ECONOMIC PERSPECTIVES
THURSDAY
Address by Governor Øystein Olsen
13 FEBRUARY
to the Supervisory Council of
2020
Norges Bank and invited guests on
Thursday 13 February 2020
perspectives 2020
FROM OIL AND GAS TO FINANCIAL CAPITAL
"We are now moving into the final phase of a period where domestic raw materials
and energy sources have provided an essential basis for economic expansion.
Hereafter, growth must increasingly rely on the production of finished goods in areas
where we do not have a natural advantage."1
The same could be said about the challenges facing the Norwegian economy today.
But this quote is from 50 years ago - from the annual address by central bank
governor Erik Brofoss on 16 February 1970.
The 50th anniversary of the first oil discovery on the Ekofisk field was commemorated
in October last year. Aptly enough, this took place on the same day as the Government
Pension Fund Global (GPFG) topped NOK 10 000 billion.
In the governor's address on the economic situation, there was no mention of what
was to become Norway's main revenue source over the next half-century.
In hindsight, it can be said that what was to be his last annual address may not have
been the most prescient. To be sure, it was still highly uncertain at that time how much
oil and gas were actually hidden under the ocean floor 320 kilometres southwest of
Stavanger. Not to mention, the value of that natural resource was much lower than
today (Chart 1).
Chart 1 Oil was cheaper before OPEC.
Oil price. 2018-USD per barrel
140 140
2011
USD 124
1979
120 120
USD 109
100 100
80 80
1974
USD 59
60 60
40 40
2016
1970 USD 46
1998
USD 12
USD 20
20 20
0 0
1950 1960 1970 1980 1990 2000 2010
Source: BP Statistical Review of World Energy 2019
1 Brofoss, E. (1970), The economic situation. Annual Address to Norges Bank's Supervisory Council, 16 February 1970.
g ,
ECONOMIC
PERSPECTIVES
Prices then surged, reaching today's levels when oil producing countries agreed on
13 FEBRUARY 2020
production cuts in autumn 1973. Perhaps what we in Norway best remember from that
time is the weekend car ban in Oslo and even the King riding the tram.
The surge in oil prices also came close to cutting the bloodline of what had been
Norway's most important export industry for more than a century - shipping (Chart 2).
In 1975, almost a quarter of the Norwegian merchant fleet was laid up.
Chart 2 Oil became the new flagship.
Export revenues as a share of GDP.1) Percent
30 30
Shipping Oil and gas
25 25
20 20
15 15
10 10
5 5
0 0
1875 1895 1915 1935 1955 1975 1995 2015
1) Break in the data series for shipping in 1970.
Sources: Statistics Norway and Norges Bank
That same year, production at Ekofisk started in earnest. Fields such as Frigg and
Statfjord followed, and combined with yet another jump in oil prices following the
Iranian revolution, a new flagship ushered the Norwegian economy into the 1980s. Oil
prices fell during that decade, but oil and gas production was growing at a vigorous
pace.
The activities on the Norwegian shelf also had a strong impact on mainland
businesses. Shipyards learned to build oil platforms as new ship orders sagged. What
might have been viewed as a rescue buoy eventually became a springboard to the rest
of the world.
The oil service industry's breakthrough overseas came into clear evidence in the
2000s. Strong demand from China and other emerging economies led to a further jump
in oil prices, and offshore oil exploration expanded worldwide. The technology
developed in the search for deep-water oil and gas became one of Norway's major
exports.
The offshore oil industry paved the way for wealth gains no future generation is likely
to experience (Chart 3). At the start of our oil journey, per capita GDP was low in
Norway compared with many other countries. Rising oil and gas production lifted the
income level in Norway in the decades that followed. When production peaked in the
early 2000s, rising prices boosted our income level further.
Chart 3 Norway s rise to wealth.
GDP per capita. PPP-adjusted. US = 100
ECONOMIC
140 140
PERSPECTIVES
13 FEBRUARY 2020
Norway
130 130
Mainland Norway
120 120
Switzerland
110 110
US
100 100
Sweden
90 90
80 80
Germany
70 70
New Zealand
60 60
50 50
1970 1976 1982 1988 1994 2000 2006 2012 2018
Sources: OECD and Statistics Norway
Even non-oil GDP increased faster than in surrounding countries, which can in large
part be attributed to the growth of the domestic oil service industry.
