26. Over the past ten years, considerable debate has arisen regarding the relationship between labor market institutions and employment performance. This debate was kindled by a seminal paper by Calmfors and Driffil (1988) showing that there was a inverted U-shaped cross-country relationship between the degree of centralization in wage bargaining and the unemployment rate, with the transmission mechanism occurring through real wage developments. Since the publication of this paper a number of researchers have tried to pinpoint weaknesses in the original analysis, in particular by pointing out the difficulty in ranking countries according to the degree of centralization because of the existence of multilevel bargaining. However, various alternative rankings for the degree of centralization have not been able to disprove the empirical connection between the variables (see in particular the work of Freeman (1988), Rowthorn (1992) and Bleaney (1996)). The purpose of this paper is to document the historical development of the wage bargaining framework in Norway, a country with a fairly centralized framework, and analyze the behavior of real wages within this framework. The paper will also compare recent wage developments in Norway with those of its trading partners to assess the implications for Norway’s international competitiveness.

Abstract

26. Over the past ten years, considerable debate has arisen regarding the relationship between labor market institutions and employment performance. This debate was kindled by a seminal paper by Calmfors and Driffil (1988) showing that there was a inverted U-shaped cross-country relationship between the degree of centralization in wage bargaining and the unemployment rate, with the transmission mechanism occurring through real wage developments. Since the publication of this paper a number of researchers have tried to pinpoint weaknesses in the original analysis, in particular by pointing out the difficulty in ranking countries according to the degree of centralization because of the existence of multilevel bargaining. However, various alternative rankings for the degree of centralization have not been able to disprove the empirical connection between the variables (see in particular the work of Freeman (1988), Rowthorn (1992) and Bleaney (1996)). The purpose of this paper is to document the historical development of the wage bargaining framework in Norway, a country with a fairly centralized framework, and analyze the behavior of real wages within this framework. The paper will also compare recent wage developments in Norway with those of its trading partners to assess the implications for Norway’s international competitiveness.

II. THE WAGE BARGAINING STRUCTURE IN NORWAY–ITS EFFECTS ON REAL WAGES AND ON COMPETITIVENESS7

A. Introduction

26. Over the past ten years, considerable debate has arisen regarding the relationship between labor market institutions and employment performance. This debate was kindled by a seminal paper by Calmfors and Driffil (1988) showing that there was a inverted U-shaped cross-country relationship between the degree of centralization in wage bargaining and the unemployment rate, with the transmission mechanism occurring through real wage developments. Since the publication of this paper a number of researchers have tried to pinpoint weaknesses in the original analysis, in particular by pointing out the difficulty in ranking countries according to the degree of centralization because of the existence of multilevel bargaining. However, various alternative rankings for the degree of centralization have not been able to disprove the empirical connection between the variables (see in particular the work of Freeman (1988), Rowthorn (1992) and Bleaney (1996)). The purpose of this paper is to document the historical development of the wage bargaining framework in Norway, a country with a fairly centralized framework, and analyze the behavior of real wages within this framework. The paper will also compare recent wage developments in Norway with those of its trading partners to assess the implications for Norway’s international competitiveness.

B. Theoretical Considerations

27. One of the main benefits of a centralized bargaining framework is that it internalizes the negative externalities created when separate groups achieve independent wage increases. For example, when wage bargaining takes place at the industry level, there are significant possibilities to shift pay rises onto consumers through an increase in the relative output price. As a result, the increase in the real product wage and the resulting employment loss are moderated. However, consumers of the industry’s products are worse off because they must pay higher prices for the products. When wage bargaining takes place at the central level, consumption wages are raised uniformly across all sectors and therefore there is no relative price change. Moreover, wage increases are moderated because unions recognize that higher wages raise product prices which have to be paid by their own members.

28. Centralized bargaining units can also internalize unemployment and fiscal externalities. The unemployment externality results from workers who become unemployed making it more difficult for every unemployed person to find work. In a decentralized system, bargaining is by individual unions which are less likely to be concerned about the effects on other unemployed people of one of their own members becoming unemployed. In contrast, in a centralized system the unions bargain as a group, forcing them to recognize that their actions affect the probability that their own members become unemployed and incorporate this understanding in their wage bargaining strategy. The fiscal externality relates to the fact that high wage bargains which result in unemployment impose a cost to the union members if the unemployment benefit system is partially financed by employee contributions. Centralized bargaining units can internalize this externality whereas bargaining units at the industry level could free ride on the understanding that an increase in unemployment benefits would be financed by increased premiums paid by all workers.8

