After 20 Years, Sweden’s Labor Market Still Hasn’t Recovered

By many accounts, Sweden did a great job managing its financial and fiscal crises in the early 1990s. But more than 20 years onward, its unemployment rate is still higher than before the crisis, as noted in a recent commentary by the Cleveland Fed’s O. Emre Ergungor (ht: Torsten Slok):

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And its labor force participation rate is still lower:

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Does Sweden’s experience portend similar problems for the United States? Ergungor thinks not. Instead, he attributes this shift to a structural change in Swedish policy that has no direct analog in the United States:

One study of public sector employment policies published in 2008 by Hans-Ulrich Derlien and Guy Peters indicates that for many years, the labor market had been kept artificially tight by government policies that replaced disappearing jobs in failing industries with jobs in the government. The financial crisis was the breaking point of an economic system that had grown increasingly more unstable over a long period of time. It was a watershed event that marked the end of an unsustainable structure and the beginning of a new one. Public sector employment declined from 423,000 in 1985 to 240,000 in 1996 mainly through the privatization of large employers—like the Swedish postal service, the Swedish Telecommunications Administration, and Vattenfall, the electricity enterprise—and it has remained almost flat since then.

With such a large structural change, what came before the crisis may no longer be a reference point for what will come after. Having corrected the root of the problem, the Swedish labor market is now operating at a new equilibrium.

That doesn’t mean smooth sailing for the United States, as he discusses. But it does leave hope that perhaps we do better than Sweden in creating jobs in the wake of a financial crisis.

7 thoughts on “After 20 Years, Sweden’s Labor Market Still Hasn’t Recovered”

  1. Interesting but incomplete. In the late 90s, I looked at the Swedish unemployment numbers after the crisis, and found that much of the increase in the unemployment rate, and the decline in labor force participation rates, were hitting young people the hardest. This is absolutely to be expected in a country so heavily unionized and politically sensitive to influential unions. I bet that’s what’s still going on — they’re still sacrificing youths on the union altar. This has terrible consequences for life time earnings for many people. It’s a deep social failure, and I tried to get colleagues in Sweden to focus on it, but it was useless.

    So, my point is that the numbers in the graph need to be disaggregated by age and education. Behind it lies an ugly truth of Swedish politics — the unions have it. This is policy, and an old equilibrium. Now, they’ve decided to screw the young, in order to keep union wages up, i.e., youth labor force participation rates have become a political control tool. It is also possible that the gray and black markets have grown considerably; in fact, I’m sure of it.

  2. Public sector employment declined from 423,000 in 1985 to 240,000 in 1996…
    Is this what is happening today in the US? Public sector employment is decreasing while private sector is increasing. If so could this be the same as Sweden?

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