Within a few months, Sweden’s 2020 national wage round will take off in earnest. Coordination among employee unions will occur this autumn, and the results of this are usually very important to the entire wage round. Actual negotiations with employer associations begin after New Year, with the aim at putting collective agreements in place before the agreements signed in 2017 begin to expire in late March. Recent decades have been characterised by low conflict levels and relatively small variations in contractual pay hikes. The gaps between different economic sectors have also narrowed. In 2017 virtually all sectors followed the benchmark set by the industrial sector, with yearly pay increases of 2.2 per cent in 2018-2020. The upcoming wage round is unlikely to diverge from this pattern in any dramatic way, but there are new factors for the negotiators to take into account. The leading role of industry in wage-setting has again been questioned recently. Heated discussion about reasons for the weak krona may also play a role in the wage round.
Timetable for the 2020 wage round
Oct-Nov: Union coordination discussions
Jan-Feb: Labour and employer organisations begin their negotiations
Mar 31: Agreements expire for 1.3 million employees in industry and other sectors
Apr 30: Agreements expire for about 0.5 million employees in construction and other sectors
Underlying conditions are pulling in different directions.
The economic environment in Sweden and elsewhere is of course important for the wage round. The picture is rather mixed. The labour market is now about to cool off, weakening the position of unions. Resource utilisation according to the Riksbank’s RU indicator has fallen but remains well above normal. The indicator will probably fall a bit further before the wage round is over, however. Productivity growth has also been weak in recent years, limiting the room for pay hikes. But at the same time, there are factors that suggest higher contractual pay increases than in the last round. Inflation expectations have risen. Labour and employer organisations have regained some of their confidence in the Riksbank’s ability to reach its 2 per cent inflation target. Tight labour markets have also helped accelerate the rate of pay hikes in various competitor countries. For example the rate in Germany − normally considered the most important − has speeded up since Sweden’s last wage round and is around 3 per cent yearly. Overall, the economic environment is unlikely to justify any major departure from 2017 contractual hikes.
Focusing on both the inflation target and international conditions.
The leading role of the industrial sector in Swedish wage formation has recently been questioned with varying intensity. The main criticism is that the system is actually rigged for a fixed exchange rate regime. In such a regime, industrial companies exposed to international competition will be the main ones that suffer the consequences if high pay increases undermine their competitiveness. In a regime with floating exchange rates and inflation targets, domestically oriented sectors are hurt just as much if the Riksbank is forced to hike its key interest rate in response to pay agreements that threaten to drive up inflation. Since the current monetary policy framework took shape in the mid-1990s, labour and employer organisations have tried to balance these two perspectives and take into account restrictions posed by both the inflation target and pay increases abroad. There have thus also been reasons to preserve the system of letting employers and employees in the industrial sector lead the way, setting a “benchmark” for the rest of the Swedish labour market. The word “benchmark” is also carefully chosen; it need not be a norm that everyone must follow, if there are good reasons for diverging. In practice, however, valid reasons for divergences have had to meet ever-rising standards.
Harsh attacks against the industrial sector norm.
The unions in the “6F” group, including the Building Workers and Building Maintenance Workers, have again challenged the industrial sector and proposed a system in which the Negotiations Secretary of the mainly blue-collar Swedish Trade Union Confederation (LO) plus a delegation of 3-4 unions would represent the labour side. The unions in the delegation would change from one wage round to another. In partnership with its think tank, Katalys, the 6F group recently presented a report entitled “Wage Formation for a New Era”, which argues that the current collective bargaining mechanism must be reformed. The report was based on source material from economists with varying degrees of affiliation with the union movement. Independent professors such as Lars Calmfors and Nils Gottfries contributed chapters respectively entitled “The Role of Industry as a Wage-setting Norm Can and Should be Reformed” and “Europe as a Norm Lacks Relevance – On the Association Between Wage Formation, Monetary Policy, Exchange Rate and Competitiveness” (our translations). Several other chapters by union-affiliated economists argued that pay demands should be higher than in the 2017 wage round and should be set at a level that fully accepts the Riksbank inflation target as an “anchor”.
Several actors have a strong interest in preserving the status quo.
Despite this offensive, the collective bargaining mechanism is unlikely to be reformed. The dominant industrial union, IF Metall, has declared that it wants to keep the current system. The employer side has hardly any reasons to open the way for reform. If the matter is to be seriously considered, it will be necessary for LO’s national leadership to firmly support the 6F group’s strategy. But the question is whether LO really wants to engage in divisive conflicts about wage round mechanisms, in a situation where it must devote a lot of energy to public advocacy in other areas where it fears that union interests are being threatened by budget collaboration between the Social Democratic-led government and the Centre and Liberal parties.