29. One of the main disadvantages of centralized bargaining is that it cannot incorporate different labor market conditions on a regional and sectoral level and therefore does not reward work according to its market valuation. This problem is mitigated in centralized bargaining frameworks characterized by a multi-level system of wage setting, as in Norway, because central bodies determine aggregate wage changes on the basis of national economic conditions and local unions make further adjustments on the basis of local conditions. For example, in the public sector almost all of the increase in wage rates is decided in the central negotiations whereas in the oil sector, wage drift is an important element in the total wage increase. Given this structure it is not surprising that the local bargain rarely reverses the centralized bargain, which acts essentially as a floor to which the local wage bargain is added. Over the past 30 years, wage drift in Norway has typically averaged about half of the total wage increase in each year and Holden (1989) is unable to reject the hypothesis that there has been no wage drift offset of the centralized wage increase.

30. Figure 3, panel 1 presents the total wage increase and the proportion attributable to wage drift received by private workers in firms which are associated with the employers’ confederation. The peaks in wage growth are synchronous with a shift between main and intermediate negotiations. During the last cyclical upswing in the late 1980s, when local labor market conditions became important, annual increases in the total wage were dominated by wage drift. However, this situation was reversed in 1989 and 1990 when an upper limit was imposed on the centralized wage increase and local negotiations were prohibited. Since then, wage drift has been fairly stable at around 2 percent per year while the centrally-negotiated wage has risen more in line with cyclical developments.

FIGURE 3
FIGURE 3

NORWAY WAGE DEVELOPMENTS

(Percent change from a year ago)

Citation: IMF Staff Country Reports 1998, 034; 10.5089/9781451829648.002.A002

Sources: Employers’ Confederation; and Statistics Norway.

31. Another disadvantage of centralized bargaining is that it does not consider differences in productivity across major sectors of the economy. For example, productivity improvements are typically lower in the service sector than in the manufacturing sector. Therefore a centralized wage agreement that is based on developments in the manufacturing sector will result in uncompetitive wage increases in the service sector. In order to analyze these issues in more depth we propose to consider the determinants of real wages across the manufacturing and service sectors in Norway.

C. Historical Perspective

32. Centralized wage bargaining in Norway goes back to 1935 when the two main labor organizations, LO, the union confederation and NAF, the employers’ confederation, agreed on a constitution which confirmed centralized bargaining as the integral mechanism to achieve wage agreements.9 Members of LO and NAF account for roughly 55 percent of all workers, but their influence in wage agreements account for more than their share of workers because workers in other unions use the LO-NAF agreement as a benchmark. Unions outside LO are mainly professional and are members of either the Federation of Norwegian Professional Associations (AF) or the Confederation of Vocational Unions (YS). Public sector employees in the central and local governments are the other major employee group and their wage agreements are also determined in conjunction with the other union confederations.

33. Since 1964 the length of contract period has been for two years, with strikes and lockouts prohibited during the contract period. Intermediate bargaining adjusts for changes in the outlook for inflation but is only conducted at the LO-NAF level. Once the central negotiations have concluded, most firms have local negotiations which are added to the centrally determined wage rate.

34. Over the past 30 years the degree of involvement of the central government in the wage bargaining process has varied. During the 1960s the central government played a passive role except for the wage council agreements in 1964 and in 1966.10 In the mid and late 1970s however, the central government played a more active role in wage negotiations to help moderate the rapid wage increases that had taken place earlier in the decade to compensate for rapid inflation (Figure 3, panel 2).11 To help induce the unions to accept moderate wage agreements, the government offered generous price subsidies and lower taxes. During the 1980s the government once again attempted to use wage councils to achieve acceptable wage agreements in both the public and private sectors and safeguard Norwegian competitiveness. This approach met with limited success, as between 1983 and 1988 the cumulative real wage increase was 7 percent. To reinforce wage discipline, during April 1988–April 1990, the labor unions agreed to an upper limit on nominal wage growth at the central level and the prohibition of local bargains. In return, the government provided a variety of incentives, including a reduction in the retirement age and in the interest costs of housing loans. This development led to flat real wages in 1988 and 1989.

35. During the recession of the early 1990s, there was broad agreement among the unions, the employers and the government on the need for more cooperation in incomes policies. This led to the publication of a policy document in August 1992 that has set the tone for subsequent wage agreements. This policy, which is one element of a tripartite economic policy framework known as the Solidarity Alternative, targets lower wage growth in Norway than among its major trading partners.12 Since the adoption of this approach nominal wage growth has been moderate but, because inflationary pressures have also been subdued, the recent pattern of real wage changes has not differed much from its profile during the mid–1980s.

