The Swedish Unemployment Experience

1. The Swedish Unemployment Experience Bertil Holmlund Department of Economics, Uppsala University LoWER conference on European unemployment Amsterdam 18-19 April 2008

2. Outline • Introduction • The Evolution of Unemployment • Macroeconomic Causes of the Rise in Unemployment in the 1990s • Institutional and Structural Changes • Concluding Remarks

3. 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

4. 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)

5. The Mid-1990s – Mass Unemployment • GDP fell by 6 % from peak 1990 to trough 1993 • Unemployment: 1.6 8 % • Employment/population: 83 73 %

6. The Late 1990s – a Strong Recovery • 4 % unemployment by the end of 2000 • A steep decline in ALMPs • A substantial rise in employment

7. The recent years • Unemployment sligthly increasing 2002-2006 • Falling during the recent cyclical upswing • Around 4 % by the end of 2007

8. Swedish unemployment 1970-2007

9. Swedish unemployment 1970-2007

10. Inflow and Duration

11. Unemployment by age, log scale, %

12. Employment/population 12

13. Macroeconomic Causes of the Rise in Unemployment in the 1990s • Stabilization policy in turmoil • A look at monetary policy

14. 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

15. 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

16. 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)

17. 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

18. Real interest rate and MCI

19. Real exchange rate and MCI

20. 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

21. Responses of unemployment to a monetary policy shock

22. Institutional and Structural Changes • Unions and wage bargaining • Unemployment insurance • Employment protection and temporary work • Deregulations in product markets

23. 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)

24. Union density 1987-2003

25. Union density in recent years

26. 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

27. 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)

28. 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

29. 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

30. 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

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

32. Temporary work and unemployment(fractions of wage employment, labor force)

33. 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

34. How high is the Swedish NAIRU?

35. How high is the Swedish NAIRU?(Lindblad & Sellin, 2008)

36. 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