This Selected Issues paper examines the labor market and migration in Sweden. Sweden enjoys a broadly well-functioning labor market. The labor force has been expanding at a healthy pace, in part reflecting rising participation including by females. This paper discusses the compositional changes in the labor force, employment, and unemployment over the past decade. A brief overview of migration flows, their composition, and their demographic benefits is provided. An assessment of the potential implications of the projected increase in migration for unemployment is done. The features of Sweden's labor market that contribute to the higher unemployment rates of the lower skilled and foreign-born are also outlined.

Abstract

This Selected Issues paper examines the labor market and migration in Sweden. Sweden enjoys a broadly well-functioning labor market. The labor force has been expanding at a healthy pace, in part reflecting rising participation including by females. This paper discusses the compositional changes in the labor force, employment, and unemployment over the past decade. A brief overview of migration flows, their composition, and their demographic benefits is provided. An assessment of the potential implications of the projected increase in migration for unemployment is done. The features of Sweden's labor market that contribute to the higher unemployment rates of the lower skilled and foreign-born are also outlined.

Sweden’s Labor Market and Migration1

A. Introduction

1. Sweden enjoys a broadly well-functioning labor market. The labor force has been expanding at a healthy pace, in part reflecting rising participation including by females. Moreover, employment growth has been solid, placing Sweden among the OECD countries with the highest employment rate, and helping bring the rate of unemployment down to about 7¼ percent recently from an average of 8 percent over the past three years.

uA01fig01

Labor Force Participation Rate, 2014

(Percent of working age population, 15-74)

Citation: IMF Staff Country Reports 2015, 330; 10.5089/9781513524368.002.A001

Sources: OECD and Fund staff calculations.
uA01fig02

Employment Rate, 2014

(Percent of population)

Citation: IMF Staff Country Reports 2015, 330; 10.5089/9781513524368.002.A001

Sources: OECD and Fund staff calculations.

2. However, there are large asymmetries across labor market groups. Participation and employment rates are lower among certain groups, including the low skilled and foreign-born, and unemployment falls disproportionately on these groups (Figure 1). The low skilled have an unemployment rate of 19 percent in 2014, with unemployment of the foreign-born almost as high at 16 percent. These rates are high, especially relative to total unemployment in Sweden.

Figure 1.
Figure 1.

Labor Market Outcomes of Various Groups

Citation: IMF Staff Country Reports 2015, 330; 10.5089/9781513524368.002.A001

uA01fig03

Low-skilled Unemployment, 2014

(Ratio of low-skilled unemployment rate to overall same-country unemployment rate)

Citation: IMF Staff Country Reports 2015, 330; 10.5089/9781513524368.002.A001

Sources: Eurostat and Fund staff calculations.
uA01fig04

Foreign Born Unemployment, 2014

(Ratio of foreign born unemployment rate to overall same-country unemployment rate)

Citation: IMF Staff Country Reports 2015, 330; 10.5089/9781513524368.002.A001

Sources: Eurostat and Fund staff calculations.
uA01fig05

Unemployment of Vulnerable Groups 1/

(Thousands, left; Percent of respective cohort, age 16-64, right)

Citation: IMF Staff Country Reports 2015, 330; 10.5089/9781513524368.002.A001

Sources: Swedish Public Employment Service and Fund staff calculations.1/ Vulnerable groups include people with first level education, people born outside Europe, people aged 55-64, and people with functional impairment leading to reduced work capacity.

3. The evolving composition of the labor force, in part a result of migration, is a challenge to maintaining Sweden’s high employment rate. Past reforms (including a tightening of eligibility for unemployment and sickness benefits, and lower taxes on low wage earners) have led in recent years to rising participation among the young, old, and foreign-born.2 3 Large migration inflows of late have also been adding to labor supply, and high inflows appear likely to continue in coming years. Asylum seekers, who historically have taken longer to integrate into the Swedish labor market, form a large portion of these inflows. The Swedish public employment service (PES) (2015) reports that the share of vulnerable groups among the unemployed reached close to 70 percent in April 2015, and projects that this share will reach 75 percent by the second half of 2016 owing largely to increasing numbers of people born outside Europe.

4. Accordingly, this paper considers how Sweden can adapt to maintain high employment, which is key to sustaining its strong social model. The paper first discusses the compositional changes in the labor force, employment and unemployment over the past decade. Second, it provides a brief overview of migration flows and their composition, their demographic benefits, and assesses the potential implications of the projected increase in migration for unemployment. It outlines features of Sweden’s labor market that contribute to the higher unemployment rates of the lower skilled and foreign-born. Finally, it discusses policies to enhance employment prospects for a more diverse labor force and facilitate the integration of asylum seekers, while preserving the strengths of Sweden’s labor market model.