36. Norway, in common with the other Scandinavian countries, employs a large fraction of its workforce in the public sector. Currently, roughly 27 percent of working time is carried out in the public sector (Table 4). Hours worked in the other sectors are spread fairly evenly between manufacturing, retail and wholesale trade and business and personal services at 14–15 percent each, with 9 percent in natural resource industries, and 5–7 percent in communication and construction. The smallest categories are banking, shipping, and hotels and restaurants. In this paper the natural resource industries and public sectors are excluded from the analysis and the focus is on the different evolution of wages and employment in the manufacturing, construction, communication and services industries.

Table 4.

Norway: Employment Shares Across Industries

(In percent of total hours worked)

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37. Figure 4, panel 1 shows the evolution of the real consumption wage and productivity in the manufacturing, construction, and communication sectors relative to the economy–wide average over the 1978–96 period. There are strong similarities between the behavior of real consumption wages in manufacturing and in communication whereas the productivity profiles begin to differ in the mid–1980s. In particular, productivity in the communication sector relative to the economy–wide average shot up suddenly in 1987 and has maintained this rapid trajectory ever since, while the relative productivity profile in manufacturing has remained fairly steady over time. Real consumption wages in the construction sector followed a substantially different profile, falling in relation to the average. Moreover, in contrast to the other sectors, the construction sector has experienced no real wage increase since the late 1970s and was therefore eliminated from the analysis.13 Real wages in the service sector have followed those in manufacturing and communication whereas relative productivity profiles in business and personal services have differed considerably, falling sharply in relation to the average (Figure 4, panel 2).

FIGURE 4
FIGURE 4

NORWAY WAGE AND PRODUCTIVITY DEVELOPMENTS 1/

Citation: IMF Staff Country Reports 1998, 034; 10.5089/9781451829648.002.A002

Sources: Statistics Norway; and staff calculations.1/ Percentage change relative to the economy–wide average,

38. To gain a more aggregative view of the contrasting real wage and productivity developments in the sectors that are most exposed to international competition (manufacturing and communication) versus the less exposed sectors (hotels and restaurants, banking, shipping, personal and business services), the panels in Figure 5 aggregate both categories using employment weights for the various sectors.14 The results appear to confirm that real wages in the exposed and less exposed sectors have moved closely together even though the productivity profiles differ considerably. In particular, the real consumption/product wage in the service sector has followed productivity developments in this sector, while since 1988 the real consumption/product wage in manufacturing and communication has risen considerably slower than its corresponding productivity measure.

FIGURE 5
FIGURE 5

NORWAY RELATIVE WAGE AND PRODUCTIVITY DEVELOPMENTS

Citation: IMF Staff Country Reports 1998, 034; 10.5089/9781451829648.002.A002

Sources: Statistics Norway; and staff calculations.

39. Real wages in the service sector appear to mimic developments in the sectors that are more exposed to international competition. The exposed sectors have preserved competitiveness through wage restraint which has allowed wages to grow much more slowly than productivity. This has also helped to hold wage growth in the less exposed sectors in line with productivity developments in these sectors, thereby preventing services from being priced out of the market.

40. Part of the explanation for the strong performance of productivity in the exposed sectors is the labor shedding that has taken place since the peak of the previous cycle in the mid-1980s. Between 1986 and 1993 employment in manufacturing and communication fell by 8½ percent whereas employment in the service sectors remained fairly flat (Figure 5, panel 3). Since 1993 employment has recovered in the exposed sectors but productivity has continued to rise, albeit at a slightly slower pace than over the 1988–1993 period.

D. Real Wage Developments Across Norwegian Sectors

41. A number of authors have estimated wage relationships for the Norwegian manufacturing sector in recent years (see, in particular, Holden (1989), Johansen (1995), and Evjen and Nymoen (1997)). Two major findings are consistent among the various analyses: (1) payroll taxes have no long–run effect on the gross wage because the tax burden is shifted to the workers, and (2) labor market pressures influence wage outcomes. However, the papers differ in terms of their specification of labor market pressures. Holden argues that these pressures are best captured by the vacancy rate whereas Johansen argues that a non-linear representation of the unemployment rate is necessary to capture wage movements prior to the 1990s. In contrast, Evjen and Nymoen demonstrate that Johansen’s non-linear specification fails to hold up during the 1990s because of parameter instability and prefer the log-linear specification.

