negotiated pay increases were very high this year. • in public sector wage settlements, little emphasis appears to have been placed on the assumptions concerning wage growth on which government allocations are based. this has a negative impact on service production in many areas of the public sector. the experience of this year ’ s wage settlement also indicates that profitability in the internationally exposed sector has been given less emphasis in wage negotiations than earlier. a shortage of labour in more sheltered industries may thus have a greater influence than previously on overall wage growth. inflation would then be determined by domestic factors to a greater extent than in the past. the norwegian economic system has undergone substantial changes over the past ten to twenty years. the model based on detailed control of capital, credit and interest rates and centralised coordination has been abandoned. less emphasis is placed on having discretionary scope for manoeuvre and on using surprise decisions to influence economic developments. it is recognised that the structure of the labour market and of wage formation has a decisive impact on developments in employment. monetary policy is delegated in norway and in comparable countries. the monetary policy guidelines provide a foundation for building credibility and creating confidence in economic policy, thereby making it more effective.

september 2002 when wage growth reaches a level that is inconsistent with the inflation target, the result over time will be higher interest rates, lower employment and higher unemployment. similarly, lower wage growth will normally result in lower interest rates, higher employment and lower unemployment. there is a relationship between wage growth and interest rates. the lower wage growth is, the lower interest rates will be, and vice versa. japan represents the one extreme, with an interest rate of zero and no wage growth. at the other extreme are iceland and norway, with high wage growth and a high key rate. annual wage growth1 ) and unemployment2 ) per cent annual wage growth unemployment rate 1 ) average for all groups, including the cost of additional vacation days 2 ) registered unemployed and on labour market programmes as a percentage of the labour force sources : trcis, directorate of labour and norges bank fafo og makt - og demokratiutredningen 6. september 2002 high wage growth affects the exposed business sector in two ways. first, it erodes earnings and reduces employment. second, monetary policy has to be tightened. this leads to an appreciation of the krone, with a further reduction in earnings and employment. annual wage growth in enterprises in the confederation of norwegian business and industry salaried employees1 ) total employees1 ) 1 ) includes costs of additional vacation days sources : trcis and norges bank fafo og makt - og demokratiutredningen 6. september 2002 it is combined wage growth for all groups that influences the outlook for inflation. however, substantial wage increases for some groups can trigger wage spirals. wages for salaried staff in the business sector have exhibited sharp growth over several years. this year, it appears that wage increases will be especially high in the public sector and in parts of the private service sector. although it is too early to draw final conclusions, there are some indications that wage formation in norway is changing : • the social partners do not appear to be placing as much emphasis as previously on developments in wage growth among our trading partners. • there are also signs that the social partners may be placing less emphasis on the impact on total unemployment when negotiating wages. • some features of this year ’ s wage settlement point to a somewhat greater degree of decentralisation in wage formation. an example of this is the municipal sector, where the federation of professional associations will, as from this year, hold local negotiations on pay increases. on the other hand, centrally