solid performance of nordic countries over the past 10 - 15 years. norway is benefiting from oil, but developments in the mainland economy have also been considerably more stable. global economic developments have brought us substantial gains, but this does not explain the strong productivity gains in our service industries. moreover, it may appear that cooperation in companies is better in nordic countries than in many other european countries. in norway, there are few examples of objections to investing in new technology on the grounds that it will eliminate jobs. on the contrary, employees will often be the first to support new investments to strengthen a company ’ s position in highly open and competitive markets. labour market adaptability is fairly similar in the nordic region, even though legislation and rules are quite different. for example, there is a high level of employment protection legislation in norway, sweden, and finland but not in denmark. in denmark, agreements between the social partners can stipulate firing rules. the negotiating position that employment protection offers employees can induce companies to go farther in safeguarding employees'interests in the event of restructuring. the social safety net – unemployment benefits and the more permanent benefit schemes – probably also make it easier to gain support for rationalisation. but this safety net has also become a pretext for not addressing the problems at hand. the increased use of our welfare schemes is increasingly becoming the achilles ’ heel of the norwegian economy. sickness absence has risen sharply in norway and a steadily higher share of the working - age population is on disability benefit or rehabilitation schemes. many choose to retire under contractual early retirement schemes at the age of 62, and these numbers will probably increase ahead. in norway, close to 600 000 persons among the working - age population are outside the labour force and on benefit and retirement schemes. this accounts for 25 per cent of the labour force. sweden has seen a similar development. the sharp increase in benefits cannot be explained by the population ’ s state of health, which is steadily improving. a survey of more than 31 european countries also shows that there is a high degree of job satisfaction among norwegians. 17 demographic developments will have a dampening impact on demand for public services and social security disbursements over the coming years. the number of elderly among pensioners, i. e. 80 years and older, will not grow and the post - war generation will only start drawing on social security in the next decade. there will still be pressures for higher public spending. demand for services we have chosen to let the government provide

profitability in the internationally exposed sector. it is important to be aware of the relationships between employment, output and inflation. if there is a shortage of labour and other economic resources, a tight monetary policy stance will reduce inflation by affecting aggregate demand. conversely, when unemployment is high, low interest rates stimulate demand, which will contribute to stable wages and prices. a monetary policy stance that is aimed at stabilising inflation will thus also contribute to stabilising aggregate output and employment. in the long term, monetary policy determines the average level of inflation. output is determined by the supply of labour, capital and technology and by productivity growth. attempts to increase output beyond the total capacity of the economy will lead to inflation in the long run. what monetary policy can do is to maintain stability without unnecessary fluctuations in output and employment. overall employment is also influenced by wage formation. if wages increase at an unsustainable pace, employment will decline and unemployment will gradually increase. monetary policy cannot prevent an increase in unemployment that is due to a wage - driven cost shock. when there is confidence that monetary policy will contribute to low and stable inflation over time, it can contribute in the short term - under certain conditions - to smoothing fluctuations in output and demand. in the short term, there is a trade - off between the objectives of inflation stability on the one hand, and output and employment stability on the other. an aggressive monetary policy will rapidly bring inflation to the target. this will cause wide fluctuations in the real economy. the interest rate can also be changed more gradually, which will have less impact on the real economy but cause more pronounced fluctuations in inflation. by influencing inflation over time, we can ensure that an overly aggressive monetary policy does not in itself cause unnecessary disturbances to the economy. the impact of monetary policy occurs with considerable and variable lags. our analyses indicate that a substantial share of the effects of an interest rate change will occur within two years. two years is thus a reasonable time horizon for achieving the inflation target. it is nevertheless conceivable that in a situation where a very high rate of inflation is accompanied by sluggish economic growth, norges bank may decide to apply a somewhat longer time horizon than two years to reach the inflation target of 2½ per cent. the choice of monetary policy time horizon reflects the fact that there are real economic costs associated with bringing inflation rapidly back to the target. this horizon is thus an indirect expression of the trade - off between the objectives of, on