Some acceleration in contractual pay hikes compared to 2017.
Although the prevailing system of negotiations will formally continue, the unions are likely to demand slightly higher pay increases than in the last round. This is partly related to their interaction with the Riksbank and its monetary policy. The drawbacks of the weak krona have recently been debated intensively. Because of high capacity utilisation in Sweden’s export sector, the weak krona’s positive effects on production volume and employment are substantially smaller than normal. Meanwhile domestically oriented sectors, especially retail, are plagued by rising import prices that they find hard to pass on to consumers. This increases pressure to reach agreements that will help ease the Riksbank’s difficulties in meeting its inflation target and thus also ease the downward pressure on the krona from the bank’s extremely low key interest rate. All the unions are probably also prepared to give the Riksbank some credit for its sincere efforts to push inflation up to target, which can also be seen in the inflation expectations of the two sides.
Business community ambivalent about the weak krona.
The employer side naturally has a greater need for proof that the Riksbank can actually push inflation higher. The focus on the consumer price index (CPI) is sometimes also singled out as a problem, since the price trend for companies’ products − not consumer prices − is what determines their wage-paying capacity. But the wide gap between producer and value added prices in different sectors, driven largely by exchange rate movements, is a dilemma. In principle, this should lead to sectoral differentials in pay agreements, but after the discouraging experiences of the mid-1990s, wage formation has again been centralised. Recently, employers have been the firmest opponents of divergences from the industrial benchmark. Business leaders have also pointed out the drawbacks of a weak krona: for example the risk that Swedish assets will be sold off at a discount. Although the connection is not self-evident, it can be noted that the period after the krona exchange rate plunged in 1992 saw significant ownership changes in Swedish business, with a wave of head office out-migrations as a consequence.
Higher trend of price increases is depressing the krona.
Recently the discussion of Sweden’s industrial competitiveness has been a bit confused. Some people argue that the weak krona gives Swedish industry such a strong competitive position that it is impeding pressure for reform in the economy and thus also productivity improvements. Meanwhile the employer side has published several reports arguing that Swedish business is being squeezed hard by cost pressures, compared to other countries. Our own analysis also indicates that due to wage and productivity trends over the past 10-15 years, unit labour costs in Sweden have risen faster than in other countries. This is one reason behind our view that the krona’s equilibrium exchange rate against the euro has weakened. The question is what role this will play in the wage round. The two sides have agreed earlier that short-term exchange rate fluctuations should not affect the available room for pay hikes. In addition, they have agreed that even given floating exchange rates, it is valuable for Sweden to adhere closely to international cost trends. For example, the unions are unlikely to use the krona’s current weakness as an argument that there is greater room to raise wages and salaries.
Is the employer side sceptical about the inflation target?
During the past decade, both the Riksbank and the European Central Bank (ECB) have had problems reaching their inflation targets, due to strong disinflationary forces. It is not so unusual that these forces were even stronger in the euro zone during its existential crisis. A slight underlying depreciation in the krona’s nominal exchange rate − a response to slightly higher inflation in order to keeps real competitiveness in balance − is also a natural result, both in theory and practice. Demanding that Swedish unit labour costs must now rise more slowly than in the euro zone, in order to offset the earlier trend, implies a significantly greater departure from the ground rules of floating exchange rates than we have seen so far. This would undoubtedly introduce strongly disinflationary forces into the economy. If the employer side should actually pursue such a strategy, we should certainly interpret this as meaning they can no longer accept the inflation target as an anchor of Swedish monetary policy. In that case it is no longer a matter of criticising how the Riksbank applies its policy, but instead of seeking some form of peg to major currencies, especially the euro – and later on, once public opinion is ready, perhaps aiming at Swedish euro zone membership.
Contractual pay increases of 2.5-2.6 per cent are not enough for the Riksbank.
Despite all the big macroeconomic issues now being debated so heatedly, it is still likely that the pragmatic negotiating machinery will finally end up with contracts that are not especially different from those signed in 2017. We believe that because of higher inflation expectations and a degree of weariness with currency volatility and extreme monetary policy, we will get 3-year collective agreements containing yearly pay hikes of 2.5-2.6 per cent. Weak productivity growth and profitability problems in several domestically oriented sectors will help keep contractual pay hikes down. Slightly higher pay agreements will allow the Riksbank some relief, but given a cooler labour market situation, wage drift above the contractual increases will probably be quite modest. The total pay hikes that we foresee – around 3 per cent yearly in 2020 and 2021 – imply that the Riksbank will continue to have problems reaching its inflation target. Because contracts will once again probably end up at about the same level in different sectors, regardless of the labour market situation, the wage formation process will not promote mobility and structural reform either. But perhaps this is a price worth paying for stability and labour peace.