Norway's oil history has produced many winners. Norwegian wage earners have over
time experienced purchasing power gains that their counterparts in other countries
could only have dreamed about.
The main beneficiary of high oil prices this century has been government finances,
thanks to the state's direct financial interest and high taxation of production profits. In
good times, the gains have been substantial. At the same time, this means that the state
bears much of the risk associated with oil price fluctuations.
It still took a long time before government oil revenues yielded surpluses that could be
set aside for future generations. Norway's sovereign wealth fund received its first
capital deposits in 1996, a quarter century after the government started earning money
on oil.
Until then, oil revenues had been spent as they were earned - and at times in advance
(Chart 4).
Chart 4 The path to NOK 10 000 billion.
1)
In billions of 2020-NOK ECONOMIC
PERSPECTIVES
13 FEBRUARY 2020
Periodic contributions to the GPFG
GPFG value
10000 10000
Oil revenue spending
8000 8000
Government oil revenues
Net transfers to GPFG
Value gains
6000 6000
4000 4000
2000 2000
0 0
1971-1995 1996-2009 2010-2019 2019
1) GPFG at 30 September 2019.
Sources: Ministry of Finance and Norges Bank
The picture changed when the cash flow from oil activities reached new heights
around 2000. It became clear that future revenues would be much higher than
anticipated.
The fiscal rule, introduced in 2001, provided for a gradual phasing in of oil revenues
into the economy. By limiting government spending of oil revenues to the real return,
the path was paved for building up substantial government financial wealth.
In the next years, the cash flow from oil production was far larger than the transfers to
the central government budget, mainly owing to high oil prices.
Transfers have been smaller in the past decade. The oil price fall reduced revenues. At
the same time, withdrawals from the fund have become substantially larger, in pace
with the increase in the fund. Despite the subsequent downward revision of the
expected real return to 3 percent of the value of the fund, we have spent as much oil
revenues over the past decade as in the 40 preceding years.
The fund was still three times larger towards the end of 20192 than at end-2009, owing
to substantial value gains. Almost all the gains have been earned in the past ten years.
The krone depreciation accounts for a quarter of the value gains (Chart 5). A weaker
exchange rate means that we have to pay more for foreign goods and services, which
is why the fund's value is adjusted for exchange rate effects when measuring the
fund's return.
Chart 5 The krone has boosted value gains.
Shares of total value gains.1) Percent ECONOMIC
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13 FEBRUARY 2020
Exchange rate
GPFG's value gains in
international currency
1) At 30 September 2019.
Source: Norges Bank
The past ten years have been beneficial for the fund, also in foreign currency terms
(Chart 6). The average return has been higher than in the fund's first years, primarily
reflecting a sharp rise in global equity prices.
Chart 6 A good decade for the GPFG.
Average annual return on the GPFG.1) Percent
10 10
Equities
9 9
Fixed income
8 8
7 7
6 6
5 5
4 4
3 3
2 2
1 1
0 0
1999-2009 2010-2019
1) At 30 September 2019.
Source: Norges Bank
The rise in equity prices has largely been driven by a fairly small number of
companies. US corporate profit margins have increased markedly. The big earners
have been the tech giants, which typically operate in markets where there are
substantial profits to be gained as the dominant company. Their profits have drawn
growing attention from competition authorities and higher taxation is under discussion
internationally.
Current valuations are based on expectations of sustained profit growth. This entails a
downward potential.
p p
of the decline in global interest rates over time.
ECONOMIC
PERSPECTIVES
13 FEBRUARY 2020
The interest rate decline reflects the expansionary monetary stance prevailing since the
financial crisis. Central bank policy rates were reduced to very low levels in many
countries in order to stimulate economic activity. Several central banks have also
engaged in substantial asset purchases, which has pushed down long-term interest
rates further.
