Incomes and Labor Market Policies in Sweden: Direct controls have been replaced by fiscal and monetary policies and energetic efforts by the Swedish Government to retrain and redeploy labor. The authors describe how well these measures have reconciled price stability with full employment and economic growth.

Contributor Notes

Incomes policy and direct price controls were used in Sweden immediately after World War II in an attempt to prevent inflation. However, direct controls were gradually replaced by fiscal and monetary policies and energetic efforts by the Government to retrain and redeploy labor. But have these measures successfully reconciled price stability with full employment and economic growth?

This paper focuses on the subject of development and income distribution, and suggests a method whereby economic development can be skewed in favor of the poor. The paper underscores that improvements in the distribution of income can be achieved by applying shadow cost significantly below money cost to determine the social cost of employing members of low-income groups and to use the social consolidation strategy in the choice of technology in the physical construction of projects. The application of this method would result in the more extensive use of labor instead of capital equipment.


This paper focuses on the subject of development and income distribution, and suggests a method whereby economic development can be skewed in favor of the poor. The paper underscores that improvements in the distribution of income can be achieved by applying shadow cost significantly below money cost to determine the social cost of employing members of low-income groups and to use the social consolidation strategy in the choice of technology in the physical construction of projects. The application of this method would result in the more extensive use of labor instead of capital equipment.

Ekhard Brehmer and Maxwell R. Bradford

In the period immediately after World War II Sweden resorted to incomes policy in an attempt to reconcile the objectives of price stability, full employment, and economic growth. Prices were directly controlled, interest rates kept low and stable, and the trade unions were exhorted to exercise restraints in their wage demands. Since this strategy was not complemented by an adequately restrictive policy of demand management, it failed to ensure domestic and external stability and there was, in consequence, a deliberate shift from direct controls to active monetary and fiscal policies during the 1950s. Increased reliance was placed on labor market policies in the late 1950s and beyond, and later measures were adopted to stimulate industrial development in depressed areas. In the housing, agriculture, and public service sectors, the system of price control has been retained.

Despite the challenge of some academic economists, the Government in the 1950s and 1960s did not attempt to interfere with the wage bargaining process because of opposition from organizations representing both trade unions and employers. However, its active labor market policies have allowed the skills and geographic distribution of the labor force to adjust to a changing industrial structure. Originally designed to support monetary and fiscal policy in controlling cyclical economic fluctuations, labor market policies have subsequently become an instrument of structural policy, used independently of cyclical conditions, and an important element in the Government’s efforts to reconcile price stability with rapid growth and full employment.

The mix of stabilization policies in Sweden has, on the whole, been more successful in preventing recessions than in combating inflationary tendencies, except from 1955 to 1963 when stabilization policies were quite successful. In assessing the success of the Government’s stabilization efforts, it should not be overlooked that economic policy in Sweden has been characterized by a continuous determination to sustain full employment and a high degree of social welfare. Rising prices in the postwar period met with little public opposition, except in years of particularly severe increases.

Direct controls and voluntary wage restraint

In anticipation of an expected worldwide postwar depression, the Government in 1945-46 sought to sustain a high level of demand to maintain full employment. It pursued expansionary fiscal and monetary policies, and in 1945–46 abolished or liberalized rationing, import controls, and building controls. Controls over prices and capital movements were retained and efforts were made to attain “voluntary” wage restraint by the labor unions in return for reasonable price stability.

Although these policies kept unemployment low (1.5 to 2 per cent in 1946-47), they did not prevent the emergence of substantial excess demand and inflationary pressures, resulting from expansive fiscal and monetary policies and the liberalization of direct controls on investment. In spite of price control and governmental pleas for wage restraint, consumer prices rose by 8 per cent in the three years to mid-1948, and wages (including fringe benefits) in industry rose by over 20 per cent in the two years 1946-47. In addition the current account balance shifted from surplus in 1945 to deficit in 1947 under the influence of excess demand, the appreciation of the krone by 17 per cent, and import liberalization.

