The Swedish third way: an assessment of the performance and validity of the Rehn–Meidner model

8/12/2019 The Swedish third way: an assessment of the performance and validity of the RehnMeidner model

1/27

The Swedish third way: an assessmentof the performance and validity of theRehnMeidner model

Lennart Erixon*

This paper analyses the functioning of the RehnMeidner model in Sweden and the

validity of the models underlying theory. Both sceptics and friends of the Swedishmodel have exaggerated the effects of active labour market policy and solidaritywage policy on employment, inflation and growth. However, these policies havecontributed to the reduction of hysteresis effects and wage differentials in Sweden.Furthermore, Swedish experiences confirm the RehnMeidner view that positivedemand shocks and expansionary macroeconomic policies make it difficult tocombine full employment with price stability, economic growth and equity even ifcentral wage negotiations are coordinated and trade unions willingly accept wagerestraint.

Key words: RehnMeidner model, Wage policy of solidarity, Labour market policy,Phillips curve, Productivity growth

JEL classifications: E31, E63, J31, O11

1. Introduction

During the early post-war years, two Swedish trade-union economists presented a unique

economic and wage policy programme, the RehnMeidner model, aimed at combining full

employment and fair wages with low inflation and high economic growth.1 Rudolf Meidner

was then the head of the Economics Research Department of the LO (The Swedish

Confederation of Trade Unions, The Swedish TUC) and Gosta Rehn was the depart-

ments leading macroeconomist. The RehnMeidner (R-M) model recommends a re-

strictive macroeconomic policyprincipally indirect taxationtogether with a wage policyof solidarity and an active labour market policy. Rehn and Meidner did not invent an active

Manuscript received 17 November 2006; final version received 20 October 2007.Address for correspondence: Department of Economics, Stockholm University, 106 91 Stockholm, Sweden;

email: [email protected]

* Stockholm University. Numerous social researchers have made constructive comments on earlierversions, not least the late Gosta Rehn and Rudolf Meidner and the participants in a Nordic network oneconomic policy with Lars Mjset, Oslo University, as coordinator. In particular, I must mention the valuablecomments on the last draft by Eva Skult, Birger and Erika Viklund. A longer version of the paper, includinga formalisation of the wage and productivity functions in the RehnMeidner model, can be acquired from theauthor.

1

See Meidner and Rehn et al., 1953 [1951]; Rehn, 1952A [1948], 1952B [1950], 1969, 1982, 1987;Hansen and Rehn, 1956; Meidner, 1952 [1948], 1969; Lundberg, 1985; Erixon, 2000, 2001, 2004 [2002],2005.

Cambridge Journal of Economics2008,32, 367393doi:10.1093/cje/bem051Advance Access publication 6 December, 2007

The Author 2007. Published by Oxford University Press on behalf of the Cambridge Political Economy Society.

All rights reserved.

atUniversityofMassachusetts/AmherstonDecember23,2011

http://cje.oxfordjournals.org/

Downloadedfrom
http://cje.oxfordjournals.org/http://cje.oxfordjournals.org/http://cje.oxfordjournals.org/http://cje.oxfordjournals.org/http://cje.oxfordjournals.org/http://cje.oxfordjournals.org/http://cje.oxfordjournals.org/http://cje.oxfordjournals.org/http://cje.oxfordjournals.org/http://cje.oxfordjournals.org/http://cje.oxfordjournals.org/http://cje.oxfordjournals.org/http://cje.oxfordjournals.org/http://cje.oxfordjournals.org/http://cje.oxfordjournals.org/http://cje.oxfordjournals.org/http://cje.oxfordjournals.org/http://cje.oxfordjournals.org/http://cje.oxfordjournals.org/http://cje.oxfordjournals.org/http://cje.oxfordjournals.org/http://cje.oxfordjournals.org/http://cje.oxfordjournals.org/http://cje.oxfordjournals.org/http://cje.oxfordjournals.org/http://cje.oxfordjournals.org/http://cje.oxfordjournals.org/http://cje.oxfordjournals.org/http://cje.oxfordjournals.org/http://cje.oxfordjournals.org/http://cje.oxfordjournals.org/http://cje.oxfordjournals.org/


2/27

labour market policy or a wage policy of solidarity. However, these policies were parts of

a strategy to satisfy all four objectives of post-war economic policy. Furthermore, it was

easier for representatives of trade unions and Social Democratic governments in Sweden to

support and win acceptance for a wage policy of solidarity and mobility-stimulating labour

market policy if they could provide good arguments for these policies leading to higheconomic growth and modest inflation. Each mean in the R-M model had more than one

purpose and also the intent of making other means more effective. This interaction makes

it difficult to selectively reject parts of the R-M model. For example, a wage policy of

solidarity must be backed up by both an active labour market policy and a restrictive

macroeconomic policy. Both adherents and critics of the Swedish model have overlooked

the comprehensive and coherent nature of the R-M policy programme.

The aim of this paper is to evaluate the functioning of the R-M policy model in Sweden.1

The paper also addresses the question of whether the economic development in Sweden

supports the underpinning of macroeconomic theory by the model. Section 2 provides

a brief account of the R-M policy model and also of its underlying economic theory.

Sections 3, 4 and 5 discuss the performance and validity of the model in terms of Swedens

ability to achieve wage equity, macroeconomic stabilisation and economic growth.

2. The content of the RehnMeidner model

2.1 Macroeconomic stability, growth and equity

The original R-M model advocated a tight fiscal policy to control inflation. Rehn and

Meidner also considered restrictive monetary policy and revaluation as deflationary means.

A tight macroeconomic policy was expected to keep wage increases down in peak

conditions, but also in the medium term; although wage growth would be stimulated by

a full employment policy. This would be counteracted, Rehn and Meidner expected, bya squeeze on profit margins (see below). The R-M model recommends a medium term

restrictive fiscal policy not only to control inflation but also to redistribute income in favour

of labour and increase public saving at the expense of company. Rehn and Meidner

preferred public saving for income and wealth distribution and industrial policy reasons.

These objectives make public saving the least market-conforming component of the R-M

model. Full employment is achieved in the R-M model through selective policy instru-

ments, rather than through expansionary macroeconomic policies. In this paper, the term

selective employment policy will include not only active labour market policies but also

marginal employment subsidies, which Rehn came to argue for from the 1970s. He hoped

that subsidies for employment increases and new investment would reduce both un-employment and inflation by encouraging price reductions. Rehn also expected that

employment subsidies would exert downward pressure on wages by reducing the profit

margins of firms not qualifying for the subsidies. Rehns final proposal was that subsidies

should be made permanent and offered to all expanding firms and for all kinds of labour.

In the original R-M model labour market policies were the main instruments for

preventing restrictive fiscal policy increasing unemployment. Moreover, ambitious labour

market policies guaranteeing full employment explain the downwards rigidity of nominal

wages in the model. These measures have three elements: supply-side retraining,

vocational education and relocation grants; actions to improve labour market matching;

1

The application of the R-M model in Sweden is analysed in (Erixon 2001, 2005). Appendix 1 surveyseconomic-policy regimes, central governments, structural conditions for economic and wage policy andimportant macroeconomic shocks in Sweden during the post-war period.

