Economic Survey of Norway 2008: The labour market: supply constraints and immigration

 

Contents | Executive summary  | How to obtain this publication | Additional information

The following OECD assessment and recommendations summarise chapter 3 of the Economic survey of Norway published on 20 August 2008.

 

Contents                                                                                                                             

Demand for labour is strong; some policies inhibit its supply

As demand pressure on the mainland economy continues to grow, adjustment takes the form of supply shifting away from the tradeable sector, where imports financed by Pension Fund revenue can replace domestic production, to the non–tradeable sector where they cannot. A partial exception is agriculture where a highly protectionist policy inhibits this shift by preventing imports of certain foods when similar domestically–produced food is available, though at a much higher production cost. Labour shortages in the non–traded sector are reflected in high wages, by international comparison, and the high and increasing relative cost of living.

 

The 2007 Economic Survey pointed out that a number of policies in Norway act to reduce the supply of labour. Although labour participation rates are among the highest in the OECD, they are partially offset by average hours worked that are among the lowest. Low working hours and increased leisure would be a natural reaction to increasing wealth, so they are not to be criticised in themselves. But they may also in part be a reaction to a generous sickness benefit scheme. Reforms to this scheme were introduced in 2004, when the number of days lost initially diminished. Since then sick leave has been on an increasing trend, and further measures were introduced in 2007, but sick leave remains prevalent as the system retains incentives towards excessive use of the scheme. Proposals made in the 2006 OECD Report on Sickness and Disability and repeated in the 2007 Economic Survey should be implemented – notably to reduce benefit levels, and remove responsibility for assessments from family doctors. In fact, there seems to be no strong reason why the culture of strict conditionality for which the unemployment benefit system is known, and which has in the past helped to maintain unemployment relatively low even in downswings, should not be extended to the sickness scheme, provided of course that its basic aim of protecting the genuinely sick is met. The same goes to some extent for disability pensions, which are frequently used as a supplementary early retirement scheme and are apparently also being awarded increasingly to young people. Here again some reforms have been introduced, but while it is too early to assess their impact, it is a fairly safe assumption that further improvements to incentives to participate in the labour market within the objective limits of the disability scheme could be made. More recently, there have been some new policy initiatives to tackle these problems. If the “NAV reform” (in which various labour market and welfare services are brought together under one roof) can be completed successfully, it should be used as an opportunity to try to impose the successful disciplines of the unemployment insurance system on the less strict welfare scheme.

 

Share of the population over 50 on different benefit schemes, 2006


While the pension reforms will restore better incentives for older workers to remain in the labour market, slow progress in sickness and disability reform suggests that it is difficult for the government to increase domestic labour supply, despite the potential for this. It was estimated in the previous Economic Survey, for example, that a significant increase in labour supply could be achieved if Norway adopted reforms to increase working hours to a level in line with the average in the European Union.


Labour market reforms might increase the benefits from immigration

Some policies thus act to restrict the supply of labour. Meanwhile, high wages and the tightening labour market have attracted historically large migration inflows since 2004, boosting the labour supply substantially. This was facilitated by the increased freedom of movement of labour within the expanded European Economic Area. Along with most potential destination countries, Norway retained some restrictions on the inflow of labour from the “EU8” countries, and later on Romania and Bulgaria too; the need for a work permit was retained, but an offer of employment is essentially sufficient for a worker from these countries to obtain a permit. Until 2007, workers from the “EU10” needed a permit before starting to work, but this restriction was abolished from 2008 – they can now start working once an application for a work permit has been submitted. With Norwegian employers eager to recruit, Polish workers in particular have taken advantage of this increased freedom of movement. As from 2009, the government is intending to remove the transitional arrangements with the EU8, and to relax some restrictions on non–EEA immigrants too.

 

Unemployment and net immigration, 1970-2007

 

Labour mobility generally improves welfare, so these plans are a welcome contribution, although one should beware of measuring the benefit from immigration simply in terms of the increased GDP that it certainly permits. The gains to existing residents are generally much less than this, since the migrants themselves are likely to receive much of the extra output in wages so the benefit comes mainly in the form of higher profits and tax revenue. In addition there are gains from improved availability of certain services when immigrants enter sectors where native labour supply is particularly limited. The policy of extending collective wage agreements beyond the parties to the original agreement, in order to force up wages paid to immigrants, tends to reduce the share of the gains accruing to natives. As part of a set of measures against “social dumping”, this may be the price for improved equity, but it should not be allowed to be used as a disguised way of inhibiting competition among domestic companies and shutting out foreign ones.

 

More generally, it is frequently observed that there are labour shortages in certain areas or professions in Norway. The construction boom means that this sector is sometimes cited, but also some engineering professions, teachers or scientific graduates. But the convention in the Norwegian labour market makes it unclear whether there really is a shortage of such labour, since the wage negotiating system seems to prevent a significant impact of relative demand and supply on relative earnings. In the current wage round, for example, despite very low unemployment and the suggestion of labour shortages just mentioned, the private sector settlement included a provision for low paid workers – in a system with one of the flattest wage distributions in the OECD – to be paid an additional amount on top of the general increase for all workers, thus further flattening the wage distribution. Plant–level bargaining introduces flexibility around the national agreements, but these do not seem to substantially increase wage differentials across sectors or types of labour. It may not be necessary to change a system that has overall worked quite well for some time, but introducing freedom of labour movement beyond the common Nordic labour market probably necessitates, in the longer run, a greater willingness to accept that relative wages should reflect supply and demand for labour more directly.

 

The benefits to natives from labour immigration, notably the fiscal benefits, generally last only as long as immigrants do well in the labour market. For as long as the boom lasts, this seems practically guaranteed, and even in a downturn there is no big problem if immigrants return home. However, given the generous nature of parts of the Norwegian welfare system discussed earlier, significant numbers may choose to stay; this could provide an additional incentive for governments to reform the welfare system.

 

How to obtain this publication                                                                                   

The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.The complete edition of the Economic survey of Norway 2008 is available from:

 

Additional information                                                                                                  

 

For further information please contact the Norway  Desk at the OECD Economics Department at ecosurvey@oecd.org. The OECD Secretariat's report was prepared by Paul O’Brien and Romina Boarini under the supervision of Patrick Lenain. Research assistance was provided by Ane-Kathrine Christensen, Elke Lüdemann and Thai-Thanh Dang.

 

 

 

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