B. Compositional Trends in the Swedish Labor Market

5. A skill divide has emerged in the Swedish labor market. The following paragraphs provide a decomposition of changes in key labor market indicators in the past decade. Workers with medium and high skills have enjoyed solid growth in labor supply and employment, and a decline in their unemployment rate. However, workers with low skills have experienced a decline in employment and a sharp rise in unemployment, despite aggregate employment growth averaging 1.4 percent since 2010. Foreign nationals have also faced a rise in unemployment, as their positive contribution to employment was outweighed by the large contribution they have made to the increase in the labor supply.

6. Natives and the medium-high skilled contributed significantly to labor supply gains. Labor supply increased by more than 560,000 persons over the past 10 years, of which the medium-high skilled accounted for about 90 percent, whereas foreign nationals accounted for close to 25 percent. These gains correspond to a 2 percentage point increase in the participation rate, reaching 72 percent in 2014. The medium-high skilled accounted for the entire increase in the participation rate and the foreign nationals for some 75 percent of the increase.

uA01fig06

Composition of Change in Labor Force

(Thousands)

Citation: IMF Staff Country Reports 2015, 330; 10.5089/9781513524368.002.A001

Sources: Eurostat and Fund staff calculations.1/ A statistical reclassification in 2005 impacts some of the results.

7. Employment gains were concentrated among the natives and medium-high skilled workers. Total employment gains of more than 460,000 people during 2004–14 amounted to about 82 percent of the increase in labor supply, of which over 100 percent were taken up by medium-high skilled, partly offset by a 5 percent decline in the employment of low skilled. Foreign nationals accounted for about 20 percent of the gains in employment. These changes correspond to a decline in the employment rate during the past decade by about 1.3 percentage points reaching 92 percent in 2014, as gains in labor supply were faster than those of employment. The decline in the employment rate was accounted for by the low skilled, whereas the employment rate of the foreign rose by about 1½ percentage points.

uA01fig07

Composition of Change in Employment

(Thousands)

Citation: IMF Staff Country Reports 2015, 330; 10.5089/9781513524368.002.A001

Sources: Eurostat and Fund staff calculations.1/ A statistical reclassification in 2005 impacts some of the results.

8. The rise in unemployment was mostly concentrated among the low skilled. Unemployment increased by more than 100,000 over the past decade, of which the low skilled accounted for about 80 percent; whereas the foreign accounted for more than one-third of the rise in unemployment. Low skilled also comprised a rising share among the unemployed over the period, with their share reaching close to 40 percent in 2014 (up from 25 percent in 2004); whereas the share of foreign nationals in total unemployed reached 17 percent in 2014 (up from 11 percent in 2004). These changes correspond to an increase in the unemployment rate by close to 1½ percent over the period, which was largely due to the low skilled, whereas the contributions of the natives and foreign were equally split.

uA01fig08

Composition of Change in Unemployment

(Thousands)

Citation: IMF Staff Country Reports 2015, 330; 10.5089/9781513524368.002.A001

Sources: Eurostat and Fund staff calculations.1/ A statistical reclassification in 2005 impacts some of the results.

C. Migration and the Swedish Labor Market

9. Sweden’s long history of immigration has led to an increasingly diverse population. Sweden has received net migration inflows since the 1930s. Gross migration inflows have been rising over the years, reaching 1.3 percent of the population in 2014, up from ½ percent in the mid-1990s. Over that period, the share of foreign-born persons has risen from 10½ to 16½ percent of the population. Swedish migration policy has a strong humanitarian dimension, therefore, peaks in migration inflows coincide with wars and unrest in other parts of the world. Indeed, Sweden receives more asylum seekers relative to its population than any other EU country, and it has a well-developed framework for integrating migrants especially refugees (Box 1).

uA01fig09

Migration Flows

(Percent of population)

Citation: IMF Staff Country Reports 2015, 330; 10.5089/9781513524368.002.A001

Sources: Statistics Sweden and Fund staff calculations.
uA01fig10

Asylum Seekers, 2014

(Percent of population)

Citation: IMF Staff Country Reports 2015, 330; 10.5089/9781513524368.002.A001

Sources: Eurostat and Fund staff calculations.

10. The shift in migrants’ composition towards asylum seekers contributes to altering the skill distribution of migrants. The share of migrants seeking asylum (and family reunification) has been rising, with asylum seekers comprising about two-thirds of total migrants’ inflows in 2014, up from about one-third in 2010. A higher share of asylum seekers is expected in 2015 and the share could remain high for some years. Further, the share of migrants from non-OECD countries has been increasing consistent with the rising numbers of refugees who, in recent years, have largely come from Eritrea, Somalia, Afghanistan, Iraq, Iran, Kosovo, Albania, and Serbia, with Syria the largest source since 2012. In 2015, unaccompanied minors—primarily from Afghanistan—are almost 20 percent of total refugees, up from about 8 percent in recent years.

uA01fig11

Migrants by Reason for Migration

(Percent of total)

Citation: IMF Staff Country Reports 2015, 330; 10.5089/9781513524368.002.A001

Sources: Swedish Migration Board and Fund staff calculations.

