Wage round will follow new paths in familiar terrain

The General Council of the mainly blue-collar Swedish Trade Union Confederation (LO) decided last week to coordinate this year’s wage and salary demands, and during the coming months the 14 LO-affiliated national unions will specify their demands. Negotiations between labour and employer organisations will enter a more intensive phase early next year.

During the last wage round, the situation became heated on a number of issues that have been important in principle during the past few decades. These included the degree of union coordination, how labour and employer organisations view the Riksbank’s inflation target as well as the role of the industrial sector as a pacesetter for wage and salary increases. The analysis below focuses on the extent to which circumstances have changed since the last wage round.

Our conclusion is that no major differences should be expected compared to last time, but that we are more likely to see two-year agreements this time. We also believe that contractual pay hikes will be a little higher than last time (2.4% compared to 2.2%). Including wage drift, we expect pay increases of about 3% yearly in 2017 and 2018, which is somewhat below the Riksbank’s forecasts. 

Big sectoral differences in activity level
One key issue is to what extent higher resource utilisation due to strong economic growth will influence wage formation. The resource utilisation indicator maintained by the Riksbank, Sweden’s central bank, is now somewhat above its historical average (see chart) but remains well below its peaks in 2000 and 2007.

The historical pattern shows that wages and salaries react to resource utilisation with a 1-2 year lag, which indicates that a clear response will not materialise for another while. However, the differences between sectors are wider than usual.

The export sector is being held back by weak international demand, and several private service sectors such as hotels and restaurants are not signalling any problems either when it comes to recruitment of labour.

However, in the public sector (which is not included in the Riksbank’s indicator), the shortage of labour is far higher than it has been since measurements began in 2005. Due to the recent refugee crisis, it is also likely that pressure on such key public sector functions as health care, social services, schools and the police will increase further.

The construction sector also has a high level of resource utilisation, among other things due to sharply rising home construction. So far this has not been reflected in wages and salaries, an indication that competition from foreign companies and labour remains significant.

The Riksbank has more to prove
Criticism by labour and employer organisations of the Riksbank’s failure to meet its inflation target was one important factor behind the bank’s shift towards a more expansionary monetary policy in 2014.

During the last wage round, the bank tried to signal that the two sides should show respect for the inflation target. This clearly annoyed the employer side, and the Riksbank now seems to be taking a step back. For example, it is arguing that today’s stronger economic conditions should mainly give companies greater opportunities to raise prices, and that only after that can we expect a wage formation response.

The divergent views of labour and employer organisations about the role of the inflation target may also lead to tensions. Union policy is that in principle, the 2 per cent inflation target should serve as an anchor for pay negotiations. Even if actual inflation currently diverges from this target, unions have argued that forecasts are uncertain and that loyalty to the inflation target may contribute to national economic stability.

But when criticism of the Riksbank was at its most intensive, industrial unions showed an understanding of the employer view that systemically lower inflation was squeezing profits in many sectors.

Recently, however, inflation expectations among both labour and employer organisations have climbed, which should be interpreted as a partial acknowledgement of the Riksbank’s position. It is thus likely that, to a higher degree than in the last wage round, industrial unions will maintain that the inflation target should anchor the 2017 negotiations.

The employer side naturally has a greater need of proof that the Riksbank can actually help push inflation higher. The focus on the consumer price index (CPI) is sometimes also singled out as a problem, since changes in the prices of companies’ products − not consumer prices − are what determines their ability to pay wages and salaries.

One dilemma is that the producer price index (PPI) diverges so much between sectors, largely driven by exchange rate movements. In principle, this should lead to sectoral differences between collective agreements, but after the discouraging experiences of the 1990s wage formation has gradually become more centralised again. Last spring, employers were the ones who most strongly adhered to the policy that there should be no divergences from the industrial pay hike benchmark.

There is thus hardly any alternative to the inflation target, but employer policy will be that the Riksbank has far more to prove and that the coming negotiations must take into account a tough international environment, both in terms of pay trends in competitor countries and downward price pressures.

LO coordination will change playing field
In the last wage round, conflict about the leading role of the industrial sector in setting wages was rekindled when several LO-affiliated unions known as the “6F” group (mainly representing construction, property management and central government employees) chose to call for higher pay hikes than the industrial unions.

