strained and the utilisation of capital resources becomes high. a growth process driven by rising investment and productivity can result in good circles. increased demand generated from the supply side leads to a favourable composition of demand that tends to strengthen the supply side even more. let me mention some examples. one effect of higher productivity growth is an upward adjustment of future profit expectations and that often leads to rising share prices. higher corporate values stimulate the companies in question to invest still more and also make it possible for new establishments to raise venture capital for continued expansion. meanwhile, shareholding households see an appreciation of their net assets, at least on paper. increased wealth and optimistic expectations of the future lead to a stronger growth of consumption. another consequence of higher productivity growth is that inflation tends to be held back in that unit labour costs are curbed. labour costs are the dominant item of expenditure in the economy as a whole. everything suggests that the higher productivity growth in sweden has contributed to the favourable economic development since the end of the crisis in the early 1990s. but there are other explanations, too. labour market working better than expected one is the workings of the labour market. many studies have shown that, at least in a formal sense, sweden ’ s labour market is characterised by more or less the same rigidities as continental europe. so there was every reason to suspect that after the crisis in the early 1990s, unemployment would also stick at a high level in sweden. here are some of the grounds for this : • labour demand is liable to be low in a labour market that is heavily regulated. firms are reluctant to recruit because of uncertainty about being able to cut costs if economic activity were to decline. • labour supply may be affected after unemployment has risen as steeply as it did in the early 1990s. people are excluded from the labour market. long - term unemployment may leave competence out of line with what firms are now looking for. the determination to find a job can be affected both by a long period of unemployment and by the structure of unemployment insurance. to date, however, the economic upswing in sweden suggests that the labour market is functioning better than one might expect. that in itself is a sign that the output gap has been larger than estimated earlier, so that our economy has coped for a time with higher gdp demand. it is conceivable that the crisis in the early 1990s taught firms that they can, in fact, cut costs if they need to. that may mean that their propensity

bonds after an experimental phase in the late 1980s ; that, too, is worth recalling as the old idea of a tobin tax is being revived in some quarters. improvements in productivity and flexibility national accounts data from statistics sweden suggest that our economy is now capable of growing faster than in recent decades. it looks as though the higher productivity growth is not only attributable to rising activity. in the period from 1974 to 1993, for example, productivity growth averaged less than 1. 5 % a year, while since 1994 the average rate has been almost 2 %. this is what lies behind the common, though not yet entirely certain, estimate that the potential rate of gdp growth is now between 2 and 2. 5 %. at the same time it should be noted that there are still no clear signs of an accelerating rate of productivity growth such as we have seen in the united states. i say this even though i believe that one cause of the difference between the united states and europe in this respect has to do with how the statistics are obtained. such a process could conceivably come about in the swedish economy, too, but i suggest we wait until that happens before incorporating it in our expectations and policy decisions. our economy is developing favourably enough as it is. given certain assumptions, there are, in principle, two ways in which labour productivity can be increased. firstly, the growth rate of total factor productivity can rise. total factor productivity seems to have been on an upward trend since 1993, which implies a successive improvement in production technology. that in turn may mean that information technology, for example, has been gradually increasing its contribution to output. secondly, labour productivity can be affected by changes in capital intensity. a rising input of capital equipment per employee, for instance, means that each person can produce more. historically, increased capital intensity has often been a characteristic of periods when the growth of labour productivity was notably high. during the present upswing, however, capital intensity has been more or less constant. so, at least to date, this mechanism cannot account for our increased productivity growth. it is not the case that business investment has been sluggish. on the contrary, investment growth, excluding the real estate sector, has been higher than for a long time. but as employment has risen equally strongly, capital intensity has been unchanged so far. but it would not be surprising if investment growth, and thereby growth of the capital stock, were to accelerate as the labour market becomes more and more