Among the stock of migrants, the share of low-educated increased to about 28 percent in 2014, from 17 percent in 2005, broadly offset by a declining share of highly-educated migrants, which fell by 10 percentage points over the same period.4

uA01fig12

Migrants by Country of Origin

(Percent of total)

Citation: IMF Staff Country Reports 2015, 330; 10.5089/9781513524368.002.A001

Sources: Statistics Sweden and Fund staff calculations.
uA01fig13

Migrants by Educational Attainment

(Percent of total) 1/

Citation: IMF Staff Country Reports 2015, 330; 10.5089/9781513524368.002.A001

Sources: Statistics Sweden and Fund staff calculations.1/ High refers to educational attainment of post secondary education of 3 years or more (ISCED97 5A) or higher; low-and-medium-refers to educational attainment below high.

11. At the same time, migration has important demographic benefits. Migration helps maintain population and labor force growth in the face of an aging of the native population, as it tends to be concentrated among the younger and economically active age groups. Indeed, three-quarters of the overall population increase in Sweden since the mid-2000s came from net migration; and the foreign nationals contributed close to 40 percent of the increase in the labor force during 2008-14 (Figure 2). Going forward, migration is critical for maintaining growth in the working age population—which, without migration, would shrink by a cumulative 3 percent by 2030 and 12 percent by 2060, according to Eurostat forecasts. Overall, these favorable effects will substantially curb the expected rise in the old age dependency ratio.5

Figure 2.
Figure 2.

Migration and Demographic Trends

Citation: IMF Staff Country Reports 2015, 330; 10.5089/9781513524368.002.A001

The Swedish Framework for Integrating Asylum Seekers

The policy goals of integrating migrants into the labor market are achieved mainly through general measures for the unemployed among the whole population, regardless of country of birth or ethnic background. These general measures are supplemented by targeted support for the introduction of newly arrived refugees in Sweden—namely, the introduction program (see below).

Accommodation: As asylum seekers pursue their application with the Swedish Migration Agency, they are offered temporary accommodation for as long as needed. These accommodations can be either in an apartment in a normal housing area or at a reception center. Applicants who do not arrange accommodation on their own cannot choose where they live, and must be prepared to move to a town where housing is available, including during the waiting period for an asylum decision, due to limited availability of housing. If the applicant has the financial resources (as assessed by the Migration Agency), they must pay for the accommodation themselves. Applicants who choose to find accommodation on their own are responsible for their living costs, but have the option to go to an accommodation center where space is available if needed later. If a residency permit is granted, the PES or the Migration Agency can help find housing. Refugees move to municipalities once a residency permit has been issued so as to start the introduction program. Until recently, municipalities could chose not to accept refugees (even though the approach is that every municipality would be ‘expected’ to be ready to accommodate refugees). However, this is now being changed, and all municipalities will be designated to receive refugees largely based on employment prospects.

Work arrangements: Asylum seekers are allowed to work, even without a work permit if certain conditions are met. This right lasts until a final decision on their asylum application is taken, including during appeals procedures, and can extend beyond that if the applicant cooperates in preparations to leave the country voluntarily. Asylum seekers who can get jobs can possibly switch from being an asylum seeker to a labor market migrant if they manage to work 4 months before receiving a final negative decision at the second instance or after their appeal to the Migration Court of Appeal is refused. A successful applicant will receive a temporary work permit of at least 1 year and at most 2 years. After 4 years on temporary permits, a person who still has a job can apply for a permanent residence permit. Asylum seekers may also engage in a ‘work practice at a company’ to help them learn about the Swedish culture, language, and working life, while building their skills.

The Introduction Program: Eligibility is restricted to asylum seekers who have received a residence permit as refugees, quota refugees, or other persons in need of protection, aged 20-64 years (or 18-19 years without parents living in Sweden) and their relatives. An introduction interview by the PES assesses their experience, education and ambitions to develop an “introduction plan” which can last up to 24 months. The plan has three main activities that should occupy participants full-time: (i) Swedish language training; (ii) employment preparation, such as the validation of education and professional experience; and (iii) social studies to provide a basic knowledge of Swedish society. Participation in the program is voluntary, but the introduction benefit is conditional on participation. Participants who find work are able to continue to claim the introduction benefit alongside their wages for six months, after which the benefit is reduced in proportion to the time spent working. The PES can assist refugees with an introduction plan in finding an accommodation at a location where it considers the chances of finding work or education are good.

uA01fig14

Old Dependency Ratio

(Number of 65+ years old per 100 working age (15-64 years old))

Citation: IMF Staff Country Reports 2015, 330; 10.5089/9781513524368.002.A001

Sources: Eurostat and Fund staff calculations.1/ Reduced migration scenario assumes that net migration is reduced by 20 percent relative to the main scenario.

