krone. the wage settlement in 2002 resulted in the highest increase in real wages in a generation. after the wage settlement last year, we projected annual wage growth in 2002 of between 5½ and 6 per cent. wage growth in 2002 was far higher than expected. substantial pay increases were also agreed on for 2003. the various groups achieved very different results, increasing the risk of wage - wage spirals. the outcome of last year ’ s wage settlement may be an indication that the social partners considered the labour market to be very tight this spring. annual wage growth in 2002 projections published at different points in time. per cent fe b de c ap r0 ju n au g o ct de c fe b ap r0 ju n au g o ct source : norges bank sg gausdal 31. 01. 03 there is little new information about wage developments since the wage settlement last year. agreements have been concluded awarding high pay increases to seamen and doctors. we may have underestimated the growth in salaries for white - collar workers last year, but there is also some anecdotal evidence to suggest that during the autumn large companies and law and consultancy firms tightened cost control. labour costs1 ) in manufacturing : norway and trading partners percentage change in hourly costs norway trading partners 1 ) labour costs per hour sources : statistics norway, trcis / imf and norges bank sg gausdal 31. 01. 03 since 1998, wage growth in norway has been markedly higher than that of our trading partners. until spring 2001, the monetary policy objective implied that, over time, wage growth had to be reduced to the level in europe. the inflation target of 2½ per cent implies that wage growth over time can hover around 4½ per cent. this takes into account that productivity growth in norway has been around 2 per cent over the past twenty years. if wage growth is higher than 4½ per cent, monetary policy generally has to be tight in order to counter inflation. this will normally lead to deteriorating competitiveness in the business sector. if wage growth is lower than 4½ per cent, monetary policy normally has to be eased to counter inflation that is too low. this can result in a weaker krone and an improvement in competitiveness in the business sector. the difference between current wage growth and the long - term equilibrium level of 4½ per cent can be referred to as the wage gap for the norwegian economy. this wage gap also provides an indication of pressures in the real economy,

not unlike the measures of the output gap shown earlier. as illustrated, the wage gap is calculated as the difference between the rise in labour costs in manufacturing in norway and 4. 5 per cent. the wage gap is calculated as the difference between the rise in labour costs in norway and trading partners in the years prior to 2001. there tends to be a correlation between the wage gap and the output gap. the output gap can be an expression of our assessment of pressures in the economy. the wage gap can be a more direct indication of the social partners ’ perception of the situation. this provides useful information in interest rate setting. moreover, wage figures and wage growth estimates in real time are considerably more reliable than preliminary national accounts figures for output and demand that are used to estimate the output gap, which tend to be subject to substantial revision. the wage growth estimates drawn up by norges bank early last summer, just after the income settlements, underestimated the increase by 0. 16 percentage point, with small deviations, on average for the period 1995 - 2001. on the other hand, the wage gap is a lagging indicator. wage growth in any one year has been heavily influenced by economic developments in the preceding 12 - 18 months. when we look at future prospects, a good estimate for the output gap can therefore provide a better indication of the outlook for wage and price inflation. both these simple measures are based on stylised assumptions concerning productivity growth and must therefore be used with caution. wage gap1 ) and output gap per cent output gap wage gap - 1 - 1 - 2 - 2 1 ) up to 2000 : difference between rise in hourly labour costs in manufacturing in norway and among trading partners. thereafter growth in excess of 4. 5 per cent. - 3 - 4 - 3 - 4 sources : statistics norway, trcis / imf and norges bank sg gausdal 31. 01. 03 the high level of wage growth in 2002 implied a tight monetary policy. the interest rate differential against trading partners widened. the krone appreciated further. relationships in the foreign exchange market are unstable, but there are a number of fundamental forces that influence the krone. high oil prices and the phasing in of petroleum revenues into the norwegian economy are part of the explanation, but the predominant factor is probably the cyclical divergence between norway and abroad. krone exchange rate1 ) and 12 - month interest rate differential against trading partners. per cent 4. 0 3. 5 3.