368 L. Erixon

atUniversity

ofMassachusetts/AmherstonDecember23,2011


Downloadedfrom


3/27

and targeted demand-side policies designed to increase demand for labour in certain

regions, industries and firms. All in all, Rehn and Meidner put greater emphasis on

mobility-enhancing policies (including supply and matching-oriented measures) than job-

creation measures (Meidner and Rehn et al., 1953 [1951], pp. 923). The purpose of

labour market policy was not only to maintain full employment and combat inflation byputting downward pressure on profit margins; but also to counter inflationary bottlenecks

in the labour market and support structural change in the business sector. A specific task of

mobility-enhancing labour market policies in the R-M model is to support solidarity wage

policy in building a fair wage structure and fostering structural change. A wage policy of

solidarityachieved by coordination of central wage negotiationsmeans equal pay for

work of equal value irrespective of the profits of firms and industries. Wage differences

should reflect objective differences in working environment and job content. In fact,

solidarity wage policy is an instrument anticipating a long-run equilibrium in the perfect

labour markets of orthodox economists.

According to the R-M model, the wage policy of solidarity is compatible with economic

growth. Equal remuneration for identical jobs establishes cost pressure on low-productivity

firms, requiring them to increase productive efficiency or die. The closure of inefficient

firms enhances average productivity, both directly and indirectly, by freeing resources for

the expansion of more dynamic firms. Furthermore, a wage policy of solidarity strengthens

incentives for structural change by inducing larger profit differentials between industries

and firms. However, wage solidarity for structural change will be muted without active

labour market policy and restrictive macroeconomic policy to encourage labour mobility

and contain overall profit margins. Moreover, these policy measures are necessary for

attaining fair wages. Expansionary macroeconomic policies risk accelerating wage drift (i.e.

wages increase outside central agreements) and widening wage differentials, especially

when labour markets are sluggish. On the other hand, high unemployment made it easierfor low profitability firms to survive by paying low relative wages. According to the R-M

model, therefore, a wage policy of solidarity requires full employment but by means of

minimising wage drift.

The R-M programme is an alternative to a free market model of structural change in

which labour mobility is induced by wage differences. Rehn and Meidner argued that large

wage differentials, required to overcome inertia on labour markets, are not only unfair but

also inflationary. Widening wage gaps can seldom be achieved through absolute reductions

of nominal wages, and they risk inducing wage demands to restore differentials. Thus, the

role of wage solidarity in the R-M model is not only to achieve greater equity but also to

contain inflation by helping to prevent wagewage spirals. The wage policy of solidarity isalso supposed to hold back wage increases in profitable companies willing and able to pay

higher wages. In fact, in the original R-M model, a wage policy of solidarity is the main

instrument for preserving wage stability and preventing a further fall in profits shares of

gross domestic product (GDP), after the initial profit squeeze, as a consequence of full

employment policies.

2.2 The RehnMeidner model in macroeconomics

The R-M model was an alternative to a Keynesian economic policy practised in Sweden

during the early post-war years (see Appendix 1). The post-war Keynesian solution to the

unemployment-inflation dilemma is linked in this paper to expansionary general economic

policies, primarily fiscal policies or devaluations, combined with regulation and selectiverestrictive fiscal measures targeted at rising prices. The R-M models restrictive economic

Performance and validity of the RehnMeidner model 369

atUniversity



Downloadedfrom


4/27

policy stance does not preclude a counter-cyclical fiscal policy or even a budget deficit in

periods of low economic activity. The difference between the Keynesian post-war model

and the R-M model can be defined in terms of the original Phillips curve. In the Keynesian

model it is mainly incomes policy that will result in a downward shift of the Phillips curve

whereas in the R-M model the downward shift comes from the contribution of labourmarket policy to a decline in actual profit margins and an increase in labour market

flexibility. (I ignore here the impact of marginal employment subsidies and the wage policy

of solidarity.) Rehn and Meidner believed that in an economy approaching full

employment their policy of restricting demand, depressing profit margins and improving

the working of labour markets works better than Keynesian strategies for fighting inflation.

They regarded incomes policies as blunt instruments in the fight against inflation if peak

rates of unemployment are maintained by expansionary general economic policy means. In

this situation, declarations of wage restraint cannot prevent extensive wage drift or high

compensatory central wage increases for wage-earner groups not covered by coordinated

wage agreements. Furthermore, Rehn and Meidner maintained that anti-inflation

Keynesian policies were not only ineffective, but also counterproductive (see below).

Besides, they feared that participation in incomes-policy agreements would weaken the

legitimacy of trade unions in the eyes of their members.

As in other Western countries, support for the Keynesian post-war model gradually

waned in Sweden from the late 1970s. Today it makes more sense to compare the R-M

model with new monetarism, giving priority to deregulation of product and labour

markets, independent central banks, price stability and also, as in Sweden, to strict targets

for monetary and fiscal policy. New monetarism is primarily based on rational expectation

theories emphasising the limitations of demand management and regulation to maintain

peak levels of employment, at least without accelerating inflation. Being considered as

a third way in economic policy, the R-M model shares some ideas with new monetarism.The models founders envisaged the social and economic costs of inflation, and they

doubted, without reference to expectations, that high levels of employment could be

sustained by the post-war Keynesian strategy. With inelastic labour-supply conditions this

strategy fostered large nominal wage increases and had adverse effects on productivity (see

below). The R-M models recommendation concerning both labour and product markets

can be interpreted as attempts to reduce the non-accelerating inflation rate of un-

employment (NAIRU) and increase GDP (Meidner, 1999, pp. 923; Rehn, 1982, pp. 11

and 17, 1987, p. 65).

However, there are crucial differences between recent monetarist viewpoints and an

R-M analysis. Rehn and Meidner had less belief than most monetarists in the self-curativecapacity of the laissez-faire economy. They believed that fiscal and monetary policies have

sustainable effects on production and employment except under overheated conditions. In

addition, in contrast to neomonetarists and most neo-Keynesians, Rehn and Meidner did

not see nominal wage flexibility as an appropriate remedy for a recession. In the R-M

model, participation in labour market programmes strengthens the inflexibility of wages in

a recession. Rehn and Meidner emphasised that downward wage flexibility would have

negative effects on income distribution and economic growth. However, the main

difference between Rehn and Meidner and the neomonetarist view is that, despite all,

the former believed in the need for state interventionism to achieve very low rates of

unemployment without risking accelerating inflation. By contrast, neomonetarists have

profound doubts about the effectiveness of both regulation and selective employmentprogrammes. This scepticism seems confirmed by the assumption in the R-M model that

370 L. Erixon

atUniversity



Downloadedfrom


5/27

labour market programmes will increase the pace of nominal wage increases.1 To counter

neomonetarist criticism, adherents of the R-M model need to emphasise that marginal

employment subsidies reduce prices, solidarity wage policy mitigates wage spirals and

policy measures to squeeze profit margins enhance productivity.

An underlying idea of the R-M programme is that productivity growth is countercyclicaland is stimulated by a restrictive macroeconomic policy (Rehn, 1969, pp. 1512 and 157).

A fall in aggregate demand will lead to price reductions and a decline in profit margins.