12. The benefits of migration for growth and long-term fiscal sustainability hinge critically on the extent of migrants’ integration into the labor market. An extensive literature has studied how migrants fare compared with natives in terms of employment and wages, as well as how their arrival affects the employment and wages of native workers.6 One of the key findings is that immigrants integrate slowly: they have lower average participation and employment rates, higher unemployment rates, and these gaps are more pronounced in the years upon arrival. Key factors affecting migrants’ labor market outcomes are found to be: educational attainment, age, and host country qualifications and language skills (Aiyar et al, 2015; and Beyer, 2015). However, these gaps are not fully accounted for, indicating other obstacles, such as difficulties with gaining recognition of qualifications.

13. Similar trends are seen in Sweden, where migrants have achieved high employment rates but their integration process is lengthy. Based on historical experience, after 5 years migrant employment rates reach about 50 percent, and 60 percent after 10 years—compared with 77¾ percent among natives percent in 2014. Migrants’ employment rates keep rising, reaching a quite high 73 percent after 20 years. However, the lengthy integration process means that average employment gaps are higher in Sweden compared with other Nordic peers, being most pronounced among the low-skilled. The unemployment rate gap with natives is also high and rising—standing at 10 percentage points in 2014, up from an average of 7 percent points during 2005–08.

Immigrant Labor Market Integration Rate, Ages 16-64, 2013

article image
Source: NIER, June 2016 Special Analysis ‘Population growth will affect the labor market’, available at:http://www.konj.se/download/18.1734e80814bc5f7dc5b529b/Population-growth-will-affect-the-labour-market.pdf
uA01fig15

Native-Foreign Employment Rate Gap, by Education Level, 2014

(Percentage points)1/

Citation: IMF Staff Country Reports 2015, 330; 10.5089/9781513524368.002.A001

Sources: OECD and Fund staff calculations.1/ Positive values imply that the native-born employment rate is higher than that of the foreign-born, and vice versa.
uA01fig16

Foreign-Native Unemployment Rate Gap, 2014

(Percentage points)

Citation: IMF Staff Country Reports 2015, 330; 10.5089/9781513524368.002.A001

Sources: Eurostat and Fund staff calculations.

14. Rising migration inflows pose upside risks to unemployment for some years. Labor supply growth is projected to be supported by continuing migrant inflows averaging about 1¼ percent of the population annually, although there is sizable uncertainty around these prospects. A majority of inflows are expected to be asylum seekers (about two-thirds of inflows in recent years), who historically have taken longer, on average, to integrate.7 A simple dynamic accounting framework that factors in migrants’ age and skill profile is utilized to project unemployment (see table 1 for details). At historical rates of integration—taking 5 (10) years to reach employment rate of 48 (60) percent—the unemployment rate could rise to about 8½ percent by 2020, and remain elevated for some years before declining. In contrast, under an accelerated integration scenario—taking 5 (10) years to reach employment rate of 60 (70) percent—the unemployment rate would remain broadly stable for a number of years at around 7½ percent before falling gradually to around 6¼ percent by 2025.

Table 1.

Unemployment Simulations: Assumptions and Data Sources

article image

The integration pace assumes a faster integration pace of highly-educated immigrants, but the overall weighted impact is consistent with NIER’s analysis.

uA01fig17

Unemployment Rate under Various Integration Speeds 1/

(Percent)

Citation: IMF Staff Country Reports 2015, 330; 10.5089/9781513524368.002.A001

Sources: NIER, Statistics Sweden, and Fund staff calculations.1/ Historical integration rates refer to employment rate at 48 percent in first five years, and 60 percent after 10 years; whereas improved integration rates refer to employment rate of 60 percent in first five years and 70 percent after 10 years.

D. The Swedish Labor Market Plays a Role

15. The labor market outcomes for the low skilled and migrants reflect in part the net effects of Swedish labor institutions and related policies. As discussed below, collective bargaining and employment protection may tend to raise unemployment among the low skilled and migrants, but government policies including active labor market policies, tax policy, and wage subsidies work in the other direction.

