The Riksbank’s calculations show that employment in the manufacturing industry has been slightly stronger than the historical pattern implies during this economic downturn, given the large fall in production, while employment in the services sector has been much stronger than one might have expected given historical relationships. As mentioned earlier, it appears as though the Okun coefficient has declined during 2009. I mentioned earlier that GDP fell by almost 5 per cent last year. According to the estimated Okun’s law, unemployment in the economy as a whole should have risen by around 3 per cent, but the increase was only around 2 per cent. Although cuts in staff have been made, companies have not adjusted their workforce to the falling demand to the same extent as they would have if the historical pattern had applied. Many companies have instead chosen to retain existing personnel to a much greater extent than during earlier downturns. In some cases, they have instead introduced measures such as freezing wages or shortening the working week. One explanation might be that companies expect demand to be restored quickly and that they want to be prepared to quickly increase their production again. Another explanation as to why production has fallen more than employment, which is mentioned in the IMF’s latest World Economic Outlook 4, could be that production has fallen most in those sectors of the economy with the highest productivity level. 2  Aranki, Friberg and Sjödin, 2010, “The relationship between the business cycle and the labour market in Sweden”, www.riksbank.se.

This means (1) a system in which the major institutions are less vulnerable to shocks; (2) a system that is less vulnerable to margin spirals and a generalized pull-back in liquidity and funding; and (3) a system that is more able to withstand the effects of failure of a major financial institution. Looking past the immediate crisis, a more resilient system must be built on stronger and better designed shock absorbers, both in the major institutions and in the infrastructure of the financial system. At the level of the financial institution, the key financial shock absorbers are capital and reserves, margin and collateral, liquidity, and the risk management and control regime. Financial stability starts with ensuring that individual institutions in periods of expansion and relative stability hold adequate resources against the losses and liquidity pressures that can emerge in economic contraction or instability. For the infrastructure of the financial system, these shock absorbers include the resources held against the risk of default by a major market participant across the set of private sector and cooperative arrangements for the funding, trading, clearing and settlement of financial transactions. Simplifying and consolidating the regulatory architecture will be instrumental to these efforts by establishing a common framework of rules, clear responsibility and authority, and by reducing opportunities for arbitrage. Through close coordination across central banks, supervisors and market regulators, we need to adopt an integrated approach to the design and enforcement of capital standards and other prudential regulations critical to systemic stability.