sou · GWB3105EN · 2009-01-01 00:00:00 — The climate policy is a cause of uncertainty, which probably leads to higher fossil fuel prices. But under the assumption that climate policy is designed in an effective way with international cooperation, targets for reduced climate impact will have relatively effect on Swedish economic growth. The following chapters discuss a number of factors of crucial importance to growth. First, the possibilities of increasing the 23 Government 2008/09:1. The Long-Term Survey 2008 labour supply and improving productivity growth in the economy are discussed. Then the adaptability of the economy, which is fundamental for healthy growth when conditions change, is considered. This is followed by an analysis of the connection between energy use and economic growth and how the design of climate policy affects economic growth in . The scenarios are based on the assumption that welfare services – health care, social services and education develop in line with changes in the composition of the population. This means main- taining the current level of welfare services for the next 20–25 years. Therefore, one issue discussed later in the report is the possibility of further developing welfare services within the frame- work of large parts of the publicly financed welfare system. 3 Increasing the Labour Supply Weak growth in the number of people of working age, a higher proportion of the population born abroad and a labour force with an older average age imply a risk that the number of hours worked in the economy will fall in the years ahead. As seen in chapter 2, the number of hours worked in the economy, together with productivity, constitutes a countrys total production. This in turn provides the basis for both private and public consumption. In our base scenario both the number of people employed and the number of hours worked increase weakly in the future. Viewed over a long period, the length of working life has declined even though some increase has been discernible in the past ten years.24 The shorter working life may be seen as an expression of the publics to take out some of the welfare increase in the form of leisure and to some extent also to devote more time to education. When the public changes what it wants to include more leisure, it seldom considers what impact such a decision has on the publicly financed welfare systems. Admittedly, some parts of these systems are connected to earned income through the compensation levels. But large parts of publicly financed welfare – health care, social services and education – do not have any such connection with individual labour input. If in future the public also wants to consume publicly financed welfare of good quality, then the public sector will have good reason for working to increase the labour supply.25 There is no indication that the public would prefer a lower standard in the publicly financed welfare services; on the 24The [2007a]. 25Possible alternatives would be to raise taxes or charge more fees for public services. As chapter 7 shows, higher taxes are not a long-term sustainable alternative while higher fees may help finance future public welfare services. Increasing the Labour Supply The Long-Term Survey 2008 contrary, chapter 7 makes clear that the demand for welfare services is expected to increase in the coming years. The discussion on the labour supply in the Long-Term Survey 2008 centres on the first labour market entry and the last exit, i.e. the length of working life. Several other studies have taken a broader perspective to labour supply.26 Our focus should not be interpreted as an assessment of where the greatest potential for increasing the labour supply exists. The total number of hours worked in the economy is also a result of how long one is gainfully employed between entry and exit from working life. Time spent unemployed, in school, on parental leave and absent due to illness is thus of great importance as are the hours worked. The birth rate and migration also have an impact on the number of people of working age. The chapter therefore does not provide a com- prehensive picture of what the total possible increase in the labour supply would be. Rather it should be seen as a contribution to the discussion on some parts of this potential. Relatively small changes in the age for entry and for exit would have a substantial impact on the labour supply. If the labour force participation pattern had been lowered one year for those between the ages of 20 and 29 and raised one year for those between 55 and 70, the labour force would have increased by 115 000 people in 2007.27 This would have represented an increase in the labour force of more than 2.7 per cent. 3.1Major changes in the labour market Economic growth, primarily by greater productivity, has made it possible to reduce gainful employment to a limited number of hours for a limited part of life. The annual average time spent in gainful employment per employed person declined from about 2 000 hours in 1950 to about 1 600 at the beginning of this century.28 In the past fifty years, the number of years individuals have spent in the labour market have also declined owing to more 26The Long-Term Survey 2003/04 looked at the labour force potential primarily for people born abroad (SOU 2004:73) and for older workers (SOU 2004:44). For a survey of the short-term potential in various groups, see Ministry Publications Series Ds 2008:36. 27That is to say, 20 year olds had the same participation rate as 21 year olds and 56 year olds the same rate as 55 year olds. The calculations are based on data from Statistics Labour Force Survey. The Long-Term Survey 2008 Increasing the Labour Supply time spent in education and earlier retirement. Nevertheless, both private and public consumption have increased sharply. Of course it is neither possible nor desirable to work around the clock or every year from birth to death. Time for education and other events in life and the and need for leisure time mean that there are bounds on how much one can work. The actual labour supply is therefore always lower than the maximum possible working hours. 