Labour market policy sustaining full employment prevents nominal wages (or more

precisely nominal wage growth) from fully adjusting to a downward shift in aggregate

demand. Rehn and Meidner expected that a profit squeeze would induce firms to enhance

productivity by rationalisation, mergers and also by investment in new technologies. Low-

productivity firms would need to improve productivity or perish, especially if wages for

identical work were uniform (the wage policy of solidarity), in which case resources for

structural change would be liberated (Meidner and Rehn et al., 1953 [1951], pp. 201, 25

and 34). Rehn and Meidner also argued for countercyclical productivity developments

other than those dependent on procyclical profit margins. High capacity utilisation, they

argued, will hamper productivity by resulting in high absenteeism, excess labour turnover,

a greater risk of accidents at work and less occupational training. Besides, Rehn and

Meidner assumed that price and investment controls to dampen overheating would harm

productive firms and investment projects.

Rehn and Meidners productivity theory was a forerunner of the SalterSolow vintage

theory and the X-inefficiency theory (Lundberg, 1985). It also seems modern in the light

of the new growth theory of countercyclical productivity (cf. Aghion and Howitt, 1998,

ch. 8). Moreover, Rehn and Meidner anticipated labour market theories concerning

relative wage preferences, redistributive wage policies and labour market policies. They

maintained that a wage policy of solidarity might prevent wagewage spirals triggered bywage earners concern for relative wages. Coordination is not an instrument for internal-

ising wage externalities per se, as suggested by modern bargaining theories (cf. Nickell,

1997, p. 68). Furthermore, in the R-M model market forces have a strong influence on

nominal wages at the aggregate level both directly and, by triggering wage drift, as

a guideline for central wage negotiations.2 A positive relationship between profits and

wages is not explained by a rent-sharing arrangement in the R-M theory (Erixon, 2001, p.

24). It is employers who take initiatives to increase the pace of nominal wage increases

whereas wage earners are more concerned with relative wages. Rehn and Meidner

expected that large profit margins would increase the financial capacity of expanding firms

to invest (enlarging the number of job vacancies) and of other firms to engage in wagecompetition to retain indispensable labour (leading to higher reservation wages for

expanding firms). They also assumed that high profit margins might increase firms

1 Rehn and Meidners strong emphasis on competitive labour markets makes it natural to attribute thepositive wage effects of labour market policy to an increase in the duration of vacancies. It is true thatmatching and supply oriented policy measures are expected to increase the search intensity and number of jobapplicants in the R-M model. However, these wage-dampening effects of labour market policies aresuperseded in the model by a reduction in the number of job applicants and a lower intensity of job search,primarily through participation in labour market training and relief work programmes. Despite their strongemphasis on market forces, there are also some wage setting elements in Rehn and Meidners argument fora positive relationship between labour market policy and nominal wagesan active labour market policybrings higher nominal wage increases than would occur in a regime of open unemployment as trade unions

gain strength in a full employment situation (Rehn, 1952A [1948], p. 32).2 Cf. Layard et al., 1991; Blanchard, 2006, ch. 6. See also (Erixon 2000, pp. 4656 and 5365, 2004[2002], 903).


atUniversity



Downloadedfrom


6/27

willingness, and ability, to remunerate employees more generously than their performance

merited (X-inefficiency wages). High profit margins, together with expectations of high

profits from employment expansion, would lead to widespread wage drift, especially in the

exposed sectors in Sweden. In turn, extensive wage drift would trigger strong compen-

satory demands from employee groups, not fully benefiting from wage drift, to restoreprevious wage relativities.

3. Wage equalisation in Sweden

In accordance with the solidarity wage policy a radical pay equalisation between industries

(and plants), and between men and women, took place in Sweden in the 1960s and the first

half of the 1970s. And, although pay equalisation between industries (and between plants)

came to a halt in the mid-1970s, it was more far-reaching in Sweden than in other

Organisation for Economic Cooperation and Development (OECD) countries in the mid-

1980s (Hibbs, 1990; Hibbs and Locking, 2000; Zweimuller and Barth, 1994). Swedish

wage equalisation supports the R-M view that wage structure can be influenced by

solidarity wage policy secured by coordinated central bargaining. From the mid-1950s to

the mid-1980s wage increases were coordinated for blue collar workers within the scope of

negotiations between the LO and private employer federations(SAF). Central wage

negotiations were also coordinated for private white-collar workers from the late 1960s.

Time-series and cross-national studies including Sweden confirm that the Swedish wage

policy of solidarity and coordinated bargaining led to a trend towards equal pay for work

of equal value, replicating what might be expected from a competitive labour market, in

the 1960s, 1970s and the first half of the 1980s.1 Empirical research also stresses the

importance of coordinated bargaining and egalitarian wage policy for wage compression

within plants, firms and industries in Sweden. A substantial part of the radical wageequalisation among both blue-collar and white-collar workers until the early 1980s

equalised pay between jobs of different value.2 In this way, the wage policy of the

coordinated Swedish bargaining system (the LO wage policy from the mid-1960s) went

beyond the application of the R-M principle of equal wages for equal work.

Flexible labour markets are a necessary condition for a successful wage policy of

solidarity in the R-M model. In the 1960s and 1970s structural change and regional

mobility was high in Sweden (however, see Sections 4.2 and 4.3). Restrictive macroeco-

nomic policy is another necessary condition for solidarity wages in the R-M model.

Monetary and fiscal policy was generally tighter and demand shocks less frequent in

Sweden from the late 1950s to the early 1970s (Erixon, 2005, pp. 201). Between 1955and 1972, Sweden also experienced a stronger reduction of profits share of value added in

manufacturing than other OECD countries. And, although this was not the result of a strict

application of the R-M programme (see Erixon, 2005, pp. 212 and table 2), it facilitated

the wage policy of solidarity by reducing the scope for wage drift.

1 Arai, 1999; Forslund, 1994; Holmlund and Zetterberg, 1991; see also other references in (Erixon 2000,pp. 5962).The relation between nominal wages and (value) labour productivity (or profits) on the industryand firm level was not generally weaker in Sweden than in other Nordic countries. However, it was probablyweaker in Sweden in the 1960s and early 1970s, the heydays of Swedish solidaristic wage policy (cf. Albaeket al., 1996; Holmlund and Zetterberg, 1991, pp. 10235).

2 Arai, 1994; Hibbs, 1990; Hibbs and Locking, 2000. However, Swedish solidarity wage policy did not

embrace both white-collar and blue-collar workers. In the 1970s and early 1980s, wage gaps between low-wage white-collar workers and high-wage blue-collar workers in the private sector were relatively stable(Hibbs, 1990, pp. 1868).

372 L. Erixon

atUniversity



Downloadedfrom


7/27

From the mid-1980s to the mid-1990s the dispersion of gross earnings between workers

increased in Sweden, though not as much as, for example, in the USA. Wage gaps widened,

not only between wage earners with different qualifications and jobs inside industries, firms

and plants, but also between wage earners with comparable jobsa flagrant violation of the

original notion of solidarity wage policy. In the first half of the 1990s, wage dispersion inthe private sector increased most between industries, firms and plants. Apparently, wage

developments in Sweden became more determined by profit conditions (Arai, 1999; Hibbs

and Locking, 2000, figure 1; Holmlund, 1997; Nordstrom Skanset al., 2006, table 1 and

figure 3; OECD Employment Outlook, 2004, table 3.2, see also Appendix 2).