42. One of the main purposes of this paper is to uncover further evidence on the determinants of real wages in the exposed and sheltered sectors and test the hypothesis that real wages in the sheltered sectors are more heavily dependent on developments in the exposed sectors than in their own sector. Drawing on the empirical work summarized above, the wage-setting schedule is defined as follows:

Wi=η(ptyi,u,τi)

where w is the real gross wage, defined as total compensation divided by total hours worked and deflated by the CPI index, pty is real GDP divided by total hours worked, u is the unemployment rate, and τ is the payroll tax rate. The industry specific variables are indexed by I. To take into account Evjen and Nymoen’s concern about parameter instability arising from complicated specifications we use log differences for all variables with the exception of the payroll tax variable which is expressed as a rate. We also include a dummy variable which takes on the value of unity for the post-1988 period, to assess whether the close relationship between the labor organizations and the government has resulted in lower real wages over this period.

43. Recent revisions to the national accounts in Norway limit the analysis to annual data over the 1978–1996 period. In order to conserve degrees of freedom, estimates were obtained by pooling the data across sectors, with a distinction made between exposed sectors and less exposed sectors. Weighted Symmetric t test statistics indicate that the wage, productivity and unemployment variables have trended upwards over time although in some cases the first differences of the variables appear to be stationary (Table 5).15 The relationships were analyzed in first differences to maintain consistency with previous research in this area.

Table 5.

Norway: Unit Root Tests 1/

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An asterisk denotes a variable or test statistic that is significant at the 10 percent level

44. Tests were also conducted to discover whether the real wages in the exposed sectors were cointegrated with an employment-weighted estimate of productivity in manufacturing and communication and with unemployment. Table 6 indicates that a cointegrating vector was obtained between the real wage, the productivity estimate and the unemployment rate. However, upon further inspection it was found that adding the unemployment rate did not improve on the accuracy of the estimate (ie. the Chi-squared test statistic was insignificant). In the less exposed sectors it was postulated that the real wage was related to the real wage in the exposed sector and to productivity developments in the less exposed sectors. However, no cointegrating relationship could be found between these variables.

Table 6.

Norway: Johansen Maximum Likelihood Tests of the System of Equations

(Cointegration likelihood ratio test based on trace of the stochastic matrix)

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45. A dynamic error-correction equation was set up for real wage changes in the exposed sectors with explanatory variables composed of lags in the dependent variable, contemporaneous and lagged changes in the payroll tax rate, lagged changes in productivity and in the unemployment rate and the error correction term. Two lags were chosen to conserve degrees of freedom. Table 4 presents the estimates and indicates that the most significant explanatory variables are lagged changes in productivity. However, the coefficient estimates are considerably below unity suggesting that real wage changes in the exposed sectors have only partially compensated for productivity improvements. The other significant variables include the contemporaneous change in the payroll tax rate, lagged changes in the dependent variable and in the unemployment rate, and the post–1988 dummy. Simulating the effects of a permanent 1 percent increase in the payroll tax rate indicates that the real gross wage increases by 1 percent within two years and gradually stabilizes at an increase of 0.9 percent. Therefore, over time there is a only a slight reduction in the net wage so that most of the burden of the increase in the payroll taxes is borne by the employers.

46. The discovery that the change in the unemployment rate is an important determinant of wage behavior coincides with the work of Johansen (1995). Moreover, he also finds that the unemployment rate plays a role in determining long–run real wage developments, whereas this analysis could not detect an independent role for the unemployment rate in the cointegrating equation. Differences in results could relate to the equation specification because Johansen explains movements in nominal wages while this paper focuses on real wage movements.

47. Bowitz and Cappelen (1997) document that the wage freeze in the late 1980s had long-lasting effects on real wages. Moreover, while Evjen and Nymoen (1997) argue that there has not been any noticeable change in wage behavior since the implementation of the Solidarity Alternative in 1993, they concede that important changes may have taken place in the labor market since the imposition of the wage freeze in 1988. When a dummy variable for the post–1988 period is included in this analysis, it is found to be significant, indicating that real wages have been 1 percentage point lower in the post–1988 period, holding all other explanatory factors constant.

