levels in high-tech manufacturing and service sectors. This will depend critically on, among other things, the smooth functioning of product and labor markets.

Against this backdrop, this paper provides an analysis of recent trends in Sweden’s labor market regulations and outcomes relative to those of comparators among OECD high-income economies.<sup>2</sup> The first part of the paper analyzes labor market regulations and labor market flexibility in Sweden in comparison with other economies in the EU15 and Nordic region, the G7 economies and the OECD average. The second part investigates the relationship between different measures of labor market flexibility and labor market outcomes in OECD and European economies. The analysis draws on several sources, including the World Bank Group’s _Doing Business_ database, Organisation for Economic Co-operation and Development (OECD) data, Fraser Institute’s Economic Freedom of the World, the _Global Competitiveness Report_ and Eurostat.

# **2. Labor Market Flexibility**

In theory, flexible labor markets promote employment and productivity. They increase the responsiveness of wages to changing economic conditions and promote labor mobility across sectors by reducing the risk and opportunity cost of changing jobs and by providing the right incentive mechanisms for both employers and employees. In addition, they align the unit labor cost with the productivity of employees by lowering the regulatory cost of employment and promoting the ability of the economy to reward the skill sets and productivity levels of individual employees (e.g., Hopenhayn and Rogerson, 1993; Martin and Scarpetta, 2012; Blanchard et al., 2013).

But just as overly protected labor markets adversely affect economies, so do overly flexible labor markets. Where labor markets are excessively flexible, they tend to decrease the productivity and innovative capacity of companies by reducing employers’ incentives to invest in employees with short-term contracts and by weakening employees’ attachment to their company and discouraging them from investing in company-specific assets (John et al., 2012). In addition, when the labor market flexibility manifests itself in greater use of temporary employees with a low level of employment protection while a high level of protection is maintained for permanent employees, the economy runs the risk of a dual labor market—where permanent employees enjoy high levels of job security and investment in training opportunities and temporary employees are marginalized through low levels of pay, social benefits and training opportunities (Blanchard et al., 2013; John et al., 2012).<sup>3</sup>

> 2 Throughout the rest of this paper, OECD high-income economies will be referred to as OECD.

> 3 Temporary employees are those with a contract in which it is understood—by both employer and employees—that the termination of the job is determined by objective conditions such as the reaching of a certain date, the completion of an assignment or the return of another employee who has been temporarily replaced. Temporary employment takes multiple forms across countries, the most common of which are fixed-term contracts, seasonal contracts and temporary agency work. Temporary contracts can be full-time or part-time.

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