But low interest rates also reflect other driving forces such as population ageing, high
saving in emerging economies, growing inequality and a general decline in
productivity growth.
Lower interest rates imply higher bond prices. During the period of falling interest
rates, the rise in bond prices has contributed to sustaining the return on the fund's
fixed-income portfolio. But this is a one-off gain. At today's interest rate level, the
fixed-income portfolio will yield much less ahead.
The interest rate decline and massive central bank asset purchases have also driven up
equity prices. In the search for yield, investor demand for equities has steadily
increased worldwide. At the same time, low interest rates have increased the valuation
of expected income further ahead.
Over time, shareholders are well rewarded for taking risk, but at times it may also
require patience. An investor with a broad equity portfolio in 1972 - the year before
OPEC shook the world economy for the first time - had to wait more than ten years to
recover the value lost (Chart 7). After the financial crisis, it took five years for the
equity market to return to the 2007 level. With its long-term horizon, the fund has been
able to earn solid returns since that time.
Chart 7 We should factor in future downturns.
Real return on global equities. Index. Year 0 = 100
180 180
From 2007
From 1972
160 160
140
140
120 120
100 100
80 80
60 60
40 40
0 1 2 3 4 5 6 7 8 9
10 11 12
Year Year Year Year Year Year Year Year Year
Year Year Year
Sources: DMS database, Dimson, Marsh and Staunton (2019), FTSE Russell, St. Louis Fed and Norges Bank
But both the downturn in the wake of the financial crisis and the high returns in recent
years should serve as a reminder that the market value of the fund may vary widely in
the future. A fall in global equity markets comparable to the decline in 2008 would
alone reduce the fund's value by almost NOK 3 000 billion.
around twice as large as the present value of remaining government oil revenues.
Chart 8 Larger-than-expected fund...
Share of mainland GDP. Percent
400 400
350 350
Projected value of GPFG in 2020
in different national budgets
300 300
250 250
Present value of remaining
200 200
oil revenues
150 150
100 100
50 50
0 0
2012 2014 2016 2018 2020 2020
Source: Ministry of Finance
The conversion has reduced the sensitivity of government revenues to oil price
fluctuations, but has increased our exposure to global financial market volatility. The
fund has built up a diversified portfolio of investments worldwide, which allows it to
reap the gains from an upturn wherever it may occur - and means it is shielded from
negative events in individual markets. But the fund is not immune to a broad-based
downturn.
As a small, open economy, Norway has always been exposed to global economic
developments. The substantial foreign assets we have accumulated mean that our
economy is even more closely intertwined with the world economy. It is then
unfortunate that the rule-based order for world trade since 1945 is losing ground.
Bilateral and regional agreements are gaining ground at the expense of multinational
cooperation. This contributes to uncertainty about the outlook for the global economy.
The value of the natural resources we found the first traces of 50 years ago has in large
part accrued to society as a whole. This was not a given as we were heavily reliant on
foreign capital and expertise in the first years of oil activities. But decisions were taken
early on in favour of substantial government ownership, high taxation of production
profits and skills transfer requirements, which were in many ways in keeping with
Norwegian traditions.
The roots can be traced back to concession policy and hydropower management, and
to the post-war focus on collective solutions. It was also broadly recognised that
economic gains from the use of natural resources, economic rent, should be returned to
society.
The value of the fund is now more than three times annual mainland GDP. The fund
has grown bigger than total net household wealth, including housing wealth (Chart 9).
This means the fund has an interesting distributional aspect. While the richest decile
controls half of household wealth, we all benefit from the fund.
Chart 9 ... and larger than household wealth.
Share of mainland GDP.1) Percent
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350 350
13 FEBRUARY 2020
Net household
wealth
300 300
GPFG value
250 250
200 200
150 150
100 100
50 50
0 0
1998 2001 2004 2007 2010 2013 2016 2019
1) At 30 September 2019. Net household wealth is the sum of net value of household assets from the
financial accounts and an estimate of the value of their dwellings.
Sources: Ministry of Finance, Statistics Norway and Norges Bank
The fund's investment management model is also designed to enable future
generations to benefit from this wealth.