Since the middle of the 1980s Swedish wage formation has been less coordinated for

both blue-collar and white-collar workers. First, central wage coordination was abandoned,

with some exceptions for the second half of the 1980s and a tripartite incomes policy

episode during the deep recession of 19911992 when almost all central labour market

organisations followed the recommendations of the so-called Rehnberg Commission (see

Section 4.4). Second, the 1980s and (especially) the 1990s saw a growing importance of

agreements between employers and local trade unions or individual workers. More

decentralised negotiations reduced opportunities to pursue an egalitarian wage policy.

These opportunities were probably further reduced by the more unstable macroeconomic

conditions of the 1980s and 1990s. Two devaluations in the early 1980s reduced the value

of the krona by 26% relative to a basket of currencies. This, together with a strong dollar

and an international recovery, led to a profit boom in Swedish export industries in the mid-

1980s. The Swedish economy was further overheated by a rapid deregulation of credit

markets during the second half of the 1980s. Under the existing tax system, deregulation

led to a credit-financed consumption, construction and stock-market boom, which the

countercyclical fiscal policy did notcompletely succeed in dampening (see Erixon, 2005, pp.

323). This overheating contributed to widening wage gaps in Sweden by encouraging wagedrift that, in particular, favoured skilled labour in the most profitable companies. From the

theoretical perspective of the R-M model high profit margins reinforced firms competition

for scarce labour and their propensity, and capacity, to offer X-inefficient backed wage

increases. Foreign economists favourable to the Swedish corporative model often neglect

the substantial wage-drift component of total wage increases in Sweden, even when wage

bargaining was coordinated. Wage drift then accounted for about half the total increase in

blue-collar workers wages (Holmlund and Zetterberg, 1991, p. 102).

At the start of the 1990s, Sweden experienced a decline in GDP and employment

without precedent, even in the early 1930s. This decline reflected earlier overinvestment,

a stock-market collapse and debt repayment (hastened by a new tax system, higher interestrates abroad and a loss of confidence in the krona). Swedish unemployment was only one

percentage point below the EU average in 1993 and it did not decrease significantly before

1998. The years 199197 witnessed a strong increase in earnings dispersion in Sweden

(see Appendix 2). Larger wage differences between industries, firms and plants seemed

to vindicate the R-M view that wage earners in less profitable firms have difficulties in

defending their relative wage position under conditions of mass unemployment. But, by

comparison, wage dispersion decreased considerably in Finland in 199197 (see Appendix

2). Finland and Sweden have a similar industrial structure and also have experienced an

almost identical macroeconomic development since the early 1980s. Unemployment rose

even more in Finland than in Sweden in the first half of the 1990s, suggesting that widening

wage differentials in Sweden were not the inevitable result of a deep economic crisis.Finnish central negotiations were not coordinated during the entire 199197 period, but


atUniversity



Downloadedfrom


8/27

the countrys wage model seems to have been more coordinated and also developed

stronger equalisation than the Swedish equivalent (cf. Johansson, 2006, pp. 56).

From the mid-1990, wage differentials have continued to widen in Sweden. Growing

wage gaps between industries, firms and plants remained the most important source of

increasing earnings dispersion in Sweden, at least until the early 2000s. Between 1997 and2004 wage differentials increased considerably between white-collar workers, but also

between white-collar and blue-collar workers. On the other hand, however, wage gaps

between blue-collar workers in the private business sector remained relatively stable

(Lundborg, 2005; Nordstrom Skans et al., 2006, table 1, see also Appendix 2).

Wage inequalities have certainly increased in the OECD area, probably resulting from

a global shift in labour demand favouring highly skilled labour in general, and computer

specialists and R&D personnel in particular. Other OECD countries also experienced

larger earnings inequality in the top half of the distribution and stable, or even decreasing,

wage inequalities in the bottom half of the distribution from the mid-1990s (see Appendix

2 and also Glyn, 2001). In Sweden, this shift in labour demand contributed to wider wage

differentials, to which the growth of local bargaining no doubt contributed.1 Continued

industrial negotiations since the mid-1990s probably reinforced the growing wage

inequality in Sweden. In 1997 a basic agreement between Swedish labour market

organisations in manufacturing, the so-called Industrial agreement, was signed. Since

1998, wage agreements covering both white and blue-collar workers have been settled for

3-year periods. The Industrial agreement is expected, e.g. by the National Mediation

Office established in 2000, to serve as a guideline for wage increases outside manufactur-

ing. However, sector wage negotiations have restricted the possibilities to conduct

a comprehensive wage policy of solidarity. Also, until 2007, the Industrial agreement

put greater emphasis on stabilisation and national competitive strength (in terms of unit

labour costs and profit margins) than on distribution. Moreover, central wage coordinationfor Swedish manufacturing has been unable to prevent extensive wage drift, challenging

the wage policy of solidarity. In 19982004, wage drift constituted half the wage increases

for white-collar workers in manufacturing (National Mediation Office, 2006).

The macroeconomic situation since the mid-1990s has probably contributed to

extensive wage drift, particularly amongst white-collar workers, and to the growing wage

dispersion. As in other OECD countries, profits share of value added in manufacturing has

increased in Sweden since the 1970s (see Erixon, 2005, table 2). This profit boost was

exceptional in the country during the first part of the 1990s, from both an international and

a historical perspective. In 1993, the first year of floating exchange rates, the krona was

depreciated by 25% against the currencies of competing countries. This explains, togetherwith strong productivity growth and higher unemployment, why the profit share in

Swedish manufacturing rose to post-war record levels (above 40%) in the mid-1990s. The

profit boom was consolidated in the late 1990s and early 2000s by continuing productivity

increases, and by a weak krona, which, in particular, cushioned the fall in profit in the

200103 recession. The rate of unemployment was also high by historical standards in

Sweden in the 1990s and first part of the 2000sa salient structural condition for the

growth of the profit share.

To summarise, radical wage equalisation in Sweden in the 1960s and early 1970s

demonstrates that income distribution can be affected by wage policy under coordinated

1

Larger wage gaps between work places in Sweden in the 1990s and 2000s may partly be explained by aninternational tendency to stronger separation between high-skill and low-skill plants (Nordstrom Skanset al.,2006, pp. 445).

374 L. Erixon

atUniversity



Downloadedfrom


9/27

bargaining. It seems also that the wage policy of solidarity was backed up by flexible labour

markets and stable macroeconomic conditions as demanded in the R-M model. Increasing

wage gaps in Sweden since the mid-1980s illustrate that solidarity wage policy runs into

difficulties in a situation of more decentralised wage bargaining and significant macro-

economic imbalances. The tendency towards larger wage differentials in the 1990s and2000s was probably reinforced by higher profit shares. However, despite continued

increases in earning gaps from the middle of the 1980s, Sweden still appears to be

a country of extensive wage equalisation.

