villy bergstrom : the labour market and wage formation speech by mr villy bergstrom, deputy governor of sveriges riksbank, at the association of swedish engineering industries'hr director conference, rimbo, 22 november 2005. * * * introduction thank you for your invitation to come and speak here. today, i will not be touching upon current economic policy in sweden or the weakening of the krona exchange rate. i will return to those issues in a couple of days in a different speech. the shift in economic policy at the start of the 1990s has entailed better conditions for wage formation in sweden. among other things, the adoption of the inflation target has reduced uncertainty over future price developments. wage - earners do not have to worry that their wage increases will be eroded by excessively fast price rises, while it is easier for employers to determine their scope for wage costs. the lower uncertainty over inflation is reflected in the fact that inflation expectations since the mid1990s have been firmly anchored around 2 per cent. it is important to remember that the current conditions for wage formation in sweden – a floating exchange rate and inflation target – are considerably different from our previous regime with a fixed exchange rate. a fixed exchange rate was the norm in sweden for some 130 years, even though the systems for maintaining it changed. background to the current system during the post - war era the exchange rate norm was supervised by international agreements through sweden ’ s membership of the international monetary fund ( imf ), and the bretton woods system. that meant that devaluations were only allowed in the event of fundamental structural problems or imbalances. so the bretton woods system limited the opportunities for individual countries to devalue their way out of a cost crisis. instead, the countries were offered loans from the imf on tough terms. for swedish wage formation, this was a successful period. the swedish trade union confederation and other employee organisations / trade unions, as well as the swedish parliament and government, were aware that the strict regulations did not permit devaluation, which had a disciplinary effect on swedish wage formation. the bretton woods system was based on an arrangement whereby the us dollar had a fixed value in terms of gold and the currencies of the other countries in turn were pegged to gold via a fixed exchange rate with the dollar. when the us was forced to abandon its dollar peg to gold in the early 1970s after having borrowed large amounts to finance the vietnam war,

outlook is instead somewhat weaker. for sweden, it seems likely that the economy will experience a rather normal recovery next year. consequently, it is also probable that inflation a couple of years ahead will be close to 2 per cent, roughly as forecast by the riksbank in august, even if inflation in the forthcoming year may be lower. long - term perspective before rounding off, allow me also to touch upon the longer - term perspective. over the last decade, the economic policy debate has largely centred on stabilisation policy. the fact that stabilisation policy was in focus during the first half of the 1990s is easy to understand. following a severe crisis caused largely by mistakes in stabilisation policy, we changed our exchange rate regime and altered the focus of both our monetary policy and fiscal policy. in the emu debate, it has been natural to continue the discussion of monetary policy and exchange rate systems. i, at least, believe that this discussion went a bit too far. it was easy to get the impression that welfare in sweden depended solely on the riksbank's actions. this is not the case of course. the objective of monetary policy over the past ten years has been to ensure price stability. this has proved rather successful - inflation is in line with the riksbank's target and it is important therefore that it lays a solid foundation for growth. but when we alter interest rates, it is mainly with a view to affecting demand around a long - term output trend. while this is important, it must be remembered that we do not affect the trend itself. and it is this trend that determines our welfare! so we must now shift our focus in the public debate from monetary policy and stabilisation policy to issues that determine sweden's ability to create growth and welfare. in fact, this has been important for a long time since sweden suffered a considerable decline in welfare terms relative to almost all other countries, especially during the 1970s and 1980s. but it is particularly significant now in the light of the challenges facing us in the near future, particularly as a result of our ageing population. essentially, economic growth is determined by how much we work and how productive we are. nothing can change this. the number of hours worked is affected by a large number of factors ; e. g. the number of people of working age, the number of these that are employed, absenteeism, etc. labour productivity, measured as gdp per hour worked, is partly dependent on