16. High entry-level wages arise from the collective bargaining process between unions and employers. The bargaining process takes place at the sector level, but is highly coordinated across industries with the national agreement for the industrial sector setting the example for the rest of the labor market. Sector agreements include floors on wage increases at the firm/local level, limiting the scope for adjusting wages at the firm level to local conditions (IMF, 2014). Although there is no national minimum wage in Sweden, the roughly 600 collective agreements include multiple minimum wages that are differentiated by sector, occupation, age and experience (Skedinger, 2008; OECD, 2011; and IMF, 2014). In 2011, these collectively negotiated wage floors were, on average, 80 percent of average wages. This is high in comparison for instance to Germany where collectively agreed wage floors in most sectors were closer to about ½ of average hourly earnings in 2014 (IMF, 2014), and is also high relative to national minimum wages in other countries.

uA01fig18

Collectively Agreed Wage Floors, 2011

(Percent of average wage)

Citation: IMF Staff Country Reports 2015, 330; 10.5089/9781513524368.002.A001

Sources: Swedish Trade Union Confederation (LO) and Fund staff calculations.
uA01fig19

Minimum Wage Relative to Average Wage, 2014 1/

(Ratio)

Citation: IMF Staff Country Reports 2015, 330; 10.5089/9781513524368.002.A001

Sources: OECD, Swedish Trade Union Confederation, and Fund staff calculations.1/ Data for Sweden are for 2011, and for Japan and Korea are for 2012.2/ For Sweden, data refers to average collectively-agreed wage floor in 2011.

17. The resulting highly compressed wage distribution seems to have particularly adverse effects on the employment (and unemployment) of migrants. Consistent with the population’s strong support for social equity, rather than allow lower wages, the tradition in Sweden is to lift the skills of workers so as many as possible attain a productivity that justifies the relatively high wages at the lower end of the distribution. As a result, sectors that would absorb workers with the lowest skills in many countries, such as domestic help, are very small in Sweden (OECD, 2015). This tradition has supported equity while achieving high employment, yet some, especially those with low skills, do not gain work.8 Migrants appear to be particularly affected, suggesting factors beyond their education and skills could be at play, including language barriers and lack of social/career networks.9

uA01fig20

Wage Dispersion, 2012 1/

(Ratio of gross earnings, decile 5/decile 1)

Citation: IMF Staff Country Reports 2015, 330; 10.5089/9781513524368.002.A001

Sources: OECD and Fund staff calculations.1/ Data for Chile, Iceland, and Israel are for 2011. Data for Estonia, France, Luxembourg, Netherlands, Slovenia Switzerland, and Turkey are for 2010.
uA01fig21

Wage Structure and Foreign-Native Unemployment, 2012

(Ratio of 5th to 1st wage deciles, X-axis; Ratio, Y-axis)

Citation: IMF Staff Country Reports 2015, 330; 10.5089/9781513524368.002.A001

Sources: OECD and Fund staff calculations.1/ 2011 wage ratio data used. 2/ 2010 wage ratio data used.

18. Employment protection is asymmetric between regular and temporary contracts, and the share of temporary contracts has risen though not far above EU levels. Employment protection of regular contracts is negotiated in collective agreements against a legislative fallback of a last-in, first-out rule for dismissals. Over time, protections for temporary contracts have been reduced, leaving a wide gap between regular and temporary contract protection—among OECD countries, Sweden is second to the Netherlands in terms of asymmetry of employment protection. The share of temporary employment in Sweden, has risen from an average of 12 percent of employees in the mid-1990s to 17½ percent in 2014, somewhat above the EU average of 14 percent

uA01fig22

Strictness of Employment Protection, 2013

(Index: 2013)

Citation: IMF Staff Country Reports 2015, 330; 10.5089/9781513524368.002.A001

Sources: OECD and Fund staff calculations.

19. Such an asymmetry in employment protection is found to raise unemployment rates for migrants and the low skilled. In principle, the availability of temporary contracts with lower skilled and migrants. A concern would arise if employees were unable to graduate to more stable work, but, in Sweden, transition rates from temporary to permanent employment are relatively high, at over 40 percent compared with an EU average of 23 percent, suggesting that temporary contracts are likely playing a role as a stepping stone to more stable jobs for many.10 However, transitions from temporary employment to inactivity (and to a lesser extent to unemployment) are also common (Figure 3). Indeed, based on a sample of OECD countries, Ho and Shirono (2015) find that a greater asymmetry in employment protection is associated with a larger gap between unemployment rates of the foreign-born and natives. This may reflect the lower skilled and migrants taking temporary jobs with relatively high labor turnover, making unemployment more likely. Such an asymmetry may also contribute to widening the skill gap if it deters firms from investing in training and human capital.11

Figure 3.
Figure 3.