4. Swedens macroeconomic balance

4.1 The Phillips curve

In the period between 1960 and 1973 the Phillips curve was more beneficial to Sweden

than to either the OECD as a whole or the large OECD countries (OECD Historical

Statistics, 1982, tables 2.14, 2.15 and 8.11, 1999, tables 2.15 and 8.11). However there is

no reason to overemphasise the stabilisation-policy success of Sweden in 196073. The

rates of inflation and unemployment in Sweden were typical of those in other small

Western European countries (Austria, Belgium, Denmark, Finland, the Netherlands,

Norway and Switzerland). In the second half of the 1970s the negative Phillips curve

ceased to exist in the large OECD countries but it survived in small Western European

countries, including Sweden. Sweden had solved the unemployment-inflation dilemma

better than the OECD on average but it now also performed better than other small open

Western European countries as a group. In 197479 Swedens inflation rate was not high

relative to total OECD (or the EU countries at that time) and only slightly above that of the

average for small Western European countries. At the same time unemployment was

significantly lower in Sweden than in other OECD countries, and below the average forother small Western European countries. However, Sweden was not exceptional among

the latter countries in terms of unemployment or the balance between unemployment and

inflation. Norway was equally successful and Austria and Switzerland even more successful

than Sweden.

In the 1980s, Sweden still lived up to the R-M models strong demand for low

unemployment, with the possible exception of the recession at the beginning of the 1980s.

However, in 198090, the Swedish rate of inflation rose above the average for the OECD,

excluding Iceland and Turkey, the rate of other small Western European countries

(excluding Norway). In the years 198891, Swedens rate of inflation came to deviate

systematically from the OECD and EU country averages. Compared to other smallWestern European countries Sweden opted in 198090 for low unemployment at the

expense of higher inflation. At the same time the trade-off between unemployment and

inflation was still better for Sweden (especially before 1988) than for total OECD, total EU

and the (seven) largest OECD countries. However, in the 1980s, development in Austria,

Switzerland and Norway prevented Swedens balance between inflation and unemploy-

ment from being superior to the average for small Western European countries.

In the 1990s and 2000s Sweden was no longer an example to follow in terms of

employment. Between 1992 and 2005 unemployment, as commonly defined, was, on

average, higher in Sweden than small Western European countries when Finland was

excluded from the latter. The International Labour Organisation (ILO) standardised

measure shows that unemployment was higher in Sweden than the average for smallWestern European countries even including Finland (7.3% and 6.3% per year,


atUniversity



Downloadedfrom


10/27

respectively). Swedish governments could neither prevent the emergence of mass un-

employment in the early 1990s, nor bring it down to previous levels when the economy

recovered. In May 2007, under boom conditions, Swedish ILO unemployment was

approximately 6% by the ILO measure and 4% using a common national measure, a high

rate even for post-war recessions prior to the early 1990s.On the other hand, between 1992 and 2005 the rate of inflation was, on average, lower in

Sweden than in the OECD, the EU and also somewhat lower than the average for small

Western European countries (1.5% and 1.8% per year, respectively). Swedens stabilisation-

policy performance in this period is ambiguous. The countrys trade-off between

inflation and unemployment was not superior to that in the OECD, the USA or other small

Western European countries (see OECD Economic Outlook, December 2006, tables 13,

14 and 18). In the 2000s, the Swedish Phillips curve shifted inward and the trade-off

between inflation and unemployment became better in Sweden than in the OECD, the

USA and the average for other small open Western European countries. However the

success of Swedish stabilisation policy during the 2000s fades away with a standardised

measure of unemployment and even with a national definition of unemployment compared

to the Netherlands, Switzerland and Norway.

Small open Western European countries other than Sweden have been successful

in controlling inflation without resort to high unemployment since the early 1960s.

Furthermore, Sweden has not consistently applied the R-M strategy since the mid-1970s.

Yet, wage differentials have remained relatively narrow and labour market policy was

predominantly active. In addition, beneficial Phillips curves for other small Western

European countries do not exclude the possibility that specific policy arrangements were

decisive in the Swedish case.

4.2 Labour market policySince the late 1950s, all Swedish governments have carried on ambitious selective

employment programmes, especially during recessions. Expenditure on active labour

market policy measures as a share of GDP was higher in Sweden than in other OECD

countries at the time of the first oil crisis (OPECI). The increasing priority given to supply

side and matching measures until the early 1970s was completely in line with the R-M idea

of rapid structural change and a reduction of inflationary bottlenecks in labour markets

(see Erixon, 2005, p. 19 and table 1). The cost of active labour market policies as a share of

central government expenditures and of GDP increased during the recessions following

OPEC I and OPEC II. The proportion of the labour force in labour market policy

programmes reached 5% in 1984 (Johannesson, 1995, table 2.2). Swedish labour marketpolicy was also ambitious during the deep recession in the early 1990s. Prioritisation of

labour market policy by a centre-right wing government meant that the share of the labour

force in active labour market programmes reached a post-war peak of 7.3% in 1994.

Spending on active labour market policy as a share of GDP was high in Sweden compared

to other OECD countries during the first half of the 1990s, especially relative to the rates of

unemployment (Nickell, 1997, table 4; OECD Employment Outlook, various issues). In

the mid-1990s, a Social Democratic government engaged in an ambitious labour market

programme. Furthermore, the weight of employment subsidies in Swedish labour market

policy has increased since the early 1990s in accordance with the R-M model. A reasonable

conclusion is that labour market policy has contributed to Swedens favourable trade-off

between unemployment and inflation since the early 1960s. Comparisons with otherOECD countries are inconclusive, but it seems that job turnover and regional mobility

376 L. Erixon

atUniversity



Downloadedfrom


11/27

were relatively high in Sweden in the 1970s and 1980s (Nilsson and Zetterberg, 1987, pp.

3552; OECD Economic Outlook, 1990, table 3.3, 1996, table 5.1). Furthermore, in the

1970s and 1980s, the Swedish Beveridge curve, that is the mapping between the number of

vacancies and unemployed rates, was not only more favourable than in other OECD

countries but was also shifting inwards.1

Swedish job turnover rates were also relativelyhigh in the 1990s and 2000s (Gomez-Salvador et al., 2004, table 2).

However, there are arguments in favour of not focusing on selective employment policy

when explaining Swedens beneficial Phillips and Beveridge curves. First, regional mobility

in the 1970s and 1980s was not exceptionally high in Sweden compared to the USA or even

to other Nordic countries (Nilsson, 1995, table 6). Second, from the middle of the 1980s

there are indications that Sweden placed less emphasis on active labour market policy and

lost its position as the vanguard of labour market policy. The 198390 period was

characterised by a decline in active labour market policy share of Swedish GDP, and the

share of the labour force participating in labour market policy measures (see Calmfors,

1993, pp. 289; Erixon, 2005, table 1; Johannesson, 1995, table 2 .2). A strong and lasting

economic boom certainly weakened the need for an active labour market policy in Sweden.

Nevertheless, the dismantling of labour market policy in the second half of the 1980s went

against the recommendation in the R-M model to reduce bottlenecks in an overheated

economy. Moreover, Social Democratic governments put less emphasis on active labour

market policy from the mid-1990s. The share of the labour force in labour market policy

programmes fell until 2004. Swedish expenditure on labour market policy as a share of

GDP also declined (see Erixon, 2005, table 1.) To some extent, the reduced emphasis on

labour market policy from the mid-1990s reflected improved labour market conditions.

But Swedish unemployment was still high by historical standards and also increased during

the recession of the early 2000s. In 2000, Denmark and the Netherlands replaced Sweden

as the leading exponents of active labour market policy in terms of expenditure as a share ofGDP.2 What is more, in the late 1990s and early 2000s, subsidies to regular employment in

the private sector, recommended by Rehn and Meidner, were higher as a share of GDP in

Belgium, Italy and Spain than in Sweden, and as high in Finland, France and Canada

(OECD Employment Outlook, 2004, table H).