The Government reacted by reintroducing import controls and some rationing; monetary and fiscal policy remained rather passive. The Government did, however, persuade the unions to accept a prolongation of the previous wage agreement in return for a promise to hold down price increases with price controls, subsidies, and low interest rates. As a result, prices rose very little in 1949 and 1950, there was only a moderate increase in industrial wage rates, and the current account balance changed from deficit to surplus. The success of these policies was, however, brief. In 1951 consumer prices rose by as much as 16 per cent, which increased union dissatisfaction and resulted in a sharp upsurge in industrial wage rates of some 20 per cent a year in both 1951 and 1952.

The Government became disillusioned with the policy of repressive controls on prices, investments, and imports especially because of the adverse effects on resource allocation and economic growth created by an inflationary atmosphere and by direct controls per se.

Demand management and labor market policies

Following the boom during the Korean War, there was a gradual shift from the use of direct controls to flexible policies of general demand management. Import controls were liberalized between 1952 and 1954, and between 1954 and 1959 licensing control of building was largely dismantled. Price control was gradually abolished and, from 1955 onward, the authorities favored the principle of price competition, supported by new antimonopoly legislation and by continuous scrutiny of developments in prices and profit margins in the business sector. However, controls on rents and agricultural prices have been maintained.

During the 1950s, the authorities experimented with a wide array of both fiscal and monetary policy instruments. Fiscal policy has relied on tax measures and, since the late 1950s, on anti-cyclical variations in public investment and housing investment, besides variations in investment out of the so-called investment reserve fund scheme. (This scheme allows firms to set aside sums for future investment at times designated by the authorities and receive certain tax benefits.) An important characteristic of public expenditure policy has been strong expansion during recessions (1958-59, 1962-63, and 1966-67), but little reduction in boom periods to counter this expansionary effect. This is consistent with the greater importance attached to full employment than to price stability—a priority helped by the absence of conflict between domestic and external policy objectives during the period 1948-67.

However, tax policy has become increasingly restrictive: the total marginal tax rate (including indirect and corporate taxes as well as social security contributions), with respect to changes in GNP, rose from nearly 40 per cent in the mid-1950s to about 50 per cent toward the end of the 1960s, a record level by international standards. The increase in the tax burden did not, however, prevent substantial deficits in the central government accounts in the five years to 1970.

In contrast to the immediate postwar period, tax and stabilization policies in general have been guided since the 1950s more by considerations of demand management and resource allocation than by considerations of the development of costs and wages. Indirect taxes, in particular, were gradually increased in the 1960s since more pressure could thus be exerted on inefficient firms and on private consumption than through direct taxation. There was no reduction in the sales tax or other indirect taxes when price stability was endangered more by cost than by demand pressures in post-boom years (e.g., 1962 and 1966). While the policy of increased direct and indirect taxation in the 1960s achieved a short-run stabilizing effect on the economy, it appears that the policy induced an extra upward push on wages and prices in the longer run. Such inflationary pressure has been made easier by a free bargaining process which does not inhibit the labor market organizations from taking into account higher taxes and prices in wage negotiations.

Labor market policies

Since 1958, general stabilization policy has been supplemented to an increasing degree by active labor market policies. The introduction of such policies was prompted by a mild recession in 1958-59 when the authorities for the first time used selective measures on a large scale to counteract unemployment in those sectors and areas with particularly weak demand. The labor market measures facilitated structural adjustment of the economy by promoting geographical and vocational mobility of labor through relief work and regional development programs, and by encouraging the entry of women into the labor force.

The range of labor market policies was also broadened during the 1960s to deal with the existence of excess demand for labor in certain sectors and areas—particularly the metropolitan areas in the south—and the simultaneous emergence of considerable unemployment (especially in the north, where unemployment rose as a result of the rationalization of the forestry industry). In addition, a low rate of natural growth in labor supply compelled rapidly growing industries to rely on labor moving out of the stagnating and declining sectors of the rest of the economy.

The activities of the labor market authorities are far-reaching. They are concerned with providing relief work, promoting labor mobility and retraining programs, and also with coordinating labor market policy and specific demand management measures, such as the release of investment reserve funds and the acceleration of public investment programs or government purchasing from industry. Total appropriations in the government budget for manpower and regional policies rose as a proportion of gross national product throughout the 1960s; and the number of persons affected by employment-creating measures rose to an estimated 78,500 persons or 2 per cent of the labor force in 1970.