48. Traditionally, Nordic unions have set wages in relation to wage developments among trading partner countries in order to remain competitive and maintain employment in the competitive sector.16 To test this hypothesis for Norway, two lags of real exchange rate changes used to proxy for competitiveness were added to the original specification. The second column of Table 7 indicates that the variables were insignificant and had little effect on the other parameter estimates. It appears therefore that the real wage does not adjust to dampen the economy-wide effects of sudden changes in the real exchange rate. However, this does not necessarily imply that the Solidarity Alternative has been unsuccessful in its attempt to moderate real wage behavior, because the variability of the real exchange rate based on relative wages has been considerably more muted over the 1993–96 period than over the 1978–1993 period (see Figure 6, panel 1).

Table 7.

Norway: Estimated Equations for Real Wage Growth 1/

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An asterisk denotes a variable or test statistic that is significant at the 10 percent level

FIGURE 6
FIGURE 6

NORWAY COMPETITIVENESS MEASURES AND EXPORT PERFORMANCE

Citation: IMF Staff Country Reports 1998, 034; 10.5089/9781451829648.002.A002

Sources: Statistics Norway; IMF, Financial Statistics; and World Economic Outlook.

49. In the equation specifications with and without the real exchange rate, the error correction term is insignificant. It appears therefore that during this limited estimation period, real wages in Norway have not adjusted to any long-run disparity between the real wage and productivity, a development which has helped to maintain Norwegian competitiveness.17

50. A comparable relationship to that proposed for the exposed sectors was estimated for the less exposed sectors, with the addition of the real wage in the exposed sectors as a further explanatory variable for wage changes in the less exposed sectors. In this case the productivity variables were negative and the real wage in the exposed sectors was highly significant. In fact, the hypothesis that the coefficient was unity could not be rejected suggesting that wages in the less exposed sectors move in tandem with those in the exposed sectors. Changes in payroll tax rates were also significant with a short- and long-term impact of a 1 percent increase in the payroll tax rate on the real wage of about 1 percent. The other significant variable was the second lag of the change in the unemployment rate but both coefficient estimates were considerably smaller than the corresponding estimates in the equation for wage changes in the exposed sectors. This conforms with the general observation that service industries are less sensitive than goods industries to cyclical conditions.

51. The general findings documented above are consistent with the stylized facts of wage determination in the Scandinavian economies. Wages in the exposed sectors are dependent on economic conditions within those sectors, whereas wages in the less exposed sectors are determined by the wage increases granted in the exposed sectors and are largely unrelated to economic conditions within their own sectors. Normally, this situation would have adverse consequences for employment in the service sectors because the services would be uncompetitively priced. However, in Norway, real wage restraint in the exposed sectors has enabled the real wage in the less exposed sectors to grow at the rate of productivity, thereby sustaining the demand for domestically produced services caused by rising incomes.

E. Real Wages and Competitiveness in an International Context

52. Recent wage developments have been relatively favorable for Norway. However, a more complete picture of Norway’s current competitive position must also take into account price and wage developments among its trading partners. This issue is addressed by considering various measures of the real exchange rate and analyzing the extent to which these appear to explain changes in Norway’s market share.

53. A number of papers have discussed the theoretical validity of using various measures of the real exchange rate to determine the competitive positions of nations with no measure clearly superior to the others (see, for example, Artus and Knight (1984), McGuirk (1986), and Marsh and Tokarick (1994)). Consumer price measures have the advantages that they are calculated based on a basket of goods that is fairly comparable across countries and that they reflect factor costs. However, they may be a poor proxy for the price of traded goods because they include the prices of services, many of which are non-traded. Measures based on unit labor costs also reveal important information about underlying costs of production but do not reflect the effect on activity of changes in intermediate input prices. In addition, unit labor costs are highly sensitive to cyclical movements in labor productivity over the course of the business cycle.

54. Figure 6, panel 1 presents various measures of the real exchange rate and indicates that an assessment of Norway’s competitive position is sensitive to the choice of measure. In particular, between 1988 and 1993 there was an improvement in Norwegian competitiveness measured by the real exchange rate based on relative unit labor costs but since 1993 this situation has changed owing to less rapid growth in unit labor costs in Norway’s partner countries (which could be associated with the different cyclical positions of the various countries). As a result of these developments the real exchange rate in 1996 at its most appreciated level for the past 20 years. Measuring competitiveness using relative GDP deflators further accentuates the recent appreciation of the real exchange rate. In contrast, the real exchange rate measured in terms of consumer price indexes has depreciated by 9 percent since 1988, and, in recent years, measures using relative wages show similar results.

55. To assess the relevance of real exchange rate indicators, simple trade equations were used. These equations treated Norway’s manufacturing exports as a function of relative prices and of a trade-weighted index of the level of activity in foreign markets, defined as:

XVMKTt=Σk=1nmkMVkt

where Mk is the historical average of the Norwegian share of country k’s non-oil imports and MVk is the volume of non-oil imports for country k in period t.