Third, from the late 1950s, expenditures on labour-market training and matching

measures advocated by Rehn and Meidner have been (with few exceptions) less than half of

total expenditures on active labour market policy, excluding regional policy (Calmfors,

1995; Erixon, 2005, table 1; Forslund, 1994). The major part was demand-side measures

and those targeting problem groups in the labour market. Demand-side measures (e.g.

relief work), in contrast to matching and supply oriented measures and programmes for thedisabled, had negative effects on regional mobility and regular employment in the 1970s,

1980s and the first half of the 1990s (Calmfors et al., 2001, pp. 93104; Lindgren and

1 Jackmanet al., 1990, pp. 47783. Sceptics maintain that Swedens beneficial Beveridge (and Phillips)curves in the 1970s and 1980s were a statistical phenomenonparticipation in labour market programmesreduced the number of people registered as open unemployed (Arpaia and Mourre, 2005, p. 12; Calmforset al., 2001, pp. 967). But this participation must also have led to more unfilled vacancies under theassumptions that the number of job applicants and the intensity of job search decreased. The propensityin (Jackmanet al., 1990) to attribute the favourable Swedish Beveridge curve to mobility-enhancing labourmarket policy and coordinated wage bargaining is more controversial.

2 It cannot be excluded, however, that Swedens lower ranking in the 2000s reflects an increasing weightof employment policy measures not counted as labour market policy. The remarkable Knowledge Lift

(Kunskapslyftet) 19972002, to increase the level of education and to reduce unemployment among adultswith only grammar school education, encompassed 10% of the whole labour force during the first 4 years(Albrechtet al., 2004, p. 1).


atUniversity



Downloadedfrom


12/27

Westerlund, 2003). Furthermore, selective employment measures other than labour

market policies were too defensive during the second half of the 1970s and early 1980s

to meet the R-M aims of rapid structural change. Between 1975 and 1983, Swedish

industry subsidies to prevent plant closures and mass lay-offs amounted to 29% of total

expenditures on selective employment policy including regional policy (Erixon, 2005, pp.2930; Johannesson, 1995, table 2.1).

Fourth, Swedish studies have shown that labour market policies probably increased

product wages in the 1970s and 1980s, primarily by lowering search intensity and raising

wage claims (Calmfors, 1993). In the first half of the 1990s, the positive effects on regular

employment of extensive labour market policy programmes were either small or non-

existent (Calmfors et al., 2001; Forslund and Krueger, 1997; Sianesi, 2002). Furthermore,

employment subsidies in the mid-1990s probably had deadweight and substitution effects.

Neither a general subsidy by a centre-right wing government in 1994 nor a Social

Democratic targeted subsidy the year after had any significant impact on either the level of

employment or the rate of inflation (Calmfors et al., 2001, pp. 99192).

In total, the mobility-stimulating and inflation-dampening effects of Swedish employ-

ment policy alone should not be overstated. It is important to note, however, that the R-M

model does not dispute that labour market policy can raise wages. The policy creates

a labour shortage, and this will counteract the downward pressure it may exert by

encouraging greater labour mobility. A hypothesis that labour market policy reduces

equilibrium unemployment by putting a downward pressure on nominal wages is neither

confirmed by Swedish studies, nor assumed in the R-M model.

Labour market policy (and other selective employment policy programmes) mainly

contributed to a sustainable low rate of unemployment in Sweden by having prevented

open mass unemployment in the recessions of the mid-1970s and early 1980s. The sheer

volume of labour market policy (and the postponement of a restrictive fiscal policy) wasalso a salient reason why open unemployment was kept lower in Sweden than in her twin

country, Finland, during the first half of the 1990s. The selective measures of the R-M

model thus counteracted discouraged-worker effects and limited the amount of hysteresis

effects (through long-term unemployment) in Sweden (see, e.g., Blanchflower et al., 1995;

Johansson, 2002). Besides, in the 1970s and 1980s, low unemployment was favourable to

labour mobility itself. In Sweden, as elsewhere, labour mobility varies with the tightness of

the labour market. Labour market policies designed to maintain full employment mitigated

the tendency towards a decline in voluntary labour turnover in recessions (Arai and

Heyman, 2000, p. 32; Nilsson, 1995, pp. 306). Thus, labour market policy did not mainly

contribute to Swedens beneficial Phillips and Beveridge curves in the 1970s and 1980s somuch by its mobility-enhancing measures as by preventing open unemployment. These

possibilities were not accounted for in the R-M model.

4.3 The wage policy of solidarity

Sceptical observers of the Swedish model maintain that the wage policy of solidarity

has caused the countrys Phillips curve to shift outwards. Extensive wage equalisation, it

is argued, led to unemployment among unskilled labour, particularly as global demand

shifted in favour of skilled labour. Reviewers of the Swedish model have also posited that

coordinated wage bargaining, a necessary condition for the wage policy of solidarity,

resulted in a less flexible labour market in the 1970s and 1980s. Furthermore,

a compression of after tax wage differentials between skilled and unskilled labour wasblamed for having weakened incentives for work, training and higher education (Davis and

378 L. Erixon

atUniversity



Downloadedfrom


13/27

Henrekson, 1997; Henrekson et al., 1996, pp. 26577; Lindbeck, 1997, pp. 1281 and

12957). In fact, wage compression within occupations seems to have had a negative effect

on general training in Sweden in the early 2000s (Ericson, 2004). Studies of the 196493

period further show that general wage compression negatively affected labour productivity

in the Swedish business sector (Hibbs and Locking, 2000). Some observers of Swedenhave claimed that wage policy of solidarity has been inflationary by inducing wagewage

spirals. Rehn and Meidner referred to the possibility that wage drift might restore the

market-determined wage relation that had been disturbed by wage policy of solidarity.

They also admitted that wage policy of solidarity could stimulate wage drift by enhancing

profits in sectors with wages above the average (Meidner, 1978 [1976], pp. 334).

However, Rehn and Meidner did not consider that there could be a strong pressure

amongst high-paid wage earners to restore wage differentials disturbed by central wage

increases benefiting low-paid groups. Neither did they suggest that trade unions would or

should permit departures from solidarity wages in the face of wage drift. Wage earners in

high demand (skilled labour in particular) can achieve higher welfare levels by wage drift,

which could encourage them to stay in the union (Martin, 1981; Udden-Jondal, 1993, ch.

5). A number of studies have demonstrated that wage equalisation has had positive effects

on wage drift in Sweden. There is no evidence that fair wages have weakened wage spirals

as suggested by Rehn and Meidner (see the survey of the literature in Erixon, 2000, pp. 69

71).