First, there has always been broad political consensus about the development of the
fund's strategy. The strategy changes have been based on thorough studies. All
important decisions are taken by the Government and endorsed by the Storting
(Norwegian parliament). Norges Bank has an advisory role. The authorities have stood
fast at the crossroads even during demanding periods. This has served us well.
A good example is the decision in 2007 to increase the equity share from 40 to 60
percent. This important change was implemented by making large purchases of
equities in the period to June 2009, about the time when markets bottomed out after
the financial crisis. In retrospect, we can see that the fund bought equities on the cheap
in that period, and has posted large gains over the past decade.
Second, Norges Bank's mandate is clearly defined. The capital is to be invested with
one - and only one aim: The highest possible return at an acceptable risk. There has
been broad political agreement that the fund should not be used to promote other
objectives. A clear and unequivocal objective enables the fund's owners to evaluate
Norges Bank's performance as investment manager. If there were several different
objectives, they would have to be weighed against each other. That would be a
demanding task for an investment manager. Political trade-offs are a matter for the
political authorities.
STRUCTURAL CHANGES AND NEW CHALLENGES
ECONOMIC
We have always know that activity on the Norwegian shelf would eventually decline.
PERSPECTIVES
13 FEBRUARY 2020
After a half-century of oil production, about half of estimated total reserves have been
extracted.3 About half of what remains has not yet been discovered. In recent years,
known oil resources have shown little increase (Chart 10). There is also the question
of how much of what remains would be profitable to extract.
Chart 10 Fewer large discoveries.
Reserve growth. In millions of scm of oil equivalents
1800 1800
1600 1600
1400 1400
1200 1200
1000 1000
800 800
600 600
400 400
200 200
0 0
1967 1974 1981 1988 1995 2002 2009 2016
Source: Norwegian Petroleum Directorate
The offshore oil industry features investments that generate income for a long time
ahead. For many fields, the exploratory, development and production phases span
several decades. The Johan Sverdrup field, where production recently started, will
according to plan remain in production for at least 40 years.
Exploration and field development decisions have always been based on estimated
futures prices for oil and gas. Uncertainty linked to future profitability has also been a
key factor. Today, global climate challenges add to that uncertainty.
More and more people are waking up to the gravity of climate change. If the world is
to meet the goals of the Paris Agreement, carbon emissions must be reduced, which
means the combustion of fossil fuels, including oil and gas, must also be reduced.
But the world will still need energy. How much and what share will have to be
covered by oil and gas are uncertain. That will depend on a number of factors,
including climate policy and technological developments.
Much remains on the technological front. There is still far to go before carbon capture
is truly profitable. Alternative energy sources are not being developed fast enough,
even if they are becoming more cost-efficient. At the same time, long-term investments
lock in emissions for a long time to come.
promote investment in alternative energy.
The European Commission also recently launched a plan to introduce a tax on imports
based on a product's carbon footprint.4 The ambition is an equal carbon price for all
products whether produced in or outside the EU. Even though the EU accounts for a
diminishing share of global emissions, this could also affect emissions in other
CO2
parts of the world, including emerging economies.
While climate policy is being strengthened in a number of countries, the international
picture is also one of resistance to the introduction of effective measures. A stricter
climate policy also raises difficult discussions about burden sharing - not least between
mature advanced economies and emerging economies. It is not surprising then that the
EU's carbon tax plans are being met with accusations of protectionism.
So far, it has been difficult to achieve a sufficient reduction in global greenhouse gases.
Instead, emissions have increased. Emissions in advanced economies are still high
(Chart 11). Emerging economies account for virtually the entire increase in global
emissions in recent years. Since 1990, emissions have tripled in Asia, while they have
been reduced by 30 percent in Europe.
Chart 11 Emissions on the rise in emerging economies.
emissons. Gigatonnes
CO2
35 35
Africa
30 Americas ex. US 30
Asia ex. China
China
25 25
US
Europe
20 20
15 15
10 10
5 5
0 0
1850 1875 1900 1925 1950 1975 2000
Source: Our World in Data
At the same time, both energy consumption and living standards are low in many
developing countries, and their emissions are barely visible in the chart. If these
countries succeed in raising living standards, energy consumption will rise, which is
unlikely to occur without higher emissions.
