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The following OECD assessment and recommendations summarise Chapter 3 of the Economic survey of Sweden published on 14 February 2007.
Although growth is strong, the number of persons excluded from the labour market has still not fully come down to where it was before the crisis of the early 1990s. From a peak of 23% in 1993, the share of 20 64 year olds who depend on public income transfers has declined to 20% in 2006, but it remains well above the 15-16% of 1990-91. Overall employment rates are among the highest in the OECD, in particular for women. Nevertheless, with 85% of the men and 81% of the women aged 25-54 being in work, employment rates for prime age workers remain well below what they were in 1990. As the economy may now be hit by more frequent structural shocks than some decades ago, reallocation of labour may be increasingly important and add to the pertinence of traditional insider-outsider problems.
Exclusion generated in the 1990s remains
Persons (full-time equivalents) receiving income support as percentage of population aged 20-64
1. Estimate by the National Institute for Economic Research.
Making the labour market more inclusive and flexible is therefore a key challenge and calls for a variety of responses. Recognising this, the government has presented ambitious reforms to make work pay and increase labour demand for targeted groups and sectors. These measures are designed to work in the context of a compressed wage structure and relatively strict employment protection. If these measures prove not to be sufficient, empirical evidence from other OECD countries would suggest that more flexible wage determination and less strict employment protection legislation are promising routes to combat exclusion. Economically, the essential elements to combat exclusion are the following.
To make work pay and support active job search. The 2007 adjustment of unemployment benefits, with replacement rates now declining gradually from 80% initially to 70% after 40 weeks and with the transfer of the unemployed person to a job and development guarantee with a benefit rate of 65% after 60 weeks, will encourage jobseekers to be more mobile both geographically and with respect to professional orientation. It may reduce structural unemployment by as much as half a percentage point, and increase employment rates by even more. The adjustment of unemployment benefits should be seen in combination with the in-work tax credit which means that the income groups affected by lower unemployment benefits will gain from the in-work tax credit if accepting a job. Meanwhile, as planned, more should be done to enforce requirements for active search and participation, supported by moderate benefit sanctions. Counselling and job search assistance is particularly important at the current juncture in order to ensure that those at the margin of the labour market benefit fully from the current upswing.
To make labour more affordable for certain targeted groups. New-start jobs waiving employers’ contributions when hiring someone having received unemployment benefit, sickness benefit, disability pension or social assistance for more than a year, or for newly arrived refugees or their families will help labour market outsiders when introduced from this year. The general employer contribution rebate planned for various service sectors is expected to increase demand for low-skilled workers, increase labour supply to the extent the services are substitutes to do-it-yourself work or leisure, and reduce shadow market activities, but may also prove difficult to administer and prone to rent seeking with firms trying to reclassify activities so as to receive the rebate. Employer contribution rebates are also introduced for the young and elderly. The effectiveness of these measures will depend on whether labour costs for these groups will be reduced. If not effective, social partners should search for ways to increase wage flexibility at the local and individual level.
To reduce the risk associated with hiring someone who turns out not to be the right person for the job. The plan to prolong the maximum duration of temporary contracts to 24 months will help in this regard, but it may aggravate labour market dualism. Indeed, the significant liberalisation of temporary employment regulations, introduced between the late 1980s and late 1990s, did not succeed in effectively resolving the insider-outsider problems. No other Nordic country has job security laws for regular contracts as strict as those in Sweden.
A series of measures are now being introduced with the new government’s reform programme. All can be expected to have positive effects, but in some cases it will be essential to evaluate and maybe refine targeting and implementation. Looking ahead, it remains an open issue whether Sweden as a small open economy can continue to reap the full benefits of accelerating globalisation without reform of employment protection and more flexible wage determination.
Immigrants suffer disproportionately from exclusion
Net immigration adds ¼-½ per cent to the Swedish population each year, and as most come from countries in South-Eastern Europe, the Middle East, Africa and Asia, diversity in the labour force is increasing. Better including these people in the labour market is a key challenge, as currently their employment rate in Sweden is below the high employment rate for natives. Youth unemployment among immigrants stands out in particular, at a rate above 30% – compared to 10% for young people in general.
Labour market outcome for foreign-born versus natives, 2003-04
Because of their wide individual diversity, immigrants may suffer disproportionately from insider-outsider problems on the labour market. Given their origin, some lack the basic literacy and other skills needed to command a wage higher than the benefits offered when not working. Others are highly educated, but potential employers may feel uncertain about their exact competence. For both groups, strict labour market regulations and a compressed wage structure may entail de facto discrimination, as immigrants are discouraged or even prevented from seeking work on conditions that match their competence and education. Moreover, they may be disadvantaged by moderate ethnic discrimination as found by a recent experiment of sending CVs with similar content but different names to employers with job vacancies.