Although there are arguments in favour of also including domestically oriented sectors in a system of floating exchange rates and inflation targets, ultimately there was a massive wave of support for the industrial benchmark. LO and the Confederation of Swedish Enterprise jointly demanded that all negotiations should follow the contractual pay hikes agreed in the industrial sector, and Prime Minister Stefan Löfven (himself a former Metal Workers Union chairman) joined the discourse.

In addition, the Riksbank has signalled more clearly that the negotiating system is entirely a matter for labour and employer organisations. Given these developments, it is unlikely that we will see any open conflict about the role of the industrial sector benchmark this time around.

Last year LO’s attempt to coordinate the demands of its member unions failed because they could not agree on how special efforts to address historical inequities should be structured. The Municipal Workers’ three-year collective agreement, which ended last spring’s negotiations, nevertheless included extra spending on assistant nurses.

This time around, the LO unions have preliminarily agreed that a general effort to negotiate extra pay hikes for low-income employees can also provide a tool for their ambitions to correct old inequities and thereby serve as the linchpin of its coordination of pay demands. This method implies that national unions will demand pay hikes of fixed krona amounts for employees with a monthly wage or salary below SEK 24,000 and a percentage figure for those with higher pay.

Given the natural assumption that pay hikes should be roughly the same for those earning just above or just below this breakpoint, we can project what impact the special effort on behalf of low-income employees will have. Our estimates indicate that the differential between the outcome for all employees and the percentage pay hike for those earning more than SEK 24,000 a month will be only 0.1-0.2 percentage points.

Somewhat higher demands than last time
At what level union demands will actually end up will be the next important question for the wage round.

Last time the industrial unions opened by demanding 2.8% in wage hikes, and the 6F unions followed with a demand for 3.2%. The industrial unions, led by the Metal Workers, will again set the pace this time, and LO’s coordination plans imply that its other affiliated unions will then respect the benchmark set by the industrial unions.

Higher inflation expectations, slightly stronger productivity increases and tighter resource utilisation suggest somewhat higher demands than last time.

Our estimate is that unions will call for pay hikes somewhere in the 3.0-3.2 per cent range. Low actual inflation, low pay hikes in other relevant countries as well as high Swedish entry-level wages and salaries in an international perspective will then be important employer arguments in the coming negotiations. At the same time, employers are probably ready to pay a little extra in order to conclude somewhat longer-running agreements this time.

Our forecast is that the negotiations will then end up with contractual pay increases of a bit below 2½%.

Leaving integration policy to the politicians
This year’s special efforts to help low-income employees indicate that the union side is not prepared to change its strategy in response to the major challenges of integrating recent refugees and other immigrants into the Swedish labour market and society. In its wage formation report, for example, the National Institute of Economic Research maintains that the labour and employer organisations can “help lower the thresholds for entry into the labour market by adjusting minimum wages.”

The employer side has also already begun to attack union efforts to help low-income employees by arguing that Sweden needs lower thresholds for entry into the labour market, and absolutely not higher thresholds. The union attitude is partly based on the view that many new arrivals in Sweden have such low levels of formal education and productivity that dramatic cuts in minimum wage levels would be needed to have any impact. The unions are instead likely to continue maintaining that the integration policy dilemma must be solved by public policymakers, for example through large subsidies, education and training programmes as well as expansionary economic policies.

Also looming in the background are tensions regarding what types of work should be performed outside the regular labour market. Here the role of the unions will be to ensure that various integration-promoting programmes will eliminate union members’ regular jobs to the least possible extent. Meanwhile there is awareness that the current system will be subjected to such major strains that changes are essential.

The situation can perhaps be described as a tug-of-war between the Social Democratic-led government and (historically Social Democratic) labour unions to determine who should shoulder the most responsibility for adapting to the new conditions resulting from large-scale immigration.

To summarise, it is clear that the 2017 wage round will have a wide-ranging impact on the Swedish economy and on policymakers. The two sides are likely to deliver collective agreements that will lead to labour peace and will not threaten Sweden’s competitiveness or economic balance in the traditional sense.

However, the wage round will probably not make the Riksbank’s situation any easier in terms of achieving its inflation target. Meanwhile far-reaching centralisation and special efforts on behalf of low-income employees will make it harder to bring about changes in relative pay between sectors and individuals that might improve the functioning of the economy. This confirms the impression that major Swedish economic players (labour and employer organisations, the Riksbank and the government) have learned their lesson from the severe crises of the 1990s. But they still need to find more paths towards collaboration and cooperation in order to manage the challenges of today.