Sunday, August 24, 2008

Swedish Employment Growth Remains Strong

When reporting on the latest Swedish GDP number recently, I expressed doubts that growth was really as weak as the report claimed, and that it would likely be revised up later. The reason for that is that the number is inconsistent with many other indicators of economic activity. There are many other economists who share that view, including Sven-Arne Svensson, chief economist at Erik Penser Fondkommission.

One of the indicators which are inconsistent with the 0.2% adjusted growth number is employment. The number of employed persons rose 2% in the second quarter, with private sector employment growing 3.9%. Hours worked rose even more dramatically, although that is likely to a large extent a calendar effect.

Now, we could on the other hand expect productivity to fall for much the same reason as why employment rose. The Swedish centre-right government's policy of reducing income taxes for low and middle income workers combined with cuts in unemployment- and sick leave benefits have boosted labor supply among low and middle income workers. Combined with various targeted cuts in payroll taxes, this have significantly boosted labor supply and therefore also employment among low productivity workers. But the flip side of particularly strong employment growth among people with low productivity is to lower statistical productivity. For that reason, it seems likely that GDP is growing slower than employment.

Still, I find it implausible that the decline in productivity has been as large as the current numbers suggest. And while it is also possible that employment growth is overestimated, the most likely explanation (considering the other anomalies, including those mentioned by Sven-Arne Svensson) is that the preliminary GDP growth number was too low.

The Swedish economy is likely facing a downturn, but it seems unlikely that it started as soon as the second quarter this year.


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