What is Sweden’s high-wage secret?

by Karl-Petter Thorwaldsson, President, Swedish Trade Union Confederation

Inequality is bad for business. Many countries try to keep wages low to boost exports, but this strategy hurts global demand since workers then have less income to spend.

Instead, an increase in wages would benefit everyone and support sustainable long-term growth — as Sweden has shown over the last two decades. Despite being an open, dynamic economy, Sweden has also seen an increase in real wages since it suffered a severe economic crisis in the early 1990s, proving that social equality, economic growth and globalization are not mutually exclusive.

Sweden’s pay rise bucks the global trend towards low wages. Since the late 1970s, wages as a share of GDP have fallen in both advanced and developing economies, while the profit share has increased. In fact, according to the International Labour Organization, the wage share has fallen in 91 out of 133 countries. Data from the IMF and OECD shows a similar trend. The consequences are growing income inequality, lower aggregate demand and slower labour productivity growth, according to several studies. This weighs on economic growth.

 

Adjusted wage share development 1970 – 2015 (as a percentage of GDP)

Image: AMECO database

With wage increases no longer driving growth, two other growth strategies have emerged. The first is a debt-led strategy: household consumption is driven by rising debt, as well as asset and real estate bubbles. The second is an export-led strategy: growth is driven by net exports, which countries boost by suppressing wages. These two strategies are symbiotic. The first depends on net capital inflows to support debt-led consumption, while the second depends on net capital outflows and a current account surplus. This is not sustainable in the long run, and increases the risk of another financial crisis. A wage-led growth strategy, however, would support sustainable economic growth.

How can we restore decent wages? Many economists argue that technological progress and globalization are the key factors behind the falling wage share, meaning there is nothing we can do to change the situation. But recent empirical research indicates that the most important explanation for the falling wage share is workers’ weaker bargaining position. This is partly a result of technological change and globalization, but also of financial deregulation, a retreating welfare state and falling union density. The conclusion is that it is absolutely possible to restore the wage share through the right policies, from regulating the financial system to strengthening the welfare state, supporting trade unions and providing workers with training opportunities and a social safety net. Strong unions, collective wage bargaining and high minimum wages can offset the negative impact of other factors, as the Nordic countries have proved.

In Sweden, for example, the wage share has been maintained or even increased thanks to equal access to public services, institutions that promote social dialogue, and a labour market model relying on powerful social partners and coordinated wage bargaining. Consequently, Swedish workers have a stronger negotiating position compared to many other countries, and real wages have increased almost 60% between 1995 and 2016. The fact that Sweden also has a very high employment rate contradicts the argument that higher real wage growth will inevitably cost jobs.

Redistribution effect of trade unions in advanced economies

Image: Jaumotte, F and C Osorio Buitron (2015), Inequality and Labour Market Institutions, IMF Staff Discussion Note No. 15/14, International Monetary Fund

Some have defended the rise in the profit share at the expense of the wage share with the argument that profits are reinvested in the economy. In many countries, however, higher profit shares have not resulted in corresponding increases in investments. In addition, higher real wages do not necessary threaten profits. By increasing demand and therefore sales, and boosting productivity growth, higher wages can actually help increase a company’s profit.

Even in a globalized world, trade unionism and social policy are still very much national affairs. But to increase global wages, we need an internationally coordinated labour movement and strategy for political reform. This would enable us to address the global factors that affect wages, and also avoid a prisoner’s dilemma in which some countries suppress wages to gain a competitive advantage over others. Given that labour markets and political institutions vary hugely between countries, a coordinated pay rise may be more likely between countries with similar conditions, but it is still important to open up the discussion to everyone. Conflict between countries that promote wage-led growth, and countries that believe in low wages as an export strategy, could result in an even more fractured world.

This article was first published in the World Economic Forum global agenda