This Background Paper examines the medium-term economic outlook (1997–99) for Norway. The central feature of Norges Bank’s reference case projection for the medium term is that the expansion of mainland output will slow from 3.3 percent in 1995 and 2.8 percent in 1996 to an annual average of 2 percent in 1997–99. Overall GDP growth will also slow from about 4 percent in each of 1995 and 1996 to 2 percent in 1997–99. Inflation is forecast to remain low, at 2 percent in 1996 and on average 2.3 percent per year in 1997–99.

Abstract

This Background Paper examines the medium-term economic outlook (1997–99) for Norway. The central feature of Norges Bank’s reference case projection for the medium term is that the expansion of mainland output will slow from 3.3 percent in 1995 and 2.8 percent in 1996 to an annual average of 2 percent in 1997–99. Overall GDP growth will also slow from about 4 percent in each of 1995 and 1996 to 2 percent in 1997–99. Inflation is forecast to remain low, at 2 percent in 1996 and on average 2.3 percent per year in 1997–99.

IV. Recent Developments in the Norwegian Labor Market 1/

Norway has a low level of unemployment by international standards, but not compared with its own past record. Despite the low overall unemployment rate, many of the jobless have been so for extended periods. Public sector employment is high, and there are unusually large numbers of disabled pensioners. Wages are determined through a centralized wage bargaining system that brings together the main social partners to maintain a consensus for sustainable real wage increases. Employment programs and the social safety net for the jobless are generous, but blunt the incentive to seek employment.

Macroeconomic policies are oriented toward promoting real income growth, job creation, and competitiveness through a combination of moderate nominal wage increases--encouraged through the centralized wage bargaining system--and low inflation--achieved through exchange rate stability vis-à-vis the ECU. Nominal exchange rate targeting imposes discipline on wage settlements as all parties understand that the erosion of competitiveness caused by excessive nominal wage increases will not be offset through devaluation, with the result that the attention of all social partners is focused on achieving sustainable real wage increases. Although this policy contributed to competitiveness gains prior to 1993, the appreciation of the krone in the current upswing and a slowdown in productivity increases have resulted in a partial erosion of these gains in 1994-95. Policies to foster employment have been complemented in cyclical downturns by expansionary fiscal policies--during the most recent recession, a cumulative fiscal stimulus equivalent to 7 percent of GDP was applied to the economy--and the creation of public sector jobs, whose share of total employment has reached 31 percent--a level second only to Sweden among the industrial countries.

Other measures to promote employment include subsidies (which have averaged about 4 percent of mainland GDP throughout the 1990’s) to favored industries, regions, and the agricultural sector. Although such transfers and price distortions introduce structural rigidities and budgetary costs that ultimately work to the detriment of job creation, they appear well entrenched.

Since the recovery in 1993, job growth has been strong, a development that has not been fully reflected in declining unemployment, owing to rapid labor force growth arising from demographic factors and increased participation rates. Downward stickiness in the unemployment rate also reflects a significant structural component, particularly among the old and unskilled, which is compounded by generous unemployment benefit levels, rigid labor market regulations (characterized by the OECD as the most restrictive among its members), and uneven skill levels across the labor force.

With the continuation of the upturn in 1996, government labor market policy is oriented toward moving the unemployed into newly created jobs, and, to this end, addressing the structural elements of unemployment through better and better targeted training. Incomes policy is focused on correcting the loss of competitiveness experienced during 1994-95 through moderate price and wage growth. Less emphasis is being given to addressing the structural rigidities born of the high level of transfers and subsidies, or alleviating the inhibiting effects of labor market regulations on employment creation.

1. Aspects of unemployment

Norway has traditionally experienced low levels of unemployment. Prior to the mid-1980’s the unemployment rate ranged between 1-4 percent, with extended periods in the vicinity of 2 percent. Although unemployment levels have risen since (reaching a high of 6 percent in 1993 before declining to 5 percent in 1995), they still compare favorably with those of other European countries (Chart 4.1). The unemployment rate is higher for men, especially during downturns, as men are more heavily represented in cyclical sectors of the economy, while women are more likely to be employed in the sheltered public sector, whose employment levels have grown robustly during economic downturns. 1/ Unemployment--generally of short duration--falls most heavily on the young, 2/ while the old and/or unskilled are particularly susceptible to long-term unemployment.