The general economic recovery will help immigrants, and the challenge is to make sure that increasing demand for their labour is not hindered by adverse structural factors. The best strategy would be to pursue general labour market and welfare reform. But to really help marginalised immigrants, such reforms would have to include substantial easing of job security rules, more individual wage flexibility and considerable reductions in benefit levels. If general reforms are less ambitious, targeted measures may need to be considered.
Adjust benefit withdrawal and maybe the level of benefits to avoid unemployment and inactivity traps. Social assistance and housing benefits for families with numerous children seem particularly problematic in creating such traps.
The social partners should allow for lower initial wages followed by stronger earnings progression during the first years of employment, thereby making it easier for immigrants to get established on the labour market while improving knowledge of Swedish language and other local conditions.
Introduce a youth package with enhanced education and training offers, activation and benefit reform, so that it never pays to remain unemployed or inactive compared to working or taking up training. Such a package has been highly successful in Denmark. It would benefit all young people, but immigrants in particular, by reducing the negative impact of inactivity on hopes and habits in working life. Experience from other OECD countries shows that apprenticeships and enhanced vocational training for young persons could also be helpful. To be fully effective, basic literacy improvements earlier in school, ideally with enhanced educational content in pre-school, are also needed.
Improve language training for newly arrived migrants, inter alia by enhancing the professional ability of teachers and integrating language training in the workplace. Introduce early childhood action for migrants’ children having language problems.
Do more piloting to develop non-bureaucratic procedures for filling job vacancies in ways that avoid possible discrimination based on name or ethnicity.
Improvements in sickness absence and disability pension must be sustained
Sickness absence among those employed and the number entering disability pension increased rapidly from the late 1990s. The numbers are now falling, although the stock of disability pensioners remains among the highest in the OECD. The aim of sickness and disability insurance must be to protect the security of those who suffer illness or an accident. At the same time, it must provide incentives and early action to promote a return to work for those who recover, fully or partially. The new-start jobs and the in-work tax credit introduced this year are important steps in this regard. Administrative improvements in local social insurance offices therefore need to continue, including both enforcement of rules and development of reliable procedures for medical assessment. To ensure that rehabilitation takes place at an early stage, sickness benefit should not be received for longer than a certain period of time. The use of partial disability benefit should be monitored closely and the many cases of disability pension granted during the past five years should be revisited to assess options for rehabilitation. Disability pensioners should have incentives to take up jobs where they can use their remaining work capacity.
Tax cuts are important for both labour supply and entrepreneurship
A number of factors need to be considered alongside labour supply arguments when deciding on the relative importance of alternative income tax cuts. From 2007, an in-work tax credit worth over 1¼ per cent of GDP has been introduced with the purpose of making work economically more rewarding compared with receiving income benefits. In combination with the reduced income replacement rates in unemployment benefits, it will improve employment rates and lower structural unemployment. Meanwhile the effect on average hours worked by those already employed is uncertain, because the positive substitution effect from lower effective marginal taxes, is weakened by the income effect which ís likely to reduce working hours a bit for large groups. For future changes, several options should be considered in order to maximize the effects on employment and hours worked. One option is to expand the in-work tax credit targeted at low- and middle-income earners in combination with benefit reform further reducing the barriers for those presently out of work. Another option is to reduce the rate of state income tax or shift up the threshold from where it is paid. Moving up the threshold by SEK 100 000 from 105% to 135% of average full-time earnings, for example, would halve the number of persons exposed to the above-70% combined marginal tax rate, which results when the state income tax sets in on top of social contributions, municipal income tax and consumption taxes. Nevertheless, with a narrow earnings distribution and many workers paying relatively small amounts of state income tax, only a quarter of the revenues would be lost. In fact, completely abolishing the state income tax would cost just 1½ per cent of GDP – only slightly more than the in-work tax credit just introduced. Of course, the effects on income distribution would be quite different.
How to obtain this publication
The Policy Brief (pdf format) can be downloaded. It contains the OECD assessment and recommendations but not all of the charts included on the above pages.
The complete edition of the Economic survey of Sweden 2007 is available from:
For further information please contact the Sweden Desk at the OECD Economics Department at email@example.com. The OECD Secretariat's report was prepared by Jens Lundsgaard and Felix Huefner under the supervision of Andreas Wörgötter.