BIS Review 93/2006  3  Capacity utilisation can also be followed more directly in the NIER’s business tendency surveys and through analyses of labour supply. The business tendency surveys indicate that capacity utilisation is not yet so high seen over the economy as a whole. However, it has risen to high levels in the construction sector and in certain services sectors. Analyses of the labour supply also indicate that there are substantial labour reserves. Open unemployment is still relatively high. In addition, there will be many latent job-seekers, including full-time students looking for work, and an increasing number of people will continue to work after they reach the age of retirement. Labour force immigration will also increase. To summarise, I can see that the economic conditions for next year’s wage bargaining rounds look good. Growth is high and employment is rising, but the economic upturn is, in my view, not so strong as to prevent capacity utilisation remaining at a relatively normal level next year. Profits in the business sector are good, but not as exaggerated as in the mid-1990s when we last faced problems with overly high nominal wages. Inflation is moderate and the conditions for attaining the inflation target over the coming years are good, on condition that the Riksbank gradually increases the repo rate. This was also the message in our most recently-published Inflation Report. Conclusion Let me conclude with a summary of what I have said so far. The experiences of the 1970s and 1980s were very negative.

The National Mediation Office also received increased powers of authority to take action in connection with wage bargaining rounds. The National Institute of Economic Research was given the task of annually producing reports on the economic conditions for wage formation. The results of these changes are clear and positive. Since the crisis at the beginning of the 1990s, wage formation has functioned much better than before. The agreements no longer contain flexibility clauses and wage drift is much more limited. The number of labour market conflicts has been lower than before. Real wage increases, which reflect what we can buy for our wages, have been better than before, while the nominal increases have been markedly lower than before (see Figure 6). The social partners have contributed in a constructive manner to this positive development. The positive institutional changes in several areas – e.g. new regulations for fiscal policy, monetary policy and wage formation - are strongly contributing factors to the favourable developments since the crisis in the early 1990s. Conditions for wage bargaining rounds The inflation process has changed in nature in recent years, not only in Sweden but also in many other countries. As the inflation-targeting policy has gained credibility, inflation is increasingly determined by inflation expectations. Inflation has become lower and also appears to be less dependent on variations in capacity utilisation (the short-term Phillips curve has shifted downwards and become flatter). Capacity utilisation mainly affects inflation through wage formation. However, wage costs still play an important role in the inflation process.