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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


The swedish unemployment experience

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


The swedish unemployment experience

Stabilization policy in turmoil 1990s

  • 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


The swedish unemployment experience

The Tax Reform 1990-91 1990s

  • 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


The swedish unemployment experience

U-turn in Stabilization Policy 1990s

  • 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 policy 1990sAlexius & 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 1990s

  • 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


Responses of unemployment to a monetary policy shock
Responses of unemployment to 1990sa monetary policy shock


Institutional and structural changes
Institutional and Structural Changes 1990s

  • Unions and wage bargaining

  • Unemployment insurance

  • Employment protection and temporary work

  • Deregulations in product markets


Unions and wage bargaining
Unions and Wage Bargaining 1990s

  • 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)


Union density 1987 2003
Union 1990sdensity 1987-2003



Innovations in collective bargaining
Innovations in 1990sCollective 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 1990s

  • 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 1990s 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 1990sTemporary 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


The swedish unemployment experience


Permanent and temporary employment 1987 2007 00 s
Permanent and 1990s temporary employment 1987-2007(00’s)


Temporary work and unemployment fractions of wage employment labor force
Temporary work and unemployment 1990s (fractions of wage employment, labor force)


Deregulations in product markets
Deregulations in Product Markets 1990s

  • 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


How high is the swedish nairu
How 1990s high is the Swedish NAIRU?


How high is the swedish nairu lindblad sellin 2008
How 1990s high is the Swedish NAIRU?(Lindblad & Sellin, 2008)


Conclusions
Conclusions 1990s

  • 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