Under the relief work program, employment opportunities in public works are offered to persons unable to find employment elsewhere. The program is phased with seasonal and cyclical variations in employment and is also used in connection with public investment in depressed areas. However, there has been a rising trend in such “relief” employment as a result of the growing number of older people with a labor market handicap and a worsening structural unemployment problem in northern Sweden.

The public relief work program has not greatly contributed to an improvement in the productivity of the economy. Increased emphasis has been placed on retraining programs to eliminate labor redundancy in depressed areas. Both government expenditure on, and the average number of persons engaged in retraining have grown steadily during the 1960s. As could be expected, the rate of increase diminished in boom periods and accelerated in recession periods during most of the 1960s.

Another element of labor market policy is that of promoting geographical mobility of labor. Travel and removal grants have been greatly improved since the latter part of the 1950s to bring about the transfer of unemployed persons from depressed areas to labor shortage areas. However, the outflow of labor from less industrialized areas in the north led to sharp criticism of labor market policy. The Government, therefore, started in 1962-64 to place more emphasis on regional development with preferential government loans and subsidies to firms willing to invest in the north.

In spite of impressive efforts to obtain a better regional balance in the labor market, excess demand for labor in industrial areas and a high level of unemployment in northern Sweden persisted throughout the 1960s. Apart from political resistance to the outflow of labor from the north, labor mobility seems to have been hampered (until recently) by housing shortages in pressure areas.

Wage bargaining

One of the main principles which guides the wage policies of the major negotiating partners—the Confederation of Swedish Trade Unions (LO) and the Swedish Employers’ Confederation (SAF)—is the absence of government intervention in the wage bargaining process. The desire not to provoke government interference has induced LO and SAF to observe an established code of conduct, and to reach agreements wherever possible in a harmonious manner. As an outgrowth of this behavior, labor conflicts have been fewer and shorter in Sweden than in many other industrial countries in the postwar period. In addition, the labor market organizations have, in general, attempted to avoid wage agreements which would have seriously endangered the national interest, especially when they might have threatened the competitiveness of exports. This has not, however, prevented the organizations from occasionally arriving at contractual wage increases in excess of what the authorities considered appropriate for price stability.

One important objective of the wage policy of LO is the attainment of wage solidarity. This principle seeks to eliminate “unjustified” wage differences between job categories and branches of industry by adhering to equal pay for equal work, without regard to the profit situation in individual industrial enterprises. Although the principle implies the elimination of marginal firms, it has been accepted by SAF on the grounds that it maintains and increases the efficiency of the economy. On the employers’ side, SAF has considerable power—the right to impose fines and a mutual assistance fund in cases of strikes or lockouts—which enables it to present a unified front against the union organizations. The LO, like SAF, is highly centralized and has wide powers to influence its constituent union members.

Through collective bargaining both parties determine the major lines of wage policy at the national level for the recommended period of the wage agreement (one or two years). During the following year, unofficial consultations take place between the SAF, the LO, the economic ministries, and other trade unions. The publication of a semiofficial survey of recent and expected economic developments by the National Institute for Economic Research (Konjunkturinstitutet) in October or November, provides an independent analysis for government, labor, and employers of the overall capacity of the economy to absorb wage rises.

The actual process of negotiation between the bargaining delegations begins in December or January, frequently under the chairmanship of an employer’s representative. The parties take into account a further Konjunkturinstitutet report and the views of the Minister of Finance—expressed in his budget speech—on the scope for wage increases compatible with price stability.

In the absence of disagreement, the SAF and LO arrive at a frame agreement in February or March. However, the agreement does not acquire legal force until its provisions are incorporated into individual collective agreements which are negotiated between national trade unions and employers’ associations concurrently with the centralized negotiations. In practice, the national trade unions usually follow the directions laid down in the frame agreement because the LO has the means to ensure discipline, and because the agreement provides for “exceptions” for certain industries where wages have lagged behind.