56. The performance of Norway’s manufacturing exports relative to its export market shown in Figure 4, panel 2 indicates that Norway lost considerable market share during the late 1970s and early 1980s but has been able to maintain a fairly stable market share subsequently.18

57. A preliminary analysis of the determinants of traditional exports (Norway’s export market and the real exchange rate) indicated that the export market variable entered into the analysis with a coefficient insignificantly different from unity in most specifications. Therefore, in order to conserve degrees of freedom this restriction was imposed. The estimates in Table 8 reveal that the real exchange rate based on relative wages provides the most explanatory power with the contemporaneous value significant at the 90 percent level of confidence (equation (4)).19 In the other equations, none of the parameter estimates of the real exchange rate variables were significant individually and an F test on the combination of lags also indicated insignificance.20

Table 8.

Norway: Estimated Equations for Traditional Export Growth

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An asterisk denotes a variable or text statement that is significant at the 10 percent level.

58. One of the main objectives of economic policy in Norway is to preserve the competitiveness of the mainland economy in preparation for the post-oil era. Therefore, an understanding of the current competitive position is important in assessing the appropriateness of current fiscal and monetary policy in Norway. According to the analysis presented above, it appears that movements in the volume of traditional exports in Norway are best explained by movements in the real exchange rate based on relative wages. Since the late 1980s this exchange rate has depreciated by 5 percent and is now 1 percentage point below the average over the 1978–1996 period. Therefore, according to this benchmark, Norway’s traditional exports are in a relatively favorable competitive position.

F. Conclusion

59. This paper has demonstrated that Norway’s centralized wage bargaining system has been successful in moderating wage pressures over the past ten years. This behavior has helped to stimulate employment in the manufacturing sector and to maintain employment in the service sector. Moreover, even though Norway is at a more challenging point in the cycle in terms of inflationary pressures from the labor market, its competitive position is strong. This is evident from the current level of the real effective exchange rate based on relative wages which is below its historical average over the past 20 years.

60. There is considerable uncertainty about the future profile of the exchange rate in Norway which depends in part on the assessment of the sustainability of the non-oil current account position. According to the most recent estimate of the net present value of petroleum wealth, Norway should be able to finance the current non-oil current account deficit over the medium-term while maintaining the real value of its net foreign assets intact. However, the exchange rate could nonetheless come under pressure resulting from external shocks, macroeconomic policies in Norway, or short-term exchange market dynamics. These issues are discussed in a companion background paper.

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7

Prepared by Alun Thomas.

8

One way of addressing this problem is to set premiums in such a way that those industries which press for high wage bargains are forced to pay for the resulting increase in benefits.

9

LO is politically affiliated with the social democratic party, Labor, and is a major financial contributor to the party. In return, every Labor government contains ministers who come from the leadership of LO.

10

Any major dispute between the LO and NAF legally has to be referred to wage councils. This has occurred nine times since the second world war.

11

In early 1997, Statistics Norway made major revisions to its series to comply with the 1993 System of National Accounts. As a result, consistent series are only available as far back as 1978.

12

The other components of the framework include maintaining the exchange rate of the krone stable against European currencies and using fiscal policy to moderate cyclical imbalances in the economy.

13

Stølen (1995), using a standard econometric formulation for wage behavior, also finds a very poor explanatory fit for wage developments in the construction sector.

14

The communication sector has only become competitive since the late 1980s and therefore referring to it as an exposed sector over the whole period is debatable. However, the lack of degrees of freedom preclude splitting the sample into two sub-periods.

15

The inconclusive stationarity tests partly reflect the limited degrees of freedom.

16

This was the so-called EFO model in Sweden in which wage increases in the sector open to foreign trade was determined by the sum of international price inflation and the rate of growth of productivity, A similar objective is embodied in the incomes policy of Norway’s Solidarity Alternative.

17

It is possible that over a longer time horizon the importance of the cointegrating relationship would be more evident.

18

The variable is defined as the ratio of the indexes of Norwegian manufactures exports and the export market.

19

The estimated equations differ depending on which real exchange rate is used.

20

Tests were also conducted on the presence of cointegrating relationships and indicated that these relationships were present when the CPI and relative wage exchange rates were used. However, because of the limited degrees of freedom, neither estimate was significant when represented as an error correction term in each separate regression.

Norway: Selected Issues
Author: International Monetary Fund