CHART 4.1 NORWAY
CHART 4.1 NORWAY

LABOR MARKET INDICATORS

(In percent)

Citation: IMF Staff Country Reports 1996, 015; 10.5089/9781451829624.002.A004

Sources: Statistics Norway; and OECD, Analytical Database.1/ Total employment divided by working-age population.2/ Total hours worked in the economy divided by the working-age population X 37.5 hours/week X 48 weeks.

a. Long-term unemployment

Long - term unemployment -- defined as joblessness for more than 26 weeks--has increased from about 15 percent of total unemployment in 1987 to 43 percent in 1995 (Table 4.1). The longest periods of unemployment are experienced by the elderly (those over 60 are jobless twice as long as the average duration of unemployment), the unskilled (those with only a primary school education are unemployed about 40 weeks, compared with 24 weeks for those with higher education), and men (who suffer longer periods of unemployment than women at all ages and levels of education).

Table 4.1.

Long-Term Unemployment (Survey Data)

(In percent of total unemployment)

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Source: Central Bureau of Statistics.

b. Structural unemployment

The symptoms of structural unemployment are evident in the lengthening average duration of unemployment, the concentration of joblessness among certain groups, the slow decline in unemployment levels during periods of rapid employment growth, and the decline in labor utilization rates. The structural roots of unemployment include generous unemployment benefits that dampen incentives to seek employment, and worker protection laws that deter job creation.

The replacement ratio provided by unemployment benefits is high (about three quarters of the average wage for a married couple with two children (Table 4.2)) and the duration of benefits is long. The replacement ratio is higher at lower wage levels, with the result that low-paid workers have a particularly low incentive to seek work. The initial period of unemployment benefits of 80 weeks may be extended to 93 weeks when no job or labor market program is available. A second period of 80-93 weeks is then offered, if necessary. Unemployment benefit recipients are guaranteed a place in a labor market program when the second period of benefits expire. Completion of a labor market program often qualifies the participant for renewed unemployment benefits if no job is identified at the end of the program, thus effectively extending indefinitely the period of unemployment benefit. However, the base salary for calculating the unemployment benefit is reduced for each successive 80-93 week period.

Table 4.2.

Norway: Unemployment Benefit Replacement Ratios

(In Percent of Previous Income)

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Source: Ministry of Finance.

Average Wage.

Labor market regulations on hiring and firing, part-time employment, and overtime restrict the flexibility of employers to respond to changes in demand and thus deter competitiveness and job creation. Most labor market regulations are set forth in three pieces of legislation. First, the Work Environment Act (WEA)--which regulates working time, appointments, and dismissals--requires firms to transfer workers to other positions, if possible, if the workers’ effectiveness or the firm’s demand has declined. Under the act, a worker has the right to challenge a dismissal in the courts and to retain his position until a court has confirmed the dismissal’s legality. The WEA effectively eliminates the possibility of dismissal as a result of the consolidation of a firm’s operations if jobs are available in other areas of the firm’s activities. In addition, the WEA establishes limits on working hours and overtime pay. The WEA’s limits on fixed-term contracts were recently tightened to prohibit, in effect, all fixed-term contracts. Second, the Employment Act (EA) grants the state a large role in job placement services, although recent steps have been made in the direction of expanding the scope of private employment agencies, and of their cooperation with public agencies. In addition, the EA prohibits subcontracting except in certain limited sectors (such as secretarial work), limiting the ability of a firm to rationalize its operations. Third, the Act on Obligatory Pay (AOP) regulates temporary layoffs and establishes the level of benefits which must be paid to workers that are temporarily laid off.

The centralized wage bargaining system that effectively sets the tone for the bulk of all wage agreements throughout the economy has so far remained flexible enough, especially at the local level, to avoid creating a serious impediment to job growth. However, real wages--which increased by 4 percent annually during the recession of 1988-93--appear insensitive to employment developments, and wage differentials in Norway are compressed. Wage compression and the heavy representation of the unskilled among the unemployed suggest that the flexibility of the centralized wage bargaining system is limited at lower wage levels, a phenomenon exacerbated by the high replacement ratios at low wage levels.

A number of factors have modified the impact on measured unemployment of changes in the availability of private sector jobs. First, high public sector employment has helped absorb the unemployed during cyclical downturns. During the recession of 1988-93, public sector employment grew by 78,000 as the private sector lost 183,000 jobs (Table 4.3). In the subsequent recovery, the public sector created a further 18,000 jobs, compared with 52,000 new jobs in the private sector.

Table 4.3.

Structure of Employment, 1987-95

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Sources: Central Bureau of Statistics; and Ministry of Finance.

