Norway emerged from the crisis at the end of the 1980s and the beginning of the 1990s without a persistent fall in employment. This is because wage formation functioned well. Wage determination was coordinated, with substantial emphasis on overall employment. Wage discipline provided the authorities with the leeway to stimulate the economy, with limited risk of higher inflation. This policy yielded positive results. As regards unemployment and inflation in Europe in the 1990s, Norway is among the top performers. There may be many explanations for the wide differences in labour market performance across countries. Historical and cultural factors may play a significant role. On the other hand, certain common features and systematic differences should be duly noted. Among other things, the effectiveness of labour market programmes, the degree of coordination in wage formation, employment protection legislation (EPL), social security schemes and the education system may be important factors. 8  BIS Review 11/2002  As in Norway, labour markets in continental Europe are marked by extensive employment protection legislation, which implies substantial restructuring costs for companies. The higher the level of employment protection, the more an employee is perceived as a long-term investment and the more cautious the employer must be with regard to hiring. On the other hand, a high level of employment protection can motivate employers to develop skills among their employees. With a centralised and coordinated wage formation process, the social partners can take account of overall employment in wage negotiations. The Scandinavian countries and Austria have organised wage determination in this way.

On the other hand, supplementary pensions may be financed by a fund where the pension is determined by the individual’s contribution to the pension fund and the return on the fund’s investments. Labour is our most important resource. The decline in average hours worked cannot continue if we are to have a sustainable pension system. The current evaluation of our public pension system must focus on the incentives to work and the effects on the average retirement age. A fund-based system may be an appropriate approach and at the same time make pension savings transparent for each individual. This may in itself provide an incentive to increase working hours. Conclusion The Norwegian economy is changing. Even a gradual increase in the use of petroleum revenues will change the industry structure substantially in the next decade. It appears that we may see an increase in locally determined wages. This will generate considerable gains, but in the absence of reforms in the labour market and in the social security and pension system, the growth potential and sustainability of our economy may weaken, labour may be displaced and unemployment may rise. Monetary policy provides the economy with a nominal anchor. The guidelines hold the promise of a fiscal policy that is anchored in a long-term strategy. When fiscal policy is predictable, monetary policy can also contribute to stability in aggregate demand and output. The social partners, businesses, borrowers and investors can act on the assumption that the inflation rate will be 2½ per cent.