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What measures could encourage young people to complete education more quickly?
Expanding the country’s output depends on making effective use of its available resources through overall labour utilisation and by ensuring that labour productivity is maximised. With already high employment rates overall, policies are now being reoriented to target those groups where participation is especially low and where there is scope for increases. One such group is young people, who could complete their education and enter the workforce at a younger average age if the rules for admission to tertiary education were rationalised to facilitate the transition from secondary to higher education and to encourage improved performance in upper secondary school. The incentives for more rapid completion of post secondary education would be strengthened, for example, by further limiting the availability of study grants to the normal duration of study programmes. The merits of shifting to a more direct “voucher” type of arrangement for funding of tertiary education could also be considered as a mechanism for more efficiently matching supply and demand for places within the tertiary system.
How can integration of immigrants into the labour market be improved?
Immigrants are also under represented in the workforce, with a significantly lower participation rate than native Swedes. The reasons for this are complex, not least because immigrants are a heterogeneous group and may face a range of obstacles to economic integration, depending on their circumstances. Improving their labour market prospects will require a combination of greater efforts to improve their language and job related skills and appropriate activation strategies, as well as vigilance against discrimination. Low skilled foreigners face an extra hurdle because the economy has relatively few jobs at their level, given the wage compression that is a hallmark of the Swedish model of the labour market. If the social partners concentrate wage increases on raising the lowest pay rates in forthcoming agreements, this will make it harder for the low skilled, whether immigrants or native Swedes, to find jobs commensurate with their current skills and productivity levels.
Employment gaps for immigrants
Employment rates of working-age nationals and foreigners (1 ) by gender
1999 2000 averages (2)
1. Nationals and foreigners refer to persons born in the host country and born abroad, respectively, for Australia, Canada, Hungary and the United States.
2. August 2000 for Australia; 1996 for Canada and March 2000 for the United States.
Source: OECD, Employment Outlook 2003.
What can be done to reduce sick leave?
Effective labour supply is also restricted by people absent from the workplace because of sickness, while long-term sick leave and disability pensions have provided a permanent exit route from the workforce for some older workers. Indeed, the growing recourse to sick leave in recent years has made it one of the most urgent labour supply issues to address. The government has made strenuous efforts in the last year to curb the upward trend by tightening administrative controls and giving employers a stronger incentive to reduce its incidence. It also intends to convert disability pensions into time limited, though renewable, sickness compensation. To be effective, these measures need to be enacted as intended in every local social insurance office; strengthening the powers of the national agency over local insurance boards would help to ensure this. If the measures already taken do not yield strong and durable reductions in days lost, further control measures to address moral hazard will need to be considered: this would avoid the less palatable alternative of scaling back benefit rates significantly.
What should be the focus of future income tax cuts?
Boosting average working hours is another way of raising labour utilisation. While trimming back working hours is a natural response to rising living standards, in Sweden’s case, hours worked are also heavily influenced by high taxes on labour income. But fewer working hours diminish the output produced, shrink the tax base and make it harder to finance the welfare state. At the same time, negotiated cutbacks in working hours may also push up the overall cost of labour intensive public services, where offsetting productivity gains are difficult to achieve. Taken altogether, the long term implications for public finances of reduced hours would be significant, and it is therefore crucial to moderate the tax burden on earned income. Once the last step of the current programme of cuts is implemented, future tax reforms could concentrate on producing stronger labour supply benefits by further lowering high effective marginal tax rates on earned income. In addition, reducing the state income tax would be justified in order to increase returns to education and promote growth in labour productivity. The revenue foregone could be financed by trimming public spending, reducing tax expenditures, raising taxes on property and removing preferential VAT rates and/or preferential treatment of pension savings.
How can obstacles to job mobility be reduced?
The productivity of labour resources depends partly on whether they are able to move easily and quickly in response to changes arising from vigorous product market competition. Swedes stay longer in the same job than do employees in other countries, which can have advantages for developing firm specific human capital. But it may also mean that some workers remain in jobs where their output is smaller than it would be if they moved to another position where their productivity could also grow more rapidly over time. Sweden’s relatively strict employment protection legislation may persuade workers to stay where they are, rather than risk moving to a different job — even if it would suit them better than their current one — because of the associated loss of job protection. The bias against hiring older workers, in part reflecting employment protection rights, also discourages job mobility. Furthermore, with wages still relatively compressed, it can be more difficult for workers to identify opportunities for increasing their long term earnings by moving to a higher productivity position. These aspects of the labour market could be addressed by:
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Amending employment protection legislation so that a better balance is struck between providing job security and facilitating the movement of people to jobs where they are most productive, where their earnings potential is greatest, and where they would prefer to be.
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Allowing relative wages to play a greater role in providing information about the demand for workers and skills between firms, sectors and professions. As wages are negotiated between the social partners, this may involve bargaining outcomes that reflect a greater tolerance for wage dispersion.
Can tax rules be changed to reduce distortion of investment decisions?
Raising inter sectoral capital mobility could also contribute to higher productivity. Current tax rules inhibit the process of shifting capital rapidly to its most productive uses. Although Sweden’s corporate tax regime is internationally competitive, more uniform tax treatment of different forms of corporate finance and different types of investment would improve efficiency. A cut of the tax rate financed by base-broadening measures could contribute to this. Wealth taxation discourages households from saving outside of institutional vehicles such as occupational pension schemes and may make it more attractive to hold assets offshore for tax reasons.
How can entrepreneurial activity be encouraged?
Entrepreneurial activity is one of the most important, though elusive, elements of a dynamic economy. It is still weak in Sweden, although the government has given it more emphasis and public attitudes have become more favourable in recent years. Several factors work against entrepreneurial efforts. The more favourable corporate tax treatment of debt is disadvantageous, especially for small companies and start ups, for which equity financing is often more appropriate. The income splitting (so called “3:12”) rules applying to closely held companies provide a neutral treatment of different organisational business forms and prevent large-scale income shifting in the dual income tax system. Although the imputed capital income formula has been chosen to reflect an average ex ante risk premium, it nevertheless limits the ex post rewards for risk taking and remains relatively onerous for highly profitable businesses, even after the recently announced changes. The risks associated with shifting from employment to self-employment may also be magnified by the loss of accumulated employment protection and the high weight of previous earnings in the amount of unemployment insurance benefit. Overall, it may be unrealistic to expect entrepreneurs to flourish in such a climate, which almost certainly could be improved with very little overall impact on public finances.
Starting or running a business
Percentage of answers, 2001
Source: Gallup Europe 2002.
Entry, exit and survival of firms
1. Data on persons employed for Denmark, Finland and the Netherlands are expressed in full time equivalents.
Source: Eurostat; OECD.
What can be done to stimulate commercialisation of R&D?
Although innovation is clearly important for technical progress, Sweden’s high rate of investment in R&D does not appear to have yielded commensurate increases in aggregate productivity that would contribute to long-term economic growth. This suggests that it would be appropriate to maintain a relatively cautious approach to policies for R&D per se, and the optimal strategy would ensure that economic conditions overall provide market based financial rewards to firms that innovate. However, in the public sector, the incentives to commercialise research could be strengthened by sharing the intellectual property rights between the researcher and the employing institution. Setting up structures that help institutions develop effective strategies for bringing research to market could also facilitate technology transfer. A similar approach could also help diffuse innovative practices within the public sector and stimulate employers and employees alike to search more actively for such improvements.
Resources used in R&D
2001 or latest available year
1. 1998.
2. 1999.
3. 2000.
4. 2002.
Source: OECD, STI Scoreboard.
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