The arguments above are primarily concerned with the effects of the Swedish

progressive tax system, and the practice rather than the principle of the R-M wage model,

which only demands equal pay for work of equal value.1 Studies of the original wage policy

of solidarity put Sweden in a more favourable light. There is evidence that the policy of

equal wages for similar work in Sweden accelerated the reallocation of resources between

plants and between industries in the 196385 period and blue-collar labour productivitybetween 1964 and 1993 by promoting structural change (Edin and Topel, 1997; Hibbs

and Locking, 2000). Neither study estimated the relative importance of solidarity wage

policy for Swedish restructuring and productivity growth. Comparisons of Nordic

countries do not distinguish solidarity wage policy as a strategic factor behind structural

change (see Erixon, 2000, p. 74; Holmlund and Zetterberg, 1991, pp. 10235). In the

1960s and early 1970s, i.e in the years of progressing wage compression in Sweden, the

change of industry composition in manufacturing was as rapid in other small Western

European countries (Erixon, 2000, pp. 717). This conclusion is actually compatible with

the R-M model. The model does not claim that the pace of structural change will increase

with solidarity wage policy (not even combined with labour market policy), only that thisstrategy imposes lower costs in terms of inequality and inflation in comparison with a free

market strategy based on large wage differentials.

1 Some economists have even challenged the view that wage compression within industries and firms inSweden was negative for employment, structural change and productivity in the 1970s and 1980s. Theymaintain that countries with a more even wage structure put a stronger emphasis on general and vocationaleducation and greater pressure on unskilled labour, threatened by unemployment, to improve their educationas well as on firms to invest in labour-saving technologies. These investments may have stimulated thedevelopment of Swedish industries producing such technologies for the world market (Agell, 1999; Erixon,1997; Glyn, 2001; Nickell and Bell, 1996). In the 1970s and 1980s open unemployment was not higher inOECD countries with small wage differentials in general, despite the shift in labour demand in favour of

skilled labour. However, far-reaching wage compression within industries and firms is hardly a salientexplanation of the Swedens favourable Phillips curve (and low rate of unemployment) in the 1970s and1980s.


atUniversity



Downloadedfrom


14/27

From the late 1970s to the late 1980s the pace of structural change in manufacturing was,

despite devaluations and subsidies to established industries, more rapid in Sweden than in

other OECD countries, excluding Canada and the USA (Hansson and Lundberg, 1995, pp.

1468). Thus, the wage policy of solidarity seems to have been beneficial to structural change

in this period. According to Lawrence Summer, workers who lose attractive high-wage jobsare less reluctant to accept jobs in other firms and industries if comparative pay differentials

are small. The compressed wage structure in Sweden made it easier for wage earners from

stagnating high-wage industries to accept employment elsewhere (Erixon, 1985, p. 27 and

appendix 2; Rehn, 1987, pp. 767; Summers, 1986, pp. 37080).

4.4 Incomes policy

Foreign economists sympathetic to the Swedish model often refer to incomes policy as

a source of macroeconomic success. In contrast, Rehn and Meidnerdesigners of the

Swedish economic-policy modelemphasised the limitations of incomes policy, especially

under boom conditions and expansionary general economic policies. This sceptical view of

incomes policy seems to be confirmed by the Swedish experience. The absence of wage

cost crises from the late 1950s to OPEC I, thus in the golden age of the R-M model (see

Appendix 1), was a consequence of stable macroeconomic conditions, including a de-

flationary fiscal and monetary policy, rather than of collective wage restraint. Coordinated

negotiations did not embrace both white-collar and blue-collar workers nor did they

prevent wage drift (Erixon, 2005, pp. 201). A wage cost crisis in the mid-1970s in the

wake of a raw material boom in manufacturing confirmed a theory of high profits as having

a destabilising role in the Swedish economy. The Haga agreements 197475 between the

political parties and central labour market organisations were a conscious effort to fight

tendencies to stagflation after OPEC I by incomes policy. However, these agreements

could not prevent a severe wage cost crisis in a situation where a profit boom anda considerable wage drift had paved the way for a wagewage spiral. The stabilisation-

policy failures of Sweden in the late 1980s also support the view that incomes policy is an

inefficient instrument of inflation control in an overheated economy. A Social Democratic

government attempted to check inflation by price controls and appeals for wage restraint

rather than by the introduction of forceful restrictive measures. In the middle of the

decade, the parties within the labour market accepted a ceiling to wage increases. However,

the pace of the wage increases broke through the ceiling.

Foreign economists probably overrate the wage-restraining capacity of the Swedish

bargaining system (Jackman et al., 1990, pp. 47783; Layard et al., 1991, ch. 9, table 2;

Nickell, 1997, pp. 613; Nickell et al., 2005, pp. 7-8). They often refer to comparativestudies of the 1970s and 1980s showing that product wages were highly responsive to

changes in unemployment in Sweden. But the estimates for Sweden reflect frequent

devaluations, leading to lower product wages, and the avoidance of open unemployment in

the recessions through selective employment policy measures.

When explaining the reduced pace of wage increases at the beginning of the 1990s the

new Social Democrat government in the middle of the decade emphasised the moderating

role of the Rehnberg commission. From the viewpoint of R-M, the radical reduction of

Swedish nominal wage growth in the early 1990s reflected a dramatic fall in labour demand

and an increase in unemployment during a deep recession. A sceptical view of incomes

policy seems to be rejected by the fact that the pace of nominal wage increases under

coordinated agreements in Swedish manufacturing from 1998 has, despite high profitmargins and low priority given to a more equal income distribution, satisfied the goal of low

380 L. Erixon

atUniversity



Downloadedfrom


15/27

inflation and that of global competitiveness in terms of relative unit labour costs (National

Institute for Economic Research, 2005, p. 39). However, high rates of unemployment

probably put a brake on wagewage spirals in Sweden until 2007. The critical moment of

the new incomes-policy regime will come when Sweden approaches the low rates of

unemployment typical of the early post-war period. The recent strong tendency in Swedenfor local wage agreements between companies and local trade unions or individual

employees have added to scepticism about the possibilities controlling general wage

developments by incomes policy. This scepticism is vindicated by extensive wage drift for

white-collar workers in the period of the Industrial agreement (see Section 3).

4.5 Why a favourable Phillips curve?

Equally favourable trade-offs between unemployment and inflation in other small open

Western European countries since the early 1960s weakens any argument that the Swedish

policy solution is unique. Labour-market and solidarity-wage policy may have contributed

to Swedens low rate of unemployment in the 1970s and 1980s, primarily by having

reduced the scope for hysteresis effects, and increased the acceptance of jobs outside

stagnating industries. However, neither mobility-enhancing labour market policy, solidar-

ity wage policy, nor nation-specific incomes policy arrangements seem to be major

explanations of Swedens relatively favourable Phillips curve in these decades.

The apparent success of Swedish stabilisation policy from the mid-1970s to the late 1980s

largely reflects the maintenance of low unemployment by the continuous stimulus of

aggregate demand. According to the yardstick of the R-M model, macroeconomic policy was

not restrictive enough, at least from the late 1970s. Macroeconomic expansion brought

down unemployment to rates that were unsustainable in the long run and postponed

structural change by favouring established companies and industries (see Section 5). A

follower of the R-M model can agree with economists sceptical of the Swedish model, whoconclude that the country reached a temporary state of low unemployment in the 1980s by

climbing up an unstable Phillips curve, that is, by maintaining excess aggregate demand (see

Calmfors, 1993, 4453; Lindbeck, 1997, pp. 130811). Analogously, since the early 1990s,

Sweden has attained a low rate of inflation by climbing down the Phillips curve (see, e.g.,

Ihrig and Marquez, 2004, table 3). From this viewpoint, the high rate of unemployment in

Sweden in the first half of the 1990s was a consequence first of a deep recession and then of

a restrictive monetary and fiscal policy to moderate expected inflation. The restraining

macroeconomic policy in the mid-1990s in a situation of mass unemployment was the

clearest expression of a departure from the priorities and means of the R-M model.1 In

addition, the inflation target of the Central Bank2% inflation with an allowed flexibility of1 percentage point in either directionhave curtailed effective demand since the mid-1990s.