The climate issue is therefore in large part about how poor countries can achieve solid
economic growth without a continued rise in greenhouse gas emissions. With the rise
in emissions we have seen, the world will have to prepare for and adapt to a warmer
climate. At the same time, climate change impacts are becoming increasingly evident.
This may lead to abrupt policy shifts.
gy
uncertainty. Businesses, banks and investors are paying more attention to this risk. The
ECONOMIC
PERSPECTIVES
outlook for offshore activities on the Norwegian shelf has also become more uncertain.
13 FEBRUARY 2020l
The oil price decline in 2014 brought to light once again the important role of the
petroleum sector for the economy.
Rather than being in a unique position, the Norwegian economy had to restructure and
adjust to lower demand in the oil industry. The oil price collapse marked the beginning
of the restructuring that we had long known would come, but it started more abruptly
than assumed earlier, for example by the Holden III Commission5 (Chart 12).
Chart 12 Business sector less dependent on oil.
Oil sector demand.1) Share of mainland GDP. Percent
15 15
Actual
Holden III
10 10
5 5
0 0
1970 1980 1990 2000 2010 2020 2030 2040
1) Sum of investment, intermediate consumption and labour costs in crude oil and natural gas production.
Sources: Ministry of Finance and Statistics Norway
In the course of a few years after the oil price fall, oil industry demand6, measured as a
share of mainland GDP, declined by 40 percent. A comparable fall in global oil-related
demand amplified the downswing in the Norwegian oil service industry.
Despite the shock to the oil industry, the downturn in the Norwegian economy proved
fairly mild. Employment growth slowed, but unlike during the financial crisis and the
downturn in the early 2000s, growth remained positive and registered unemployment
did not exceed 3 percent.
The mildness of the downturn following the oil price fall shows that the Norwegian
economy has effective shock absorbers, such as flexible wage formation, a floating
exchange rate and solid government finances. We also had monetary policy space,
which we used (Chart 13).fi
C a t 3 o eta y po cy s t e st e o de e ce
Policy rate and capacity utilisation.1) Percent
ECONOMIC
PERSPECTIVES
6 6
13 FEBRUARY 2020
Policy rate
Capacity utilisation
5 5
4 4
3 3
2 2
1 1
0 0
2005 2008 2011 2014 2017 2020
Capacity utilisation is Norges Bank's output gap projecton for the Norwegian economy.
Source: Statistics Norway
The primary responsibility of monetary policy is to provide the economy with a
nominal anchor, quantified as the Bank's inflation target. Monetary policy can
contribute to high and stable output and employment and to counteracting the build-up
of financial imbalances.
In normal times, monetary policy is the first line of defence in stabilising the economy.
The policy rate can be changed quickly when the economy is exposed to shocks.
Given the structure of the Norwegian credit market, where floating interest rates
predominate, the policy rate is an effective tool.
The inflation targeting regime must be flexible. Norges Bank's close to 20 years'
experience with inflation targeting suggests that a small, open economy must expect
inflation to deviate fairly widely from the target from time to time. However, inflation
has remained within a range where deviations from the target cannot be said to have
entailed material economic costs. This has provided leeway to give weight to other
considerations in interest-rate setting.
During the most recent downturn, the krone exchange rate fell in pace with oil prices.
This led to prospects for higher inflation. The prevailing confidence in the monetary
policy framework and wage formation proved to be of benefit. As long as we were
certain that the rise in inflation was temporary, monetary policy could look through the
rise.
From autumn 2014, the policy rate was lowered in four steps, by a total of 1 percentage
point. But in an economy marked by structural changes, monetary policy could not
fully counteract the effects on output and employment.
In recent years, economic activity in Norway has picked up again, and the rate cuts
following the oil price fall have been reversed. By comparison, policy rates among
many of our trading partners are still negative more than ten years after the financial
crisis. Monetary policy has been stretched thin internationally.
can be very effective when the economy features high unemployment, and very low
interest rates alone do not provide sufficient stimulus.
In Norway, there is a long tradition of fiscal policy support in stabilising the economy.
The GPFG has increased our fiscal space. As in the downturn in the early 2000s and
during the financial crisis, oil revenue spending over the central government budget
was stepped up markedly during the most recent, oil-driven downturn.
An active countercyclical policy with high spending in downturns must be followed
by a reversal or tightening measures when economic indicators point to a recovery.
However, because the value of the fund has steadily risen, we have long been spared
the more demanding tightening measures. This may not be the case in the years ahead.
Oil revenue spending over the central government budget has reached a high level. As
mentioned, we must take into account the possibility that developments in global
financial markets may be weaker than in recent years, with a possible downward
correction in equity markets. This will reduce the value of the GPFG. In addition,
Norway is facing demographic challenges that will put pressure on government
finances ahead.
The government also has a responsibility for the balance between the public and
private sector. Since 2014, public consumption and investment have risen to a
recordhigh share of mainland GDP (Chart 14). The krone depreciation over the past years
has entailed a sharp increase in the GPFG's value in krone terms. This has increased
the government's domestic purchasing power. However, a krone depreciation does not
increase our national wealth. In the years ahead, we need a larger non-oil tradable
sector. If that sector is to expand, it must be given room to grow. If the government
lays claim to a growing share of available production resources, the room for growth
will diminish. The government must therefore be especially cautious about increasing
public spending on the basis of a krone-driven rise in the fund's value.
Chart 14 Strong growth in public demand.
Public consumption and investment. Share of mainland GDP.
Four-quarter moving average. Percent
36 36
35 35
34 34
33 33
32 32
31 31
30 30
29 29
28 28
1990 1995 2000 2005 2010 2015 2020
Source: Statistics Norway
the krone depreciation has made it cheaper for foreigners to buy goods and services
from Norway. At the same time, higher import prices have given Norwegian customers
an incentive to shift demand towards domestic producers. Thanks to inflation targeting
and a floating exchange rate, cost adjustment took place much faster than would
otherwise have been the case.
Chart 15 Is Norway competitive enough?
Labour costs.1) Index. 2013=100. Trade deficit. Share of mainland GDP. Percent
13 120
Trade deficit excluding oil and gas (l.h.s.)
115
12
Labour costs in a common currency (r.h.s.)
11 110
10 105
9 100
8 95
7 90
6 85
5 80
4 75
3 70
2000 2003 2006 2009 2012 2015 2018
1) Figures for 2019 are based on the projections in Monetary Policy Report 4/19.
Sources: Norwegian Technical Calculation Committee for Wage Settlements (TBU),
Statistics Norway and Norges Bank
Despite a more than 15 percent reduction in labour costs in a common currency since
2014, the tradable sector has shown fairly weak growth, as reflected in recent trade
balance developments. The non-oil trade deficit has continued to widen, which must
be seen in the light of the decline in oil service exports owing to the sharp fall in
global offshore oil investment.
Seafood exports have recently set new records in krone terms, but exports have
remained flat for several years in volume terms, partly because of salmon lice
problems.
Capacity constraints have also hampered exports of metals and other capital-intensive
manufactured goods. Profitability has clearly improved, but a considerable increase in
production requires substantial investment, and it is only in the past few years that
manufacturing investment has shown a pronounced pick-up.
The large foreign assets that we have accumulated mean that we can run a trade deficit
when oil and gas revenues eventually decline. Recent developments nevertheless
suggest that we have become more dependent on the return on those assets for
financing tomorrow's imports (Chart 16).
Chart 16 Growing dependence on the GPFG.
Share of mainland GDP. Percent
ECONOMIC
13 13 PERSPECTIVES
13 FEBRUARY 2020
12 12
11 11
10 10
9 9
8 8
7 7
Trade deficit excluding oil and gas
6 6
3 percent of the GPFG
5 5
4 4
3 3
2000 2005 2010 2015 2020 2025 2030 2035 2040
Sources: Ministry of Finance and Statistics Norway
Measured as a share of mainland GDP, the trade deficit is larger than the expected
return on the GPFG further ahead. It should be noted, however, that a substantial share
of Norway's goods and services imports is related to activity on the Norwegian shelf.
These imports will decline as oil activities wind down. On the other hand, lower oil
prices or a decline in global equity markets will reduce the expected return on the
GPFG.
Moreover, the trade deficit has shown a substantial increase in a period where both
demand in the Norwegian oil industry and the krone have weakened. For many years,
Norwegian companies could afford to pay much higher wages than companies in
neighbouring countries. Perhaps the ability to pay high wages has been more
dependent on the oil industry than thought earlier.
Going forward, the key to success for Norway will be the same as for other countries:
We must make the most of our number one resource - labour.
The value of Norway's human capital is around three times the sum of its natural
resources, production capital and financial capital.7 Our future welfare level therefore
depends on how many are in work and how productive they are.
Employment in Norway is no longer as high as it once was. Today, a smaller share of
the population aged between 25 and 54 is employed than 20 years ago (Chart 17), and
the share is now higher in a number of countries, not least because female employment
abroad has also risen. At the same time, the share of adult men in work in Norway has
fallen.
Chart 17a No longer at the top of the employment chart.
Employment. Share of population aged 25-54. Percent
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88 88
13 FEBRUARY 2020
2001
86 86
84 84
82 82
80 80
78 78
76 76
UK US
Rep.
Japan
Finland Norway
Canada Sweden
Denmark
Czech
Netherlands
Source: OECD
Chart 17b No longer at the top of the employment chart.
Employment. Share of population aged 25-54.1) Percent
88 88
Now
86 86
84 84
82 82
80 80
78
78
76 76
US UK
Rep.
Japan
Finland
Canada Norway
Sweden
Denmark
Netherlands Czech
1) Latest observations.
Source: OECD
Those outside the labour market share a number of characteristics.8 One is weak
formal qualifications. Among them, we find recently arrived immigrants and young
persons who have dropped out of school. Another is poor language skills. Moreover, it
is worrying that disability rates are rising, particularly among young people (Chart 18).fi
Chart 18 Higher disability rates.
Change from 2010 to 2019.1) Share of population. Percentage points
ECONOMIC
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4 4
13 FEBRUARY 2020
3 3
2 2
1 1
0 0
20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64
1) Change from 30 September 2010 to 30 September 2019.
Source: Norwegian Labour and Welfare Administration (NAV)
The Norwegian labour market is characterised by small wage differences. On the
whole, small wage differences are an asset for the economy, partly because this entails
higher skills and productivity requirements. On the other hand, it means that jobs for
unskilled workers are limited. Those in a weak position in the labour market may then
struggle to enter the labour market, or re-enter after a period of unemployment.
The economy's structural features and the functioning of the labour market will
determine the level of employment in the long run. Economic policy plays an
important role, particularly in terms of how education, tax and welfare policies are
designed. For those who are at risk of being excluded, targeted measures may be
necessary.
Monetary policy can serve as an employment cushion. In periods of falling labour
demand, a more expansionary monetary policy will dampen the decline. By avoiding
the deepest downturns, fewer people are likely to end up outside the labour force.
But monetary policy cannot have a primary responsibility for the level of employment.
Keeping the policy rate at a persistently low level with the aim of boosting activity and
employment more permanently could lead to price and wage pressures and to a sharp
increase in house prices and credit growth. This could give rise to imbalances that in
turn increase the risk of a downturn and job losses further out.
CONCLUSION
ECONOMIC
In the quote from 1970, Erik Brofoss predicted a shift away from a resource-based
PERSPECTIVES
13 FEBRUARY 2020
economy. Fifty years later the structural shift is underway. Brofoss was optimistic
about the way ahead, and he was clear about what the main source of progress is as he
formulated in his speech:
"Now is the time to reap the fruits of our efforts in general education and vocational
training to boost human capital."
Brofoss had high hopes for the coming generations of well-educated young people.
The young workers in Brofoss' day are now retired, or close to retirement. In the
coming years, the dependency ratio will increase. The aim must therefore be to mak