Temporary Employment

Citation: IMF Staff Country Reports 2015, 330; 10.5089/9781513524368.002.A001

uA01fig23

Employment Protection and Labor Market Outcomes, 2013

(Index: 0-6 where 6 is most restrictive, X-axis; Percent, Y-axis)

Citation: IMF Staff Country Reports 2015, 330; 10.5089/9781513524368.002.A001

Sources: OECD and Fund staff calculations.

20. At the same time, Swedish policies promote employment through a combination of measures which benefit the low skilled and foreign-born:

  • Active labor market policies (ALMPs) receive substantial resources. They encompass a large number of programs aimed at addressing both supply and demand side barriers to employment. They include training, wage subsidy schemes (see below), and job matching services targeted at various groups.12 In 2013, public spending on labor market policies stood at 2 percent of GDP, of which two-thirds were active measures. These efforts are one of the highest in the OECD countries–only Denmark spends more on ALMPs.

  • However, ALMP spending is skewed towards wage subsidies with mixed effectiveness. Wage subsidies accounted for almost half of ALMP spending in 2013, while spending on training and job-matching services comprised only 30 percent of this total. Some studies find that wage subsidies reach the right people and have a positive but small effect on the employment of people with weaker attachment to the labor market (NIER, 2014), and that among ALMPs, wage subsidies are the most effective tool to employ migrants (Butschek and Walter, 2014; and Aiyar et al, 2015). In other studies, the effectiveness of wage subsidies has been questioned.13 An assessment by the National Audit Office (2013) of the Step-in-Jobs scheme found that participants did not have a higher probability of gaining unsubsidized employment within three years, rather they moved to another subsidized employment scheme. Similarly, OECD (2014) finds that New Start Jobs have little or no lasting employment impact on the vulnerable groups they are intended for, and that there is a displacement effect between different programs, such as Step-in-Jobs and New-Start-Jobs.

  • Tax policy also seeks to support employment within the context of high overall tax burdens. Measures to boost labor demand include reduced employer social security contribution for the young and the old, and a lower VAT rate in hotels and restaurants. Other tax measures focus on enhancing incentives to work, including the introduction of an earned income tax credit in 2007, which was strengthened over time. However, the effectiveness of some of these measures has been questioned, as they can lead to displacement effects with limited aggregate employment gains and generate high deadweight costs—as many beneficiaries would be employed even without the tax break (Fiscal Policy Council, 2014). Indeed, this was the reason behind the phasing out of the lower social security contribution for the young in the 2016 Budget Bill.

uA01fig24

Active Labor Market Programs, 2013

(Percent of GDP)

Citation: IMF Staff Country Reports 2015, 330; 10.5089/9781513524368.002.A001

Sources: OECD and Fund staff calculations.1/ 2011 data used2/ 2012 data used
uA01fig25

Labor Market Programs By Category, 2013

(Percent of total expenditures on LMPs)

Citation: IMF Staff Country Reports 2015, 330; 10.5089/9781513524368.002.A001

Sources: OECD and IMF staff estimates.

E. Policy Priorities

21. Containing risks to unemployment from rising migration requires addressing high unemployment of the low skilled and accelerating the pace of migrant integration. The analysis presented in section C raises concerns around unemployment prospects given the historical experience with migrant integration. Sections B and D indicate parallels between the performance of low skilled and that of migrants in the Swedish labor market, which is consistent with migrants on average being less educated compared with natives.14 Further, among the more highly educated migrants, their foreign qualifications are less likely to be accepted by Swedish employers; language barriers and lack of knowledge of the Swedish culture further exacerbate these challenges.

22. Adapting the Swedish labor market to broaden employment does not mean conceding its core principles, which seek a careful balance between equity and efficiency. The Swedish labor market delivers high overall participation and employment rates, aggregate wages move with productivity in a manner that protects competitiveness over time, and it continues to do well in terms of achieving social equity objectives. Andersen (2015) notes that the Nordic model is defined not in terms of specific policies but rather in terms of overall objectives, and that the model is not static, but has seen ongoing reforms and has been adapted to changes in the economic environment and in society more widely. Recent and prospective trends in the composition of the Swedish labor force call for further adaptation, with a focus on elements that deter employment of the low skilled and migrants. Achieving high employment of these groups is important to sustain the broader social model and is also consistent with promoting active participation and inclusion of these groups in society.

23. Increasing wage flexibility within the existing system would expand work opportunities for the low skilled and migrants. While maintaining collective agreements, the social partners could allow greater scope for firms and workers to find wages that reflect the individual workers’ productivity, firm specific factors, and local demand conditions (NIER, 2014). Social supports and tax credits could ensure adequate income. Wage flexibility could also be enhanced in a selective manner by introducing special wage scales for those needing on the job training (likely low-skilled and newly arrived immigrants), as seen in the Netherlands (Box 2).