3.1.1People are working less The number of hours worked is determined by how many people are working and how many hours they work. According to Statistics Labour Force Survey, over 3.8 million people were at work and they worked an average of 1 882 hours per person in 2007 (see figure 3.1). The total number of hours worked increased in until 1990, but then fell sharply until 1993. This decrease was followed by an increase until 2007, which was only interrupted by two weaker cyclical downturns. However, the 2007 level was only 0.8 per cent higher than the 1990 level even though the working- age population increased by almost 8 per cent during the period.29 The main explanation for this is that a lower proportion of people were at work, but those who had jobs also worked fewer hours on average. 29 Those aged 15 to 74. Increasing the Labour Supply The Long-Term Survey 2008 Chart 3.1 Population aged 15–74 in 2007 Thousands, number of people and hours worked In the labour force Source: Statistics . The proportion of people with jobs has declined sharply... Between 1980 and 1990, the proportion of people aged 20–64 who were working increased as more women entered the labour market (see figure 3.1). During the crisis of the 1990s, there was a sharp drop and the upturn that followed has not led to a restoration of the 1980s level. The one exception is the growing proportion of older people who are at work. in part to more young people studying longer, the percentage of young people who are working fell sharply and has not regained its earlier level despite a positive trend in the last ten years. The percentage of women working approached that of men until 1990, but thereafter the difference between the groups has remained relatively . The Long-Term Survey 2008 Increasing the Labour Supply Figure 3.1 Proportion of the population aged 20–64 at work, 1980–2007 people (20–24) Older workers (55–64) Source: Statistics and calculations. and working hours have declined somewhat The average weekly working hours are more stable than the proportion of people at work (figure 3.2). There was, however, some reduction after 2000, primarily among men. Since the mid- 1990s, older workers (55–65) have been nearing and have almost reached the average weekly working hours per person at work. Like womens labour force participation, womens working hours approached that of men up to the beginning of the 1990s, but not thereafter. The average number of hours worked by young people is steadily declining. Increasing the Labour Supply The Long-Term Survey 2008 Figure 3.2 Weekly working hours per person at work aged 16–64, 1980–2007 people (16–24) Older workers (55–64) Source: Statistics [a] and calculations. 3.1.2Two divergent trends in the level of education The contribution made by the labour force to growth is decided not only by the number of hours worked but also by the quality of the labour force and here education is an important factor.30 The number of well educated people has increased... A number of education policy reforms have led to a steady increase in the number of years spent getting an education in in the past fifty years and as a result, the labour force is now better educated. There are fewer and fewer people with no more than a compulsory school education while an increasing number have a post-secondary education. The proportion of the population with an upper secondary education is so far relatively unchanged. 30 The effect of education on productivity is discussed on more detail in chapter 4. The Long-Term Survey 2008 Increasing the Labour Supply upper secondary education is still the most common highest level of education achieved by those in the labour force. The chief explanation for the drop in the proportion of people having no more than a compulsory school education is the exit from the labour market of older workers with a low level of education. The rise in the proportion with a post-secondary education is due to more young people entering the labour market. but many fail to complete upper secondary school Even though more young people complete university studies, there is also a large group that do not finish upper secondary school. The percentage of young people who had not completed an upper secondary education increased sharply in connection with the reform of upper secondary education at the end of the 1990s and has not returned to previous levels in spite of a drop in recent years (see figure 3.3). The current trend in the level of education achieved by young people can thus be described as divergent, with many getting a post-secondary education and many failing to complete an upper secondary education.31 There are different ways of defining how large a percentage have not completed an upper secondary education. The level varies, depending on what method is used, but the overall trend is similar. In Statistics Education Index, the definition of upper secondary educated is to have studied at least one term at the upper secondary level. There is no requirement that one must have earned a school-leaving certificate to be counted as upper secondary educated. Under this definition, 14 per cent of 20-year-olds lacked an upper secondary education in 2007. With the for Educations definition, which includes only those who have a school-leaving certificate or the equivalent, the number lacking an upper secondary school education is substantially higher. Twenty-eight per cent of the countrys 20-year-olds did not have a school-leaving certificate from upper secondary school in 2007, which is somewhat lower than at the end of the 1990s.32 In addition, approximately 10 per 31Heckman, J. [2008] has pointed to an increased polarisation of American society since more people graduate from university but at the same time more do not complete secondary school. 