Second, the number of disability pensioners is also high, and has risen sharply since the 1980s. 1/ Since 1990, the incidence of disability among men has remained about 7½ percent of the male working age population, while the incidence among women has remained about 9½ percent. The high rate of disability is attributable to four factors. First, the increased labor market participation among women--who appear to be more susceptible to disability than men--has contributed to the growing ranks of disability pensioners. Second, disability pensions are used in many cases as a form of early retirement for workers whose productivity has waned prematurely. Many of those on disability pensions might, under a more rigid interpretation of eligibility requirements, find themselves among the unemployed. Third, eligibility rules were relaxed in the 1980s, in part to accommodate early retirement among “tired workers”. Finally, programs to rehabilitate the disabled and long-term sick have hitherto not been given high priority. The heavy resort to early retirement through disability pensions has contributed to a reduction in the effective retirement age from the statutory age of 67 years to 61 years. However, measures introduced in the early 1990s to tighten eligibility standards and medical review procedures have slowed the rate of increase of disability pensioners.

Third, there are a number of labor market programs aimed at returning the jobless to employment. Participants in these programs are not included among registered unemployed. The level of participation in such programs--which is cyclical--peaked at 2.3 percent of the labor force in 1993, falling to 2 percent by September 1995 (Table 4.4); further reductions are planned in 1996 with the continued upswing in growth. The cost of these programs is high--the most expensive programs require outlays 1¾ times the average level of unemployment benefits. Recent surveys of the effectiveness of these programs find positive but quite limited benefits, often of limited duration, notwithstanding their high cost.

Table 4.4.

Active Labor Market Programs--1987-September 1995

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Source: Central Bureau of Statistics.

2. Prospective labor market policies

Following the creation of 40,000 jobs and mainland output growth of 3.2 percent in 1995, the authorities anticipate continued strong growth in output (2.7 percent) and employment (30,000 new jobs) in 1996. As the upturn proceeds, the authorities are orienting their labor market policies toward preparing the unemployed to take advantage of the ample supply of new jobs through better training and incentives that promote job search. Incomes policy remains focused on maintaining competitiveness by moderating nominal wage increases.

In view of the upswing, the 1996 National Budget proposes a reduction in the average number of labor market program participants to 40,000 in 1996 (from 56,000 in 1994 and 43,000 in 1995). In addition, these programs will be reoriented toward those most in need of improved skills and toward meeting actual demands for labor. Job placement services will be strengthened, and geographical mobility, the lack of which has hitherto proven to be an impediment to successful placement, will be promoted. In order to encourage the unemployed to seek jobs, the delay in offering places in labor market programs will be increased. Efforts to rehabilitate the disabled will be intensified through expanded and improved vocational training and job placement.

The authorities are considering two main reforms of the regulations governing unemployment benefits. First, the effective duration of benefits is to be reduced to three years by eliminating the renewed qualification for benefits following completion of a labor market program. Second, access to unemployment benefits is to be tightened by raising the minimum threshold of prior income by two thirds. In addition, the authorities intend to apply strictly existing sanctions on unemployment benefit recipients who refuse job offers. However, the current practice of reducing the level of unemployment benefit in the second (and each successive) 80-week round would be eliminated to permit a constant benefit level during the 156 weeks unemployment benefits.

References

  • OECD, Norway Economic Surveys, 1993-94 and 1994-95 (Paris: OECD, 1994 and 1995).

  • OECD, Employment Outlook 1995 (Paris: OECD: 1995).

  • Royal Norwegian Ministry of Finance, National Budget 1995 (Oslo, 1994).

  • Royal Norwegian Ministry of Finance, National Budget 1996 (Oslo, 1995).

  • Royal Norwegian Ministry of Local Government and Labour, White Paper on Norwegian Labour Market Policies (Oslo, 1995).

1/

Prepared by David J. Ordoobadi.

1/

In 1993, when the overall unemployment rate peaked at 6 percent, joblessness among men was 6.6 percent, compared to 5.2 percent for women. This disparity narrowed with the cyclical upturn: at the third quarter of 1995, total unemployment stood at 4.8 percent, with 4.9 percent for men and 4.7 percent for women.

2/

During the third quarter of 1995, joblessness for those under 24 stood at 12.4 percent, compared with total unemployment of 4.8 percent and an unemployment rate of 3.8 percent for those aged 25-74.

1/

During 1980-90, the number of disability pensioners rose from 160,000 to more than 230,000, an annual average rate of about 4 percent, or 7½ times the labor force growth rate. Since 1990, the number of disability pensioners has stabilized. For further details on disability in Norway, see Chapter VI.