Read news from:
Austria
SHARE
COPY LINK

ECONOMY

Union power should come with responsibility

Swedish interest rate rises have been pushed on by high wage demands from trade unions. The unions' short-term gains are being won at the expense of the economy as a whole, argues Nima Sanandaji of think-tank Captus.

Published: 26 June 2007 16:18 CEST

The Swedish Central Bank (the Riksbank) last week increased the interest rate by 0.25 percentage points, in a move that will cool down the pace of the Swedish economy. Given that some 20 percent of the workforce is still not active in the labour market and that visible and hidden unemployment remains high, this move is less than desirable.

The Riksbank (as a historical note the first of its kind in the world, founded in 1668) in most likelihood made the right decision. If anyone is to blame, it might be the Swedish labour unions. One of the causes of the interest rate increases is the high wage demands, resulting from aggressive negotiations from Swedish labour organizations.

You could choose to look at the labour market from the same perspective as any other market, where prices are determined by supply and demand. But the reality is that the labour unions have been privileged by various rules and regulations that give them disproportional powers of negotiation.

There are a number of laws that are formed in such a way as to promote the power of unions in workplaces. For example the labour unions can exclude workers from the “first in last out” law, a law that stipulates that those who have been on a workplace the longest are the last ones to be made laid off.

This rule gives the unions the ability to intimidate workers into joining their organization, out of fear of being fired. Also, if a company signs a union deal, all workers will be part of the collective contract, even those not wishing to be. Not only can unions force or persuade workers into joining their organizations, they can also force companies to sign contracts, by threatening to put them under blockade.

According to the unions themselves, their actions in the labour market are justified by the fact that they safeguard the interests of the workers. If the unions were not active, the argument goes, workers wages would decrease rather than increase. In fact, there is no support for this argument. OECD statistics show that around 60 percentage points of GDP in various industrial nations go to wages for workers, whereas the remaining 40 percentage points are income of one person firms, taxes and profits.

A look at the OECD countries shows no correlation between the number workers on under collective contracts and the percentage of GDP given to workers as compensation for labour (this statistics can be found in the report “I fackföreningarnas intresse – en granskning av de nya moderaternas arbetsmarknadspolitik, published by Captus in Swedish, 2007).

In reality, the unions can distort the economy by forcing the wages of the workers over the market price temporarily. Or, as in the case of Sweden, increase the wages of the less skilled at the expense of the well skilled (who are severely underpaid in Sweden). But in the long term, market mechanisms rather than collective contracts are the real guarantees of the high living standard of workers in industrial nations.

Whether or not it is fair, the unions have considerable strength in wage negotiations and if they decide to, they can negotiate aggressively and temporarily increase wages over the market price. Of course, this distortion of the market leads to problems – for the very same workers the unions claim to protect. According to the National Institute of Economic Research (Konjunkturinstitutet) a wage increase of one percentage point, above the market price for labour, leads to a loss of around 100,000 jobs in the long term.

Sharp rises in wages force the Riksbank to increase the rate, reducing economic growth and increasing the costs for companies and individuals alike who have loans. Great power aught to come with great responsibility. If Swedish unions had abided by this mantra, we would most likely be in a better economic situation. Contrary to socialist ideology, what makes economic sense for the Swedish economy as a whole benefits the majority of workers and firms alike. Sadly, the short-term interest of the unions is not always the same thing as the long term interest of the country.

Nima Sanandaji

Nima Sanandaji is the president of the Swedish free market think tank Captus and publisher of the weekly online Swedish magazine Captus Tidning. He is also a PhD student at The Royal Institute of Technology in Stockholm.

www.captus.nu

www.captustidning.se

For members

ECONOMY

How is Denmark’s economy handling inflation and rate rises?

Denmark's economy is now expected to avoid a recession in the coming years, with fewer people losing their jobs than expected, despite high levels of inflation and rising interest rates, The Danish Economic Council has said in a new report.

Published: 30 May 2023 15:46 CEST
How is Denmark's economy handling inflation and rate rises?

The council, led by four university economics professors commonly referred to as “the wise men” or vismænd in Denmark, gave a much rosier picture of Denmark’s economy in its spring report, published on Tuesday, than it did in its autumn report last year. 

“We, like many others, are surprised by how employment continues to rise despite inflation and higher interest rates,” the chair or ‘chief wise man’,  Carl-Johan Dalgaard, said in a press release.

“A significant drop in energy prices and a very positive development in exports mean that things have gone better than feared, and as it looks now, the slowdown will therefore be more subdued than we estimated in the autumn.”

In the English summary of its report, the council noted that in the autumn, market expectations were that energy prices would remain at a high level, with “a real concern for energy supply shortages in the winter of 2022/23”.

That the slowdown has been more subdued, it continued was largely due to a significant drop in energy prices compared to the levels seen in late summer 2022, and compared to the market expectations for 2023.  

The council now expects Denmark’s GDP growth to slow to 1 percent in 2023 rather than for the economy to shrink by 0.2 percent, as it predicted in the autumn. 

In 2024, it expects the growth rate to remain the same as in 2003, with another year of 1 percent GDP growth. In its autumn report it expected weaker growth of 0.6 percent in 2024.

What is the outlook for employment? 

In the autumn, the expert group estimated that employment in Denmark would decrease by 100,000 people towards the end of the 2023, with employment in 2024  about 1 percent below the estimated structural level. 

Now, instead, it expects employment will fall by just 50,000 people by 2025.

What does the expert group’s outlook mean for interest rates and government spending? 

Denmark’s finance minister Nikolai Wammen came in for some gentle criticism, with the experts judging that “the 2023 Finance Act, which was adopted in May, should have been tighter”.  The current government’s fiscal policy, it concludes “has not contributed to countering domestic inflationary pressures”. 

The experts expect inflation to stay above 2 percent in 2023 and 2024 and not to fall below 2 percent until 2025. 

If the government decides to follow the council’s advice, the budget in 2024 will have to be at least as tight, if not tighter than that of 2023. 

“Fiscal policy in 2024 should not contribute to increasing demand pressure, rather the opposite,” they write. 

The council also questioned the evidence justifying abolishing the Great Prayer Day holiday, which Denmark’s government has claimed will permanently increase the labour supply by 8,500 full time workers. 

“The council assumes that the abolition of Great Prayer Day will have a short-term positive effect on the labour supply, while there is no evidence of a long-term effect.” 

SHOW COMMENTS