Special Salary Scales in the Netherlands

Collective agreements in the Netherlands can include special scales targeted at certain groups. The wage level under these special arrangements typically starts at 100 percent of the statutory minimum wage, while the regular wage scales typically start at 5-10 percent higher.

For instance, ‘preliminary scales’ were introduced in 2004 in an effort by the social partners to combat the high youth unemployment. These are included for workers who still receive training, such as the young. The social partners’ recommendations included making use of these preliminary scales that are determined under collective agreements, together with creating work place training opportunities for young people enrolled in education.

The ‘special scales’ were introduced in 2014 for disadvantaged young workers (i.e., young workers who entered into a youth disability scheme). The social partners recommended combining these lower pay scales with subsidies to lower the cost to employers while ensuring that workers receive the minimum 100 percent of the statutory minimum wage. In 2012, out of 53 concluded collective agreements, 31 have included preliminary scales, and 8 included special targeted scales.

24. Reducing employment protection for regular contracts would lower hurdles to stable jobs. Employment protection is negotiated in the shadow of a strong legislative backstop, which has led to relatively high exit costs.15 Anecdotal evidence suggests that one effect of such protection is for employers to raise minimum educational qualifications to ensure they will be able to reallocate employees to other roles in case business needs change, which would likely disadvantage foreign-born workers. There is a need to review this legislation to ensure a better balance, such that exit costs do not deter firms from hiring new entrants with sufficient skills. Easing the protection on regular contracts would also help alleviate the extent of labor market duality and its adverse consequences on labor market outcomes of the low skilled and migrants.

25. ALMPs support the unemployed, particularly the low skilled and migrants, but effectiveness should be enhanced. Improving results in terms of creating new jobs and increasing prospects for gaining unsubsidized employment would benefit from a refocus of ALMPs on training that meets employers’ needs and strengthened job matching services. In particular, the PES needs stronger contacts with employers and better information provision to employers.16 In cases where wage subsidies are used, they are more likely to be effective if a better employee-employer match is made at the outset. Closer contacts with employers, along with expanding work-place based training programs, would also help align training and vocational programs with employers’ needs. More generally, while ALMPs are used intensely in cases of long-term unemployment, it would be useful to intervene earlier in cases where risks of long-term unemployment are high. Addressing housing supply constraints (Chapter II), especially building affordable rental housing in or near the main centers where job prospects are best, would facilitate labor mobility and employment.

26. Focusing on migrants—in particular, accelerating their integration into the labor market is a key priority. As noted, Sweden has a well-developed framework for integrating migrants (Box 1), ranking top among 38 economies.17 However, in practice, the integration process is lengthy as in other countries (section C), with only 30 percent of participants in the introduction program are in employment or full-time education after two years. Beyond the specific features of the Swedish labor market model discussed above, there are non-wage barriers, such as the lengthy residency permit process—a pre-requisite for the introduction program—difficulties gaining recognition of foreign skills and qualifications, and potential “statistical” discrimination (OECD, 2014; and European Commission, 2015).18

uA01fig26

Migration Integration Policy Index, 2014

(Index: 100=Most favorable)

Citation: IMF Staff Country Reports 2015, 330; 10.5089/9781513524368.002.A001

Sources: MIPEX and Fund staff calculations.

27. The Swedish authorities are taking a range of steps in this area. The ‘fast tracks’ initiative aims to create faster entry to the labor market for highly skilled migrants in occupations where there are shortages. The reception system is being adjusted to designate municipalities to receive refugees based mostly on job opportunities. Recognizing the potential adverse role of discrimination, a new government body, The Equality Ombudsman, was created in 2009 to combat discrimination and promote equal rights and opportunities for all. Migrants also benefit from comprehensive ALMPs, including from wage subsidies which can help overcome employers’ risk aversion (OECD, 2014), although relatively large and prolonged subsidies may be needed if exit costs are high.19

28. Continued efforts to accelerate integration are needed. This is particularly important in light of the rising numbers of asylum seekers recently, estimated to reach about 160,000 (1.6 percent of population) in 2015—roughly double earlier projections—and expected to be almost as high in 2016. The average processing time for residency permits has doubled from an average of 108 days in 2012 to 220 days during Q1-Q3 2015, suggesting a need to channel more resources to the Migration Agency. Potential areas where improvements are most important include: 20 21

  • Expediting the educational assessment and skill validation process, so as to help develop an appropriate introduction plan at early stages, and identify courses needed to upgrade skills and help refugees succeed.

  • Easing the advanced Swedish language requirements to start the qualification validation process and/or begin supplementary education for regulated professions (doctors, nurses, teachers, and lawyers); expanding the availability of supplementary education beyond the regulated professions; and ensuring that employers are an integral part of the certification procedure in order to build trust22

  • Improving the quality of the Swedish for Immigrants language training and increasing its flexibility by combining it with vocational training.

  • Continuing support for highly qualified migrants who accept a low-skilled job (who lose access to PES services once employed), to help them continue to search for a better job.

  • Expanding certain employment programs for youth that combine work and training, such as the vocational introduction employment program to also cover newly arrived refugees could help them gain their first job quickly and build needed skills.

1

Prepared by Asmaa El-Ganainy.

2

Youth unemployment reached 23 percent in 2014. But half of youth unemployment reflects the inclusion of young unemployed people in full time studies. Hence, the analysis in this paper does not focus on this group.

3

See Box 2 in chapter III of IMF (2014) for a summary of labor market reforms in Sweden over the past two decades.

4

Highly-educated are defined as those with tertiary education or higher according to the International Standard Classification of Education (ISCED97 levels 5A-6); medium-educated are those with educational attainment of upper secondary up to post secondary of less than 3 years (ISCED97 levels 3C-5B); and low-educated are those with educational attainment of less than lower-secondary education (ISCED97 levels 0-2).

5

About 80 percent of the migrants’ inflows to Sweden over the next 40 years are projected to be in working age group (15-74 years old).

6

See Kerr and Kerr (2011) for a review of the literature on the labor market effects of migrants, and Beyer (2015) for evidence from Germany.

7

Analysis by Statistics Sweden suggests that asylum seekers have the lowest employment rate, but with increasing time in Sweden the differences with other immigrant groups narrow.

8

Eliasson and Skans (2014) show that in industries where the minimum wage is binding, workers with low skills are squeezed out when minimum wages rise further.

9

A number of studies confirm the potential negative employment effects of high wage floor for workers with weak attachment to the labor market, including the low skilled and foreign-born as it leaves a gap between wages and productivity (Skedinger, 2008; Eliasson and Skans, 2014; NIER, 2014; Ho and Shirono, 2015; and OECD, 2015).

10

Indeed, Hartman et al (2010) find that receiving a fixed term contract reduces the risk of future unemployment. They also find that the longer the temporary contract, the higher the probability of having a permanent contract at the same site 2–2.5 years after the start of the contract.

11

Evidence from Sweden shows that employers provide less training to temporary workers (Wallette, 2005).

12

See Calmfors et al (2004) for a comprehensive review of the effectiveness of various ALMPs in Sweden.

13

There are doubts about subsidies creating additional jobs due to evidence of displacement effects as employers switch into subsidized hiring rather than creating new positions. There are also questions around their effectiveness in transitioning participants to unsubsidized employment due to the limited focus of these programs on boosting participants’ skills (Calmfors et al, 2004; IMF, 2014; European Commission, 2015; OECD, 2015; and NIER, 2015).

14

Migrants from Afghanistan, Iraq, Syria, Somalia, and Eritrea—the main countries of origin of the current wave of asylum seekers, are on average less educated than the native population or other migrants (Aiyar et al, 2015).

15

See OECD (2011) for a detailed discussion of some aspects of the Swedish employment protection.

16

Such information would, for instance include information about existing employment subsidy schemes and migrants’ skills and qualifications.

17

The ranking is based on the migrants’ integration policy index (MIPX), developed by Barcelona Centre for International Affairs, and the Migration Policy Group. The index is based on a review of integration outcomes, policies, and beneficiaries in all EU Member States, Australia, Canada, Iceland, Japan, South Korea, New Zealand, Norway, Switzerland, Turkey and the USA. The MIPX covers 8 policy areas: labor market mobility, education, political participation, access to nationality, family reunion, health, permanent residence, and anti-discrimination.

18

Statistical discrimination occurs when risk-averse employers avoid hiring based on a candidates’ country of origin or surname if it signals greater uncertainty about a candidate’s experience or qualifications (OECD, 2014).

19

See Aiyar et al, 2015 for a review of the literature on the effectiveness of ALMPs in integrating migrants, many of which include studies on the Nordic countries, including Sweden. The findings suggest that many of the Swedish programs, such as ‘the special introduction’ program introduced in 2003, and the ‘intensive coaching’ program introduced in 2006, have a positive effect on the employment rate of migrants.

20

Recently, the Swedish National Audit Office (2015) made more comprehensive recommendations along these lines to promote rapid and effective establishment of newly arrived immigrants.

21

See OECD (2014) for more detailed recommendations on specific measures to accelerate the integration of migrants into the Swedish labor market.

22

Swedish language requirements could be eased for instance by using English (or maybe Arabic for now in light of large numbers of Syrian refugees) to start the validation process while migrants learn Swedish along the way.

Sweden: Selected Issues
Author: International Monetary Fund. European Dept.