Sweden's Road Back to Full Employment

Abstract

The article reviews the Swedish model in the context of international evidence on the determinants of unemployment. There are three main determinants. (1) How unemployed people are treated. Unemployment benefits available for long periods tend to encourage long-term unemployment. The humane alternative is to replace benefits for long-term unemployed people by a guarantee of work or training. This policy has served Sweden well, despite frequent arguments to the contrary. (2) How wages are determined. Where unions are strong, centralized is better than decentralized bargaining because it takes into account the common interest in low unemployment. Countries like Sweden which have strived for wage consensus have benefited. (3) High minimum levels of skill. Unless these are achieved, the solidaristic wage policy advocated in the Swedish model is bound to increase unemployment. Other proposed remedies for unemployment, such as lower employers' payroll tax, less employment protection, more work sharing and early retirement are unlikely to have much effect on unemployment.