The number of new jobs certainly grew by some one per cent in Europe when activity was recovering but almost as many jobs disappeared in the downturns. In the United States, on the other hand, over the business cycle there have been net increases. Economists differ as to the underlying causes. For some economists, equilibrium unemployment has moved up on account of underlying structural factors. One hypothesis, put forward by, among others, the American economist Paul Krugman, is that certain categories of labour (low educated, for example) are having increasing difficulty in competing in the labour market.6 This is mainly bound up with a technology that replaces manual labour with machines but presumably it also has to do with increased competition from countries where wage levels are considerably lower. It is often pointed out that the effects of this are countered by a wider wage spread that in turn has stimulated an expansion of the private services sector. Employment has therefore risen rapidly in the United States. In Europe, on the other hand, the result has been increased unemployment; the labour market and wage formation here have not permitted the same development as in the United States. A similar effect, leading to a stronger employment trend, may have come from a lower average real wage rise in the United States compared with Europe. The steep real wage increase in the EU area has favoured capital-intensive sectors and stimulated the use of capital-intensive technology. At the same time, low-productivity enterprises have shrunk or closed down.

When potential output rises slowly for structural reasons, growth will be weak even if economic policy is expansionary. In spite of devaluations and fiscal expansion with a view to boosting demand, growth has remained lower than in many other industrialised countries. This is an important lesson to bear in mind when discussing monetary policy’s functions and tasks. Other economists have been less interested in why employment has been slack and unemployment has risen and more concerned with unemployment’s tendency to remain at a high level. The observation that unemployment, having risen, tends to stick at a high level or falls back to normal levels only gradually is usually described in terms of hysteresis and BIS Review 38/1997  - 10 8  persistence. An explanation for the occurrence of persistence tendencies is provided by the insider-outsider model. Briefly, an increase in unemployment does not lead to wage restraint because those who have lost the jobs--the outsiders--exercise no influence on wage setting. Instead of a restrained wage rise, with lower labour costs and a possibility of taking on additional labour, the wage increases remain high and the outsiders remain out of work. 9 Strictly speaking, this does not constitute an increase in equilibrium unemployment but it still amounts to unemployment that is more or less permanent. In Sweden, wage increases tended to accelerate in the 1995 round of settlements even though unemployment was high. Statements by representatives of labour market organisations are indicative of a propensity to give real wage increases priority over increased employment.