Wednesday, May 24, 2006

Disastrous Swedish Employment Report

Today the Swedish statistical bureau released the employment report (more details in the Swedish language version ) for April 2006 in Sweden. And it was bad, really bad.

What do you mean by "really bad", someone might ask. Employment did rise, albeit only slightly, compared to last year. Yes, but first of all that small increase was in fact lower than the population increase and in fact so small that the increase is within the statistical margin of error. This means that the employment rate in fact fell somewhat.

And as Johnny Munkhammar points out in an op-ed column in Svenska Dagbladet today, this is during a cyclical peak. Global growth is at 5%, well above the average for the last decades, something which have of course benefited the Swedish economy.

Moreover, it could be added that in the case of Sweden, this have been re-inforced by the inflationary policies of the Swedish Riksbank. During the last 2½ years, they have lowered interest rates, while most other central banks have raised them. As a result, money supply and credit growth have been even higher than in the Euro-zone (that saying a lot).

That implies that there is an even stronger cyclical element in Swedish growth than in the rest of the world. And yet, during this time, when both strong global growth and a loose domestic monetary policy have pushed growth way above sustainable levels, job growth is still near zero and total unemployment is still increasing slightly.

Imagine then what will happen when global growth slow down and/or rising consumer price inflation forces the Riksbank to significantly raise interest rates.

Some would perhaps explain this in a neo-Luddite way, that technological progress is enabling companies to increase production while still reducing the number of workers. But while it is true that productivity is increasing fast in manufacturing, this does not prevent other countries from experiencing robust job growth. Neighboring Finland for example saw employment growth of 2% and significantly reduced unemployment during the same period.

The reason why job growth is so slow is that the labor-intensive private service sector is inhibited by high taxes, taxes which in effect functions as internal tariffs and destroy private service sector activity for much the same reason that international tariffs decreases international trade. This is re-inforced by high minimum wages and high unemployment benefits.

Until and unless Sweden deals with these structural problems, high unemployment is here to stay and could get even worse during future cyclical downturns.


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