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The Swedish Unemployment Experience. Bertil Holmlund Department of Economics, Uppsala University LoWER conference on European unemployment Amsterdam 18-19 April 2008. Outline. Introduction The Evolution of Unemployment Macroeconomic Causes of the Rise in Unemployment in the 1990s

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the swedish unemployment experience
The Swedish Unemployment Experience

Bertil Holmlund

Department of Economics, Uppsala University

LoWER conference on European unemployment

Amsterdam 18-19 April 2008

outline
Outline
  • Introduction
  • The Evolution of Unemployment
  • Macroeconomic Causes of the Rise in Unemployment in the 1990s
  • Institutional and Structural Changes
  • Concluding Remarks
slide3
The paper argues that:
  • The rise in unemployment in the 1990s was mainly caused by adverse macroeconomic shocks
  • The shocks had domestic origins but was reinforced by the international recession
  • The fall in unemployment reflects unwinding of the previous shocks and perhaps some decline in NAIRU over the 1990s
the evolution of unemployment
The Evolution of Unemployment

The 1980s – a success story

  • Unemployment around 2 %
  • Very high labor force participation

75 - 82 % for women

85 - 88 % for men

  • Employment/population: 80 - 83 %
  • 2 % of labor force in active labor market programs (ALMPs)
the mid 1990s mass unemployment
The Mid-1990s – Mass Unemployment
  • GDP fell by 6 % from peak 1990 to trough 1993
  • Unemployment: 1.6 8 %
  • Employment/population: 83 73 %
the late 1990s a strong recovery
The Late 1990s – a Strong Recovery
  • 4 % unemployment by the end of 2000
  • A steep decline in ALMPs
  • A substantial rise in employment
the recent years
The recent years
  • Unemployment sligthly increasing 2002-2006
  • Falling during the recent cyclical upswing
  • Around 4 % by the end of 2007
macroeconomic causes of the rise in unemployment in the 1990s
Macroeconomic Causes of the Rise in Unemployment in the 1990s
  • Stabilization policy in turmoil
  • A look at monetary policy
slide14

Stabilization policy in turmoil

  • A legacy of high inflation
  • Fixed exchange rates, recurrent devaluations
  • Financial liberalization in the mid 1980s
  • A surge in private consumption
    • Negative saving (-5 % in 1988)
    • Housing boom
  • Monetary policy tied to defending the fixed exchange rate
  • Lax fiscal policy
slide15

The Tax Reform 1990-91

  • Lower marginal tax rates on labor earnings
  • Reduced scope for deductions of mortgage payments
  • A rise in real after-tax interest rates
  • A slump in the housing market (fall in real prices by 30 % 1990-93)
  • A steep rise in household savings ratios
    • 5 % in 1988
    • + 7 % in 1992
slide16

U-turn in Stabilization Policy

  • Low inflation the overriding goal (1991)
  • Unilateral affiliation of the krona to the ECU (May 1991)
  • Stubborn defense of the fixed exchange rate
  • The defense had to be given up in November 1992 (floating krona)
a look at monetary policy alexius holmlund economics e journal 2008
A look at monetary policyAlexius & Holmlund: Economics E-Journal (2008)
  • Tight monetary policy in the early 1990s
    • High real interest rates (500 % Oct 1992)
    • Overvalued exchange rate
  • Index of monetary policy, MCI:
    • Weighted average of the real interest rate and the real exchange rate
    • Capture regimes with fixed or flexible exchange rates
results from structural var model
Results from structural VAR model
  • Some 25-30 % of the fluctuations in unemployment are caused by shocks to monetary policy
  • The effects are quite persistent:
    • Around 30 % of the effects of a shock still remain after 10 years
  • Hump-shaped responses with peak after 8-12 quarters
institutional and structural changes
Institutional and Structural Changes
  • Unions and wage bargaining
  • Unemployment insurance
  • Employment protection and temporary work
  • Deregulations in product markets
unions and wage bargaining
Unions and Wage Bargaining
  • Union density around 80 % for many years (coverage even higher)
    • Voluntary UI provided by union-affiliated UI funds
  • Slight decline in the late 1980s
  • A rebound in the 1990s
    • Increased demand for UI when unemployment increased
  • Sharp fall in recent years
    • Higher costs of UI (policy change)
innovations in collective bargaining
Innovations in Collective Bargaining
  • 1983 – more decentralized negotiations
  • 1997 – Industrial Agreement
    • Blue- and white-collar unions
    • Establish consensus on rules of the game and the room for wage increases
    • Informal coordination
  • Increased local flexibility
unemployment insurance
Unemployment Insurance
  • A trend rise in generosity over the 1970s and 1980s (90 % repl. rate in 1990)
  • Benefit cuts in the 1990s induced by the slump (gov’t budget deficit)
  • Rebound to increased generosity in early 2000 (gov’t budget surplus)
  • Some cuts in net replacement rates from 2007 and onwards (benefits, taxes)
unemployment insurance 2008
Unemployment insurance 2008

Day 1-200 80 %

Day 201-300 70 %

Day 301- 65 %

Cap on benefits

Max duration: 300 days

+ 300 under some conditions

employment protection and temporary work
Employment Protection and Temporary Work
  • Fairly stringent employment protection
  • Few changes during the 1990s
  • Some modest changes regarding fixed-term contracts
  • Very liberal rules regarding temporary work agencies since 1993
slide30
Fixed-term employment has increased substantially during the 1990s

From 10 to 17 % of the number of employees

  • Temporary work agencies account for

1 % of the labor force

deregulations in product markets
Deregulations in Product Markets
  • A general trend towards deregulations in the 1990s:
    • Public procurement
    • Telecommunications, energy
    • Air traffic, taxi and railway transport
    • International competition
  • Should probably reduce the NAIRU
conclusions
Conclusions
  • The rise in unemployment was mainly caused by macroeconomic shocks
  • The shocks had domestic origins (policy failures) but was reinforced by the international recession
  • The fall in unemployment reflects unwinding of the previous shocks and perhaps some decline in NAIRU over the 1990s
  • Recent reforms of UI and the tax system will probably reduce the NAIRU
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