32National Agency for Education [2008a]. Increasing the Labour Supply The Long-Term Survey 2008 cent of those receiving a school-leaving certificate do not meet basic entrance requirements for university studies.33 All in all, this means that about 35 per cent of 20-year-olds lack basic university entrance requirements. Figure 3.3 Different measures of those 20-year-olds who have not completed upper secondary school Per cent of population Incomplete upper secondary education Lack basic university entrance requirements Pre-upper secondary education only Note: to changes in the way data are collected, there is a break in the series for pre-upper secondary school education between 1999 and 2000. Source: for Education [2008c], Statistics [c] and calculations. 33 To meet basic university entrance requirements, courses corresponding to 90 per cent of the credits must be completed. The Long-Term Survey 2008 Increasing the Labour Supply 3.2Earlier labour market entry age through a more efficient education system The age at which young people enter the labour market is rising. There are several possible explanations for this, for example, a longer time spent getting an education, a reduced demand for labour without work experience, rising wages and poorer qualifications among some young people.34 The Long-Term Survey 2008 focuses on the consequences of later entry and the reasons for the longer time spent getting an education. Time in education is determined by the way in which the educational system works, individual choice and individual achieve- ments. A later labour market entry means reduced tax revenues and in those cases involving failures in education, increased public expenditure. Somewhat simplified, this means that the state should get individuals to acquire a given amount of knowledge (human capital) as rapidly as possible.35 According to an estimate, at the end of the 1990s, time lost in various parts of the education system was equivalent to almost 130 000 person years.36 There are relatively well documented problems with both throughput and results in the Swedish education system. These problems in turn affect the transition from studies to work. Acquiring knowledge later in life is possible but it costs both society and the individual considerably more. 3.2.1Young people begin working later The age at which young people enter the labour market has risen (see figure 3.4).37 There was a major change in connection with the crisis in the 1990s, but even after the demand for labour recovered to more normal levels, this pattern has persisted. This may be due in part to the extension of the two-year programme in upper secondary school and the higher proportion going on to university studies. Generally speaking, women get established later than men, 34For a discussion see , O. and others [2006] and , R. [1999]. 35Or alternatively, that one attains a higher level of education during a given time in education. 36Ministry Publication Series Ds 2000:58. 37Åslund, O. and others [2006]. Increasing the Labour Supply The Long-Term Survey 2008 mostly because a higher percentage of women pursue university studies. Figure 3.4 at which young people obtained their first job, percentage by year of birth Note: Entry is defined here as when individuals reach an income equal to 50 per cent of the median income for 45-year-olds. Of those born in 1967, about 40 per cent obtained their first job at the age of 19 and by the age of 25, about 90 per cent had obtained their first job. Source: , O. et al. [2006]. Later labour market entry in as a result of later studies According to international comparisons, there is a substantial decrease in the percentage of Swedish young people studying between the ages of 18 and 20, after which the percentage increases. Compared with the average, fewer Swedish young people study and more work until the age of 23 (figure 3.5). Swedish young people appear to be postponing their university studies and working for a couple of years instead. It should be noted that has a relatively large proportion of young people about 20-years-old who neither work nor study. The Long-Term Survey 2008 Increasing the Labour Supply Figure 3.5 peoples labour market status in 2006, by age In education, not at work In education and at work In education, not at work In education and at work Employed, not in education Neither employed nor in studies Employed, not in education Neither employed nor in studies Note: The average is an unweighted average of 22 countries. Source: Statistics and calculations. There is also a large age spread among university students in , indicating relatively weak norms for when studies are expected to begin. A stronger norm for a rapid transition from upper secondary school to university would mean that more people would finish their studies early. Norms can be defined as the expectations others have for a persons behaviour. Those who fulfil the expectations of those around them are esteemed while those who violate expectations are not.38 But norms are difficult to influence, whereas measures that change the social norm may have considerable effect if many people are included. Delayed labour market entry owing to uninformed choices In choosing an education, there is always a risk of making the wrong choice. There may be various reasons for a wrong choice. It may be difficult to form an opinion on the long-term labour market outlook. There may also be a lack of information about 38 , A. [2003]. Increasing the Labour Supply The Long-Term Survey 2008 whether the education chosen will lead to a job or about the knowledge required for a certain education. Structural change as well as cyclical effects may in some in- stances mean that what was a suitable choice at the outset is no longer so upon completion.39 In some cases this may mean that the individual has so possibility of finding employment in the labour market that a new investment in education is necessary. But it is uncommon that changes are so rapid that an education becomes entirely useless. There are signs indicating that those choosing upper secondary or university programmes are not well informed about the labour market situation facing those who have already completed the education they are now choosing.40 It is neither good for the individual nor, under the assumption that the individuals produc- tivity would be higher if their education better reflected their future profession, good for society. Objective information on labour market outcomes for various programmes of education, such as average income and risk of unemployment, directed at those persons who will be choosing an education is therefore a valuable tool for avoiding major mistakes. An additional factor increasing the risk of making the wrong choice is that students have too information about what is required in order to successfully tackle and be able to profit from an education and whether they have these abilities. If study and vocational guidance were an integral part of the instruction, the risk of making this type of mistake would decrease. Such guidance may also help encourage students who are non-traditional learners to continue their studies.41 3.2.2Lack of achievement at school leads to problems in the labour market As seen in section 3.1.2, almost 30 per cent of 20-year-olds do not have an upper secondary school leaving certificate. There are various explanations for this. Some point to the importance of the 39One example where cyclical effects may have led to substantially worse employability is IT trained people in the early 2000s. But structural change indicates that demand for people with a specialisation in this area will, if anything, continue to increase. 40Appendix 8 to the Long-Term Survey 2008 (SOU 2008:69). 41Appendix 8 to the Long-Term Survey 2008 (SOU 2008:69). The Long-Term Survey 2008 Increasing the Labour Supply extension of the upper secondary school programme from two years to three.42 Others point to the fact that there was no large rise in dropouts for the first cohort having the three-year programme as their only option, but there was a rise once the upper secondary school reforms were fully implemented.43 Drop- outs have also increased in the programmes that were already three years before the reforms. It thus may have been other parts of the reformed upper secondary school, such as the new grading system or grading in individual courses that has led to more dropouts. Other possible explanations for this development are changes in attitudes, more students born abroad, changes in qualifications and the labour market situation. Fact Box 3.1 Individual upper secondary school programmes Among those who neither study nor work, students who have dropped out of the individual programme are substantially overrepresented.1 The upper secondary school individual programmes are intended to prepare students for studies in the national programmes. They are primarily aimed at those who do not qualify for any national programme. Students take the individual programme for various reasons. Some lack the entrance qualifications in some particular subject while others lack grades in most compulsory school subjects. Another group is comprised of those who have upper secondary school qualifications but have not been able to gain entry to the desired programme or have dropped out of the programme they began. Immigrants with insufficient knowledge of Swedish are also a large group. In the 2006/07 school year, about 7 per cent of upper secondary school students were enrolled in the individual programme; there were slightly more men than women. Most of them (76 per cent) were in year one. half of the students in year 1 came directly from compulsory school. The percentage of students in the individual programme has been relatively stable since 1999, after having risen in connection with introduction of the requirement for passing grades in mathematics, Swedish and English in order to be able to begin upper secondary school. The percentage going from the individual programme to the national programme has declined somewhat. About 30 per cent of those beginning the individual programme complete their upper secondary education within four years. 1Ministry Publication Series Ds 2003:33 2National Agency for Education [2007]. 42Åslund, O. and others [2006]. 43Murray, Å. [2007]. Increasing the Labour Supply The Long-Term Survey 2008 Much worse labour market for those without an upper secondary education Unlike physical capital, knowledge in the form of education does not wear out when it is used but rather when it is not used. For young people, a delay in entering the labour market often results in a decline in the acquisition of knowledge and in the value of the knowledge one already has. One study shows that those who were unemployed for a period directly after upper secondary school have an unemployment risk five years later that is 3 percentage points higher and annual incomes that are 17 per cent lower than those who had not been unemployed.44 That the effects can be measured such a long time after the initial period of unemployment indicates that high youth unemployment is a factor that limits the labour supply even in the longer term. Labour market entry has been delayed more for those who have not completed any upper secondary education programme (figure 3.6). Part of the explanation for this is that practically everyone without an upper secondary school certificate still has some upper secondary school studies. But the chief reason is that it has become more difficult for those without an upper secondary education to get into the labour market.