During the first half of the 2000s the Swedish rate of inflation generally undershot the 2%

target and occasionally fell below the targets lower limit of 1%.2

1 The Social Democratic fiscal restraint 19951998, with Goran Persson as Prime Minister (Minister ofFinance, 19941996), has no equivalent in other OECD countries in the period of comparative statistics from1970 and onward (Braconier and Holden, 1999, pp. 247; OECD Economic Outlook, June 1997 and 2001,table 31 and June 2005, table 30; Price and Muller, 1984, Table 1 ).

2 See Giavazzi and Mishkin, 2006. However, it is difficult to put forth strong objections to Swedensmacroeconomic policy from the late 1990s until 2007 using the R-M model as a norm. After all, in a situationof high unemployment by Swedish standards, monetary policy was mostly expansionary from 1997 to theboom year of 2006. Social Democratic fiscal policy was predominantly countercyclical though restrained in

the medium term in conformity with the R-M model by some disciplinary budget reforms. A criticism of R-Mmust concentrate on indications of a political business cycle, and also of a book-accounting (procyclical),approach to fiscal policy in Sweden from the late 1990s (see Erixon, 2005, pp. 534).


atUniversity



Downloadedfrom


16/27

The conclusion that Swedens trade-off between unemployment and inflation has been

relatively favourable in the 1990s and 2000s is sensitive to the choice of reference countries

and unemployment measures (see Section 4.1). An analysis of the countrys macroeco-

nomic performance in these decades is further complicated by the impact of counter-

balancing, disequilibrium forces. Structural changes, and also hysteresis effects, havecontributed to a higher rate of unemployment given the adjustment capacity of the labour

market. In the 1990s employment was cut in the public sector and high demand for ICT

competence made it more difficult to fill vacancies in the Swedish labour market given the

composition of the labour force. In addition, extensive immigration from countries outside

the EU-25 in the 1990s and 2000s led to higher unemployment in Sweden. What is more,

despite relatively flexible labour markets and ambitious integration policy programmes, the

employment ratio for immigrants is lower in Sweden than in the EU-15 and the USA,

though not lower than in other small Western European countries (Ekberg, 2007; OECD,

2005C). At the same time, there are indications that high productivity growth (see next

section) and delays in wage adjustment contribute to Swedens favourable Phillips curve.1

This conjecture is consistent with the R-M theory provided that increasing labour scarcity

and soaring profits will prompt extensive wage drift, and significant wagewage spirals

in the second half of the 2000s in response to the 200507 profit boom. From this

perspective, lower unemployment in Sweden will, especially under current overheated

conditions, contribute to faster nominal wage growth despite any commitment to wage

restraint by central trade unions. It remains to be seen, however, whether Swedens

productivity development reflects the practice of the R-M policy model or, at least, the

growth mechanisms emphasised in the models underlying theory.

5. Swedens growth performance

During the golden age of the R-M model, if the second half of the 1940s is excluded from

the reference period, Sweden registered a historically high GDP per capita and labour

productivity growth (Erixon, 1991, p. 245, figure I :1 and table I :1). Furthermore, in the

period of 196073, Sweden was in the group of OECD countries with the highest labour

productivity growth in manufacturing.2 However, in this period, Swedish GDP per capita

growth was moderate in comparison to that in other OECD countries. A sharp increase in

female participation rates had positive effects on Swedens relative GDP per capita growth,

but the effects were offset by strong catch-up and recovery tendencies after World War II

in other OECD countries. Moreover, other small Western European countries belonged

to the OECD group with the highest productivity growth in manufacturing. Swedensfavourable productivity development in the 1960s and early 1970s seems largely to reflect

mechanisms shared by other open small Western European countries rather than the

effects of a unique economic and wage policy model. Trade liberalisation increased the

opportunities of companies in small Western countries to exploit scale advantages and their

incentives to rationalise. In addition, Swedish companies showed a high capacity to meet

global challenges and to absorb foreign technologies. These capacities reflected the early

1 Other Swedish economists have posited that equilibrium unemployment decreased in Sweden in the1990s and 2000s due to reductions in benefit replacement ratios and marginal taxes, deregulation of productand labour markets (including exceptions from job security laws) and coordinated wage agreements for the

exposed sector (see Holmlund, 2006).2 Erixon, 1991, table I:2; Monthly Labor Review, August 1991, table 50 ; US Department of Labor,2007A, table 1.1.

382 L. Erixon

atUniversity



Downloadedfrom


17/27

global orientation of Swedish companies and had been demonstrated long before the

application of the R-M model. However, Swedens good productivity performance in

manufacturing in the 1960s provides support for the R-M growth theory. Harder

international competition led to extensive rationalisations, mergers, and to closures of

plants and industries with low profitability, which in turn created a basis for structuralchange (Erixon, 1997, ch. 5).

The relation between the R-M model and Swedens growth performance from the mid-

1970s to the early 1990s is ambiguous. This reflects not only the fact that the model was

only partially applied, but also that international statistics provide no clear picture of the

Swedish growth performance in this period. Almost all OECD countries experienced

considerably lower GDP growth between 1973 and 1990 than in the period 196073.

However the conclusion by some Swedish economists that Sweden experienced a relative

growth problem in the 1970s and 1980s, the heydays of the Swedish model (broadly

defined), is not obvious (cf. Lindbeck, 1997, pp. 12756). It is true that in the 197390

period Swedens GDP per capita growth was low, from an OECD and EU perspective,

despite a continuing huge inflow of women into the Swedish labour market and a high rate

of labour force utilisation (OECD Historical Statistics, 2001, tables 2 .5, 2.8, 2.14 and

2.19). Swedens labour productivity growth was also low in this period compared to the

OECD and EU total, both in manufacturing and in the business sector as a whole. Yet, in

the 197390 period, productivity growth was higher in Sweden than in the USA, Canada

and the Nordic countries, with the exception of Finland, which was catching up.1 In fact,

Swedens growth lag seems largely to reflect a catch-up process in less developed

countries.2

It cannot be denied, however, that Sweden experienced lower growth rates than some

countries on a similar development level in the 1970s and 1980s. Moreover, the validity

of the convergence theory is weakened by Swedens impressive productivity performancein the 1990s and 2000s (see below). In the early 1990s, under the influence of the R-M

growth theory, a productivity commission drew the conclusion that the transformation

pressure (omvandlingstrycket) on exposed Swedish industries was too weak in the

preceding decade. The devaluations weakened stimuli to rationalise, to introduce new

products, technologies and organisations, and to transfer resources to expanding industries

(Erixon, 1991; Swedish Productivity Commission, 1992). In the 1980s, there was evidence

in Sweden of a slowe

The Swedish third way: an assessment of the performance and validity of the Rehn–Meidner model

Documents

Transcript of The Swedish third way: an assessment of the performance and validity of the Rehn–Meidner model