Settling deadlocks

Because of the policy of government noninterference, it is only late in an intractable negotiation that official mediators are brought in to settle a deadlock. The parties themselves may appoint an impartial arbitrator and it is only when he is unable to settle the differences that a district or special mediator can be appointed by the National Labor Market Board. If the dispute is serious, the Government may appoint a conciliation commission. Should these procedures fail, the parties can, subject to conditions laid down by law, resort to direct action (either strikes or lockouts), or submit to arbitration by the Labor Market Board.

In the 1950s and the first part of the 1960s the labor market parties generally had less and less recourse to the mediation system since the negotiation procedure was successful in minimizing the amount of friction inherent in the collective bargaining system.

How successful has the “policy mix” been?

Swedish economic policy has been characterized since the late 1950s by a mixture of stabilization and structural policies. Tax policy has been continually tightened in an effort to hold down the growth of domestic demand and to reallocate resources from the private to the public sector. Furthermore, there was considerable acceleration of structural change during the 1960s as the number of shutdowns of firms and production lines increased. Labor market policies since the late 1950s assisted this process of structural adjustment and helped to maintain unemployment at a low level.

However, general demand management policies have not been used since the late 1950s to reduce excess demand for labor. This may be attributed to the authorities giving higher priority to full employment than to price stability. Such excess demand during the 1960s led to an increase in wage rates considerably in excess of overall productivity growth. The wage increases originated in high wage drift which developed in spite of the far-reaching influence of the labor market organizations. Wage drift has made the wage policy of the labor organizations difficult to implement for it worked against attempts by the LO to raise relative wages of low-paid workers, and against attempts by unions representing salaried employees to keep up with wage increases of industrial workers.

Increases in wage rates exceeded the substantial rise in industrial productivity during the 1960s and particularly in 1970. Until 1967 unit labor costs (including fringe benefits) in industry rose more than in Sweden’s competitor countries, but the development of unit costs in the following three years was slightly more favorable in Sweden. Sharp wage increases in Sweden have undoubtedly helped force inefficient firms out of the market and may have also stimulated efforts by other firms, particularly in the export sector, to increase their efficiency. However, the accelerated closures of import-competing firms and a more liberalized trade regime have increased the propensity to import—a development which underlines the need for greater cost stability than in the period 1948-67 when there was no conflict between external and internal policy objectives.

In judging the success of the Swedish policy mix, it should be stressed that the attempt to prevent price rises in conditions of full employment has been hampered by a combination of factors partly of structural origin and outside the control of demand management: for example, the differences in productivity gains between the “sheltered” sectors of the economy and those exposed to international competition, and occasionally (as in 1964/65 and 1969/70) a relatively rapid rise in export prices in a system in which unions persist in their attachment to the principle of wage solidarity.

In its position as a wage leader, the competitive sector—despite accounting for a smaller proportion of output and employment than the sheltered sector—played a key role in both wage and price developments. In this sector, wage costs rose faster over 1960-67 than productivity growth (even allowing for increases in export prices) because of excess demand in the labor market. As a result of the union policy of wage solidarity, the competitive sector transmitted such increases in wage rates to the sheltered sector where productivity gains were smaller. This resulted in price increases in the sheltered sector far in excess of those in the competitive sector, where prices are determined by international competition. An attempt to use demand management policy to contain price increases of structural Origin—those resulting from uniform average wage increases but differential productivity growth between economic sectors—might have achieved its objective of reducing the ability of the sheltered sector to pass on increased costs in prices. However, such an attempt would have led to an unacceptable impact on employment and economic growth.

On the other hand, the existence of wide productivity differences between economic sectors and the lack of control over wage drift by the labor market organizations would have made it difficult for the authorities to adopt an effective incomes policy. All the labor market partners have come to recognize the need for stricter wage discipline, particularly better control of wage drift in boom periods. This was reflected in the 1967 proposal by the Employers’ Association for an improved wage bargaining method designed to obtain greater stability in wages and prices. This proposal was, however, rejected by LO, mainly on the grounds that it would result in a transfer of the problem of income distribution from negotiation between LO and SAF to “objective” estimates by experts who might be influenced by the Government, and would thus deprive the unions of their chance to bargain freely.

Finance & Development, September 1973
Author: International Monetary Fund. External Relations Dept.