, and the intentions of the Industrial Cooperation and Negotiation Agreement between the social parties were fulfilled. The three-year central settlements bring stability, and the NIER predicts that total wage growth including local settlements will be below 3 per cent each year from 2013 to 2015. This will provide scope for firms’ current rather weak profitability to improve as the economy picks up.

However, the labour market faces major challenges. A larger share of those joining the labour force lack the qualifications that firms require, and a higher number of long-term unemployed means a larger group is less attractive to employers, who tend to be cautious about recruiting those who have been out of work for long periods. Both of these factors are contributing to less efficient matching. There are also signs that the long-term unemployed are not having a moderating effect on wage formation. Taken together, there is a risk of the above preventing a permanent decrease in unemployment. These problems may furthermore mean that the central bank will see risks to inflation even at relatively high levels of unemployment and so pursue less expansionary monetary policy. Continued political action is therefore needed to increase the chances of the long-term unemployed and vulnerable groups gaining a foothold in the labour market. Such action is most effective if it enhances the employability of those who have the greatest difficulty finding work.

For further information, please contact:

Göran Hjelm, Head of Macroeconomic Research, +46 8 453 5926
Sarah Hegardt Grant, Head of Communications, +46 8 453 5911

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