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The following OECD assessment and recommendations summarise Chapter 4 of the Economic Survey of Sweden 2005 published on 9 June 2005.
Labour supply needs to rise
Avoiding any discouragement to work is crucial in order to preserve national income and to shore up public finances. Sweden cannot afford to have one of the world’s most generous welfare systems if labour supply is just average. The main avenue for achieving this is to reduce the disincentives that currently hold down average hours of work. Working hours are low partly as a result of sickness and disability absences, but other forms of time off work along with negotiated reductions in working hours also contribute to the problem. There are several pockets where employment could be enhanced as well.
Overly generous leave schemes reduce labour supply
Several paid leave schemes have been introduced for various social reasons, but they have the side effect of reducing effective labour supply. In total, they contribute as much as sickness to lost work time:
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The parental leave scheme has valid family policy objectives but may have become too generous in the sense of harming women’s labour market prospects. The social goals of the scheme need to be traded off against these costs. In general, measures that increase the duration of mother’s leave further should be avoided so as not to aggravate gender segregation and human capital loss, which are detrimental to longer-term career prospects. But one way to improve the scheme would be to increase the share that is not transferable between parents.
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A paid sabbatical leave scheme was introduced this year whereby employees can take up to a year off and be replaced by an unemployed person. The aim is to provide workers with a chance for recreation or personal development (even though the study leave scheme gives ample scope for the latter) and to give the unemployed a foothold in the labour market. While small, there is likely to be pressure to expand the programme. It should be abolished instead. Workers who want extra holidays can always negotiate them, but they should not be paid for by the taxpayer. Furthermore, arguing that this scheme benefits the unemployed relies on the misperception that there is only a fixed amount of work to be shared around (the “lump of labour fallacy”).
Work absences mean that effective employment is much lower than actual employment
Employment rates and people at work, per cent of population
Source: Statistics Sweden, OECD.
Young people need to enter the workforce earlier
Younger adults are another under-used source of labour supply. They tend to enter the workforce later than in most countries, partly because of a late start to university. Admission is based mainly on grades, but there are plenty of ways to improve one’s chances by studying for an extra year or two in a post-secondary programme. This creates a pointless “arms race”, at the end of which mostly the same people gain entry, but it takes an extra couple of years to achieve. Some simple solutions include giving preference to people who qualify directly from school and not granting bonus points for irrelevant work experience. Once students have started studying, generous grants and an absence of tuition fees mean they are in no hurry to graduate. One way to encourage them to finish more rapidly and choose courses more relevant to the labour market would be to introduce modest tuition fees backed by income-contingent loans. But if that is not acceptable, other ways to improve efficiency should be found. For example, Sweden could consider Norway’s new policy of converting some of the student’s loans into grants if studies are finished within the prescribed period. In addition, income support rules that allow students to take a year of paid holiday during a course should be modified: grants should be given only for the minimum duration of a course, while those who want to take longer could finance that through the loan scheme.
There may be some scope to increase labour supply among older workers
There is also scope to increase participation among older workers, even though Sweden does better than most other OECD countries in this respect. The incentives to retire early that are embedded in the public pension system are lower than in many countries because, although the pension can be taken at any time from age 61, the payout rate is increased the longer somebody stays working. However, there are two reasons why it may want to consider tilting incentives even further, going beyond neutrality. First, while the current adjustment is appropriate for an actuary, most people probably have a subjective rate of time preference that is higher than the standard discount rate. It therefore takes a bigger financial incentive to encourage them to postpone their retirement. Second, the tax they would pay if they stayed at work has positive spillovers for the rest of society, such as providing more room for better welfare services in the future. Society and public finances will be better off so long as the extra taxes exceed the financial cost of the incentive.
Measures for getting the unemployed back to work could be improved
Improvements to the unemployment insurance (UI) system could lower the rate of joblessness, thereby providing additional labour input. The administration of UI is patchy. Similar cases can be treated differently across the country, with some local offices being more likely than others to extend a benefit beyond the normal maximum. In addition, while the Activity Guarantee is an improvement on the previous system, it is not being used as well as it should be. It is designed to provide full time, tailored labour market programmes for the long term unemployed who need special help. Instead, it is being used to give unlimited access to UI benefits. To deal with these problems, the institutions should be streamlined (by merging the national and local labour market boards, for example), local case offices need to apply the rules consistently, sanctions on those who are not actively looking for work should be strengthened, and the Activity Guarantee should be of limited duration and offered only to those who need intensive programmes. In general, Sweden would get better value for money from its active labour market programmes if they were shorter and started earlier in the unemployment spell. This would best be done in conjunction with the introduction of profiling in order to minimise the risks of spending money assisting people who would easily find a job by themselves.
A more flexible labour market would raise employment and reduce sickness absences
Job prospects for marginalised groups are likely to be raised if employment protection legislation (EPL) were eased. While there is no clear international evidence that EPL affects the unemployment rate, there is evidence that strict EPL reduces employment and participation rates. In Sweden, the main restriction is the seniority or “last in first out” rule. This is designed to give extra protection to older workers and to reduce the amount of stigma associated with being made redundant. However, it may have several adverse side-effects. It risks locking people into less suitable jobs (and Swedes do stay longer in the same job than employees in other countries). It reduces the probability that an employee might start a new venture for themselves if they lose their acquired tenure rights by doing so. It may make sick people more reluctant to change jobs, which in some cases might eliminate the cause of their illness in the first place. Finally, it may raise the sickness rate for another reason, as there are some signs that absenteeism is higher when there is strong job protection.
Return to the OECD Economic Survey Sweden 2005 homepage
Go to Chapter 5
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A printer-friendly Policy Brief (pdf format) can also be downloaded. It contains the OECD assessment and recommendations, but not all of the charts included on the above pages.
To access the full version of the OECD Economic Survey of Sweden:
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Readers at subscribing institutions can go to SourceOECD, our online library.
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Non-subscribers can purchase the PDF e-book and/or printed book at our Online Bookshop.
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Government officials can go to OLISnet's Publication Locator ( subscribe).
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Accredited journalists can go to their password-protected website.
For further information please contact the Sweden Desk of the OECD Economics Department at webmaster@oecd.org. The OECD Secretariat's report was prepared by David Rae and Martin Jørgensen under the supervision of Peter Jarrett.
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