Abstract
This paper argues that Sweden's structural problems of slow productivity growth and high wage inflation can be linked in an important way to the institutional features of its labor market, which is characterized by a combination of centralized bargaining and wage equalization. In particular, Sweden's high wage inflation in the 1980s was due to the combined impact of the breakdown of the leading role assigned to the traded goods sector in wage determination and high wage drift. Slow productivity growth is attributed to the inappropriateness of the policy of wage equalization in an environment in